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On Wednesday (July 25) Arctic Systems, owned by husband and wife, Geoff and Diana Jones, had a landmark legal victory when the Lords ruled unanimously that HMRC did not have a case to pursue Mr Jones - a higher rate tax payer - for tax on dividends paid to his wife. In legal terms that was the end of the road for HMRC.
Arctic Systems - along with tens of thousands of other business - had been found to be acting within the parameters of acceptable business practise.
But it was just the beginning of the political road.
Unfair
On Thursday (July 26), Angela Eagle, Exchequer Secretary to the Treasury, informed the House of Commons that this means of 'diverting income' for tax purposes was unfair and that those involved should pay tax on what it described as 'their own income' As a result, consultation followed by new legislation is proposed.
In a written statement, Angela Eagle, said: " The Government acknowledge the judgement given by the House of Lords in the Jones v Garnett (Arctic Systems) case.
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"Some individuals use non-commercial arrangements (arrangements that they would not reasonably enter into with an arms-length third party) to divert income (which would, in the absence of those arrangements have flowed to them) to others. That minimises their tax liability, and results in an unfair outcome, increasing the tax burden on other tax-payers and putting businesses that compete with these individuals at a competitive disadvantage.
"It is the Government's view that individuals involved in these arrangements should pay tax on what is, in substance, their own income and that the legislation should clearly provide for this. The Government will therefore bring forward proposals for changes to legislation to ensure this is the case. In the meantime, HMRC will apply the law as elucidated by the House of Lords and will be providing guidance in due course.
"The Government would not want commercial arrangements to be caught by any change to legislation. Consultation should help to ensure this."
Future
As many forecast, the Government has played its trump card - the ability to change the law if the outcome went the wrong way. Many could be forgiven for thinking this was a case of 'heads we win; tails you lose'.
But there is a victory to be recognised in this. Had HMRC won in the House of Lords, they might have pursued husband and wife businesses for retrospective tax, resulting in demands for up to £42,000. Under the present circumstances, the new law will apply to the future and give contractors the opportunity to rearrange their affairs without being attacked for past behaviour.
However, while Section 660 was an old, proven-to-be irrelevant law, it can be predicted with confidence that any new proposals will be securely targeted at couples who jointly own a business where one partner is the major fee earner by providing his or her services.
Further information
Shout99 has followed the events relating to Section 660. You can also read more about the background to this case and the issues at stake in Shout99's Section 660 resource centre
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Susie Hughes © Shout99 2007
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