Appeals Panel Rules In Revenue’s Favour In Section 660 Case

by Jason Gorringe, Tax-News.com, London

01 October 2004

Dealing a tax blow to the UK’s small businesses, a tax court appeals panel on Wednesday ruled in favour of the Inland Revenue in the ‘Section 660’ case, a judgement that will leave tens of thousands of firms potentially facing higher tax bills.

The case concerned Arctic Systems, a small IT consultancy owned by Geoff Jones and his wife Diana, which has been landed with a £42,000 retrospective tax bill due to the Revenue’s interpretation of a piece of tax legislation.

Section 660 is an existing piece of legislation which helps determine the principal beneficiary of a business - in other words, the shareholder who receives dividends from company profits at the end of the year.

Many independent freelancers form a limited company allocating some shares to a spouse who carries out administrative work for the business. This then allows corporate dividends to be paid at the end of the year to husband and wife, helps the contractor reduce his or her own earnings and thus stay out of a higher tax bracket.

However, the Revenue has been arguing that if one of the partners is the principal earner, then all shares should be apportioned to them.

Lamenting the split decision by the Special Commissioners of Income Tax, the Professional Contractors Group, itself formed to help freelancers fight a previous Revenue ruling, stated: “This result adds to the uncertainty and confusion surrounding the taxation of family businesses.”

“If two highly expert Commissioners of Tax cannot agree on a case such as this, it is hard to see how a small business is properly to assess its own tax bill,” the PCG added.

The dissenting Commissioner, Ms Judith Powell, found in favour of Arctic Systems; however Dr Nuala Brice, who was presiding, found for the Revenue and as chair had the casting vote.

According to Mike Warburton of accounting firm Grant Thornton, up to 200,000 small businesses could be forced to pay a total of £1bn in backdated taxes as a consequence of the decision.

Meanwhile, the Jones’ legal team is mulling its next course of action.

“This is arguably the most important tax case of the last 20 years,” observed Dave Smith of Accountax Consulting, a Fellow of the Chartered Institute of Taxation and assistant to Malcolm Gammie QC.

He added that the team “will examine the judgment closely before coming to a view on the best way forward.”

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