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Andy Vessey writes:
What is Section 660A and who does it affect?
The ‘settlements legislation’, formerly Section 660A Income and Corporation Taxes Act, and now found at Sections 619 et seq , Income Tax (Trading & Other Income) Act, has been on the statute book since the 1930s, but in recent years HM Revenue & Customs (HMRC) has been trying to extend the way in which it is applied.
The intention of the legislation is to prevent one person from obtaining a tax advantage by diverting income-generating property to another whilst retaining an interest in that property. It excludes an outright gift to a spouse that is substantially more than a right to income, such as a house that is let to earn rental income.
Following the Pre Budget Report (PBR) 2007, the Government intends to introduce legislation aimed at tackling ‘income shifting’ i.e. income diverted from one spouse to another via company dividends or partnership profits.
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HMRC has stated that it will take into account the activity of individuals in the business, investments that they have made and the risks they are exposed to by being involved in the business.
Legislation
If the Government is intending to push this legislation through for the next tax year then there will only be a short consultation period evoking memories of the MSC consultation period – not a good omen!
The legislation could be applied to many situations in which some form of income-generating property is transferred from one person to another. Up until now HMRC had been focusing attention on family-based companies where some of the shares are in the hands of a spouse who does not perform fee-earning duties on the company’s behalf.
In the case of Mr. and Mrs. Jones of Arctic Systems Ltd, the husband and wife each held 50 per cent of the company shares, but the ruling in the High Court was that the wife’s dividend income should be assessable upon the husband, as if it were solely his income. The husband received a relatively low salary, which left significant profits for the company to pay out as dividends, and the wife undertook no fee-earning duties. There are thousands of small companies operating on a similar basis. Partnerships are also open to attack.
Mr. Jones subsequently won his case at the Court of Appeal and the House of Lords, causing HMRC to resort to introduce ‘income shifting’ legislation as announced in the Pre-Budget Report 2007. The Government hopes to have this in place from 6th April 2008.
Andy Vessey
Senior Tax Manager
Qdos Consulting Limited
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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