The Federation of Small Businesses, which represents 185,000 mainly self-employed people in the UK, has joined forces with the accounting profession to condemn the Inland Revenue’s tough stance on enforcing Section 660, better known as the ‘husband and wife tax’.
Many freelancers and self-employed traders 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 to both partners at the end of the year, which helps the contractor to reduce their own earnings and thus stay out of a higher tax bracket. However, the Revenue is arguing that if one of the partners is the principal earner, then all shares should be allocated to them.
Naturally, this interpretation is universally unpopular with the small businesses which are affected, and the groups that represent their interests.
“This is another stealth tax” observed Mark Lee, Chairman of the ICAEW Tax Faculty (Institute of Chartered accountants of England and Wales).
He continued: “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. Nevertheless, they are applying their view for at least the last six years, which means many small businesses could face backdated and unexpected tax bills.”
John Walker, Policy Chairman of the FSB is also critical of the Revenue’s aggressive policy. “We are particularly worried that small businesses, which are the engine room of the economy, are being distracted by this unfair tax at a time when they should be concentrating on the market recovery” he announced.
Meanwhile, Tim Ambrose of the Chartered Institute of Taxation goes as far as to call the issue a breach of human rights, arguing that: “We believe that the Revenue have a legal and moral obligation to inform taxpayers of how the legislation is going to be applied.”
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