Section 660 Case Goes To Court Of Appeal

by Robert Lee, Tax-News.com, London

10 June 2005

The owners of Arctic Systems, the small IT firm at the centre of an important test case concerning Section 660 settlements legislation, are to take their case to the Court of Appeal.

In what was described as a "bitter blow" to potentially hundreds of thousands of small firms in the UK, the High Court last month rejected an appeal against Revenue & Customs's interpretation of Section 660, which was brought by the owners of a small IT firm, Arctic Systems.

Geoff and Diana Jones, the firm's owners, were contesting a £42,000 bill for back tax resulting from the Inland Revenue’s interpretation of the settlements legislation in a bid to prevent the husband and wife-run firm from reducing their tax bill by allocating income to the less active partner, who pays tax at a lower rate.

In his judgment, Mr Justice Park agreed with the views of Special Commissioner Dr Nuala Brice, who had asserted that Diana Jones’s dividends were in fact income arising under an arrangement and that the exemption in Section 660A (6) should not apply.

It has been estimated by some tax experts that the ruling could affect as many as 200,000 small firms in the UK, which could be compelled to pay a total of £1 billion in back taxes. However, in his judgment published last month, Mr Justice Park stated that the implications of the ruling have been "greatly exaggerated."

Nonetheless, Simon Juden, chairman of the Professional Contractors Group, which has supported Mr and Mrs Jones throughout their legal ordeal, contends that the decision "undermines the self-assessment tax system by leaving a host of questions unanswered."

"It could affect hundreds of thousands of small family businesses who’ve shared the risk and hard work of running a business, expecting to share in the rewards," remarked Dr Juden.

“We are campaigning for clarity, consistency and common sense in regulation and legislation,” he added.

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