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The decision has been eagerly awaited - and feared - by thousands of small businesses who are owned by husband and wives or close partners. It could now mean the Revenue feels more confident about pursuing Section 660 challenges and could lead to tax bills of thousands of pounds for these companies.
The case featured Arctic Systems, an IT consultancy set up and owned by Geoff Jones and his wife Diane. The legal team for Arctic was led by Malcolm Gammie QC, a tax expert and Fellow of the Chartered Institute of Taxation, who was supported by Dave Smith of Accountax. The case was supported by the Professional Contractors Group (PCG) who described it as a 'landmark' Section 660 case.
The decision was not unanimous as the view of the senior Commissioner prevailed by way of a casting vote
Section 660
Section 660 is a highly controversial interpretation of an old law by the Revenue, which has been widely condemned by the professional bodies. But the Revenue and the Government showed no indication of backing down and this Arctic Systems case at the Special Commissioners was seen as the first real test of the Revenue's approach.
The Revenue claimed that in the case of a husband and wife in business, even if a couple draw salaries from the business and contribute to it in different ways, one party is the business's fee-earner and therefore the business's profits should be his or hers and by paying dividends according to shareholding split means that money goes to the 'non-fee-earner', which would otherwise be the main fee-earner's.
From that, the Revenue concluded that this is 'avoiding tax' because the income from the dividends has been taxed at partner's basic rate of income tax rather than the fee-earner's higher rate.
Retrospective
Initially the Revenue sought to apply this retropectively and back-dated the tax demand for six years, amounting to a claim for £42,000 in unpaid tax from the Jones. However, the specific circumstances of the Arctic case led to this retrospective element being dropped during the Commissioners hearing when it became clear that the Revenue had information relating to the prior enquiry. This does not set a precedent that it would be dropped in all future cases.
What it means for freelancers
Tens of thousands of small businesses which are jointly owned by husband and wife could now come under the Revenue's spotlight.
It has been suggested that the Revenue was holding back a larger-scale attack on potential Section 660 cases until the decision of this case was known. The Revenue - strongly supported by its political masters - has always believed it had a sound case.
A decision by the Special Commissioners does not set precedence or case law in the legal sense. That would come into effect following a High Court decision.
However, it will have a bearing on the actions of other Inland Revenue inspections and can
be used as a reference tool when negotiating settlements or pressing for claims. The decision is specific to this case and while it can be used as guidance it is essentially based on the facts that surround the specifics of the Arctic case.
Appeal
For an appeal to be granted there needs to be a point of law which would have to be established at an appeal hearing and then 'permission to appeal' granted. The appeal would go to the High Court, which would set precedence.
However, that process could take a year or more.
The PCG is taking advice about the next legal steps.
Protection for freelancers against Section660
Protection against Section 660 challenges by the Revenue is included in Shout99's Freelancers Outside IR35.
Freelancers and small businesses can purchase FO35 for £104.50 for a year's cover. The manual includes information on how to minimise your Section 660 exposure.
If the Revenue challenges your Section 660 position, Qdos Consulting would represent you in your dealings with the Revenue. It also provides insurance against penalities.
For more information or to purchase FO35 on line click here:
Freelancers Outside IR35
Section 660 resource
Shout99 has a free Section 660 resource which contains news and information. It also provides a free online 'decision tree' which can be used to assess your risk.
Shout99 has a downloadable guide to Section 660 which has been updated to take account of the latest developments.
For more information, click on:
www.shout99.com/section660
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Susie Hughes © Shout99.com 2004
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