Section 660 Test Case Gets Under Way

by Robert Lee, Tax-News.com, London

15 June 2004

A key test case commenced in London yesterday that will decide whether the Inland Revenue has the right to pursue millions of pounds in retrospective tax from thousands of small businesses.

At issue is the way in which small ‘husband and wife’ firms distribute dividend income. Many small family businesses in the UK have legitimately formed limited companies, enabling 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, citing a pre-war regulation concerning the tax treatment of husband and wife partnerships, has seized an opportunity to outlaw the practice, and it was the department’s £42,000 demand for back taxes from Geoff and Diana Jones’s small IT firm, Arctic Systems that triggered the current case.

Speaking to the Financial Times, Roger Williams, tax partner with solicitors Wilkins Kennedy warned: "If the decision goes the Revenue's way it could be used to attack thousands of other small businesses structured in a similar manner. The ruling will apply retrospectively so the Revenue could be looking to collect hundreds of millions."

The Jones’s case is being funded by the Professional Contractors Group, which was originally established to help mainly IT contractors fight adverse Revenue interpretations such as the IR35 rules. The group’s chairman, Simon Juden observed this week that:

"The way Arctic Systems is set up is typical of the way accountants say a family business should be structured. We know the legislation has been around for a long time but the Revenue has changed the way it is using it."

The Revenue however, begs to differ, arguing that the legislation first enacted in 1936 has been applied “consistently” in the intervening years.

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