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A member of the Shout99 network had previously written to his MP about the unfairness of Section 660 - the business tax between family and friends. His MP had taken the matter up with the Paymaster General on his behalf. (Details of the earlier correspondence are available on Shout99 on June 17: Dawn warns nothing new in family business tax).
However, Ms Primarolo overlooked one point which a subsequent letter reminder her that she hadn't addressed. The point being made was whether it was fair that shares in public companies can be freely allocated to reduce a couple's overall tax exposure but, under Section 660, shares in family businesses can't be.
Ms Primarolo argued the Revenue's position with phrases which will sound familiarly vague to IR35-watchers - particularly that it is perfectly legitimate that the Inland Revenue should seek to tackle this form of tax avoidance as not to do so would be unfair to the vast majority of tax payer who pay the correct amount of tax on their incomes.
Letter from Primarolo
The text of the letter from Paymaster General, Dawn Primarolo, to the MP who had raised the issue, said:
Thank you for your further letter of June 19 enclosing correspondence from your constituent, Mr X about the application of Section 660 Income and Corporation Taxes Act 1988 (the settlements legislation).
Mr X considers that my reply to you of May 22 fails to answer one of the questions raised in his original letter. He refers to the apparent difference in treatment where a married couple hold shares in a public quoted company and where they hold shares in a family business and asked whether this is fair or just.
As example 10 in the Tax Bulletin article explains, shares in a quoted company are likely to have a capital value, and therefore a gift of such shares falls outside the settlements legislation. In those cases the Inland Revenue has challenged, the shares generally have no or a very low capital value. The arrangement entered into involved the transfer wholly or substantially of a right to income and thus falls outside the statutory exemption at Section 660a (6). It is perfectly legitimate that the Inland Revenue should seek to tackle this form of tax avoidance as not to do so would be unfair to the vast majority of tax payer who pay the correct amount of tax on their incomes.
I am sorry I overlooked this point before.
I hope Mr X will find this helpful."
What it means to freelancers
Shout99's expert, Kevin Miller FCA, said: "The Paymaster General seems to be implying that because knowledge based businesses may have less need for capital or retained reserves then in some way they are less of a 'real business' than a traditional business that needs more capital investment. This is a strange view for a Government that claims to be trying to boost Britain's entrepreneurial small businesses.
"The Paymaster General has not really answered the point that the tax payer raised - namely why is it fair or reasonable that a transfer between spouses of shares in a quoted company is exempted by Section 660A(6) while shares in a knowledge based family company are not?
"She says the exemption in Section 660A(6) does not apply because the shares in the family company are considered to be of no capital value and therefore to be wholly or substantially a right to income, whereas quoted company shares have a capital value.
"This seems to be a rather narrow view of the rights and value associated with ordinary shares. Whether a share has a high capital value or not cannot be the only determinant of whether that shares is wholly or substantially a right to income. Ordinary shares represent a bundle of rights and liabilities.
"Being a shareholder in a quoted company often means, in practical terms, having little real rights other than a right to income and a capital distribution. Shareholders, individually, are unlikely to be able to exercise much real power over the directors. Most ordinary shareholders in a quoted company hold shares for the income they earn and the possibility of a capital gain.
"By contrast a shareholder in a family company is often much better placed to exercise real influence over the directors because they may well hold a signifcant number of shares. Shareholders in family companies may also have expectations of an increase in capital value as profits and reserves accumulate in the company. All shares have some capital value which may increase or fall depending on the success of the business.
"When you also take into account the problems that many small knowledge based businesses have under the IR35 legislation of earning profits and building up reserves it does seem that this Government has decided that small businesses in the knowledge based sector are not, and never will be allowed to become, 'real' businesses. As more traditional industries and businesses continue to decline this attitude has serious consequences for the shape of Britain's economic future."
What is Section 660?
In a nutshell, the Revenue takes as an example the case of a business owned by a husband and wife where the shares are divided. One of the parties is the major fee earner who receives a salary from the business. The profits are then paid out as dividends between the shareholders - the husband and wife. The Revenue claims this is a transfer of earnings from the higher tax payer to the lower tax payer in order to avoid tax - and is pressing that point with hefty backdated tax bills of up to £42,000.
Shout99 has a Section 660 resource centre for freelancers who think they could be affected, which includes a free online decision tree.
Shout99 has also produced a set of papers from experts who spoke at the recent Section 660 seminar. More information Expert Papers on Section 660
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Susie Hughes © Shout99.com 2003
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