Inland Revenue Faces Legal Challenge To Section 660 Interpretation

by Robert Lee, Tax-News.com, London

14 January 2004

The Inland Revenue’s controversial interpretation of Section 660, or the so-called ‘husband and wife’ tax, is to be challenged next month in a landmark court case.

The legal challenge has been brought by small businessman Geoff Jones and his wife Diana after an investigation into their company, Arctic systems, by the Inland Revenue resulted in an unexpected tax demand for £42,000.

Many husband and wife businesses in the UK have legitimately formed limited companies. This enables them to receive income via dividends, which are distributed to the less active partner of the firm, in order to reduce the amount of tax they pay. However, the Revenue has begun to apply a harsh new interpretation that bases tax liability on the most active partner’s tax rate, resulting in demands for additional tax, often backdated up to six years.

The accounting profession believes that the Revenue has illegally extended the reach of the settlements legislation enacted to prevent manipulation of asset ownership for tax purposes.

“The Revenue did not publish their interpretation of this legislation until 2001, and then only in a technical manual rarely read even by tax specialists," Mark Lee, Chairman of the ICAEW Tax Faculty (Institute of Chartered Accountants of England and Wales), observed recently.

Others, such as Simon Griffiths, chairman of the Professional Contractors Group, a body set up to represent independent contractors facing ruin at the hands of the IR35 ruling, believe the Revenue has a moral, as well as a legal case to answer. “We feel that the Inland Revenue is wrong, both morally and in law, to seek to apply the settlements legislation in this way,” the Times quoted him as observing.

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