UK Contractors Group Says Inland Revenue Is Unfairly Attacking Business Wives

Tax-News.com, London

20 February 2003

The UK's Professional Contractors Group (PCG), which represents thousands of independent freelancers, and led the abortive defence against the Inland Revenue's hated IR35 anti-self-employment legislation, has written to Paymaster General Dawn Primarolo complaining that the Revenue is unfairly attacking husband and wife companies.

The PCG is concerned about the Inland Revenue's interpretation of Section 660 - an existing piece of tax legislation which helps determine the principal beneficiary of a business - in other words, the shareholder who receives dividends from company profits at then 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, helps the contractor reduce their own earnings and thus stay out of a higher tax bracket.

Suddenly the Revenue is arguing that if one of the partners is the principle earner, then all shares should be apportioned to them. David Ramsden, co founder of the PCG said, " This is an attack on small businesses and will be regarded by many as an attack on women's rights to hold shares. We don't believe the government would support such retrograde taxation policy and are asking Dawn Primarolo, the Paymaster General to intervene as a matter of urgency."

The PCG believes that existing legislation is vague and the Revenue is interpreting it without government backing. Tax experts admit they've been caught unawares and are joining with PCG, the Federation of Small Businesses for urgent clarification from the Treasury.

Here is the PCG's letter:

The Rt. Hon. Dawn Primarolo MP
Paymaster General
Treasury Chambers
Whitehall
London SW1P Gareth Williams
Director of External Affairs

11/02/03

Settlements legislation - Income and Corporation Taxes Act Section 660A and following sections

Dear Paymaster General,

I am writing to express our deep concern about the application by the Inland Revenue of the Settlements legislation to shareholdings in small family businesses.

In a number of recent cases the Revenue has sought to recharacterise a wife's dividend income from a small limited company as that of her husband, under Section 660A ICTA 1988.

We are advised the Revenue believes it is justified in its approach. We disagree. We believe this approach is legally flawed, unprecedented, and will widely be seen as an unfair new tax on a very large number of small businesses in all sectors of the economy.

Following discussions with the Federation of Small Businesses involving Stephen Alambritis, we understand the FSB is equally concerned about this issue and that they will also be looking at the adverse effects of this application of S660.

Our concerns are principally:

1) Any small business with a husband/wife or other family shareholding is likely to be affected. The numbers affected are very large, because this is the most common method of structuring a family company.

2) Application of S660 to a situation in which shares are initially subscribed by several family members (rather than transferred at a later date) is legally unprecedented, and there must be significant doubt whether the courts would support it. Were it so supported the implications would be wide ranging.

3) The policy will be seen as an attack on a woman's right to own assets and receive income independently from her husband, and as a retreat from independent taxation.

4) The taxpaying public and their advisers are wholly unaware that the IR considers that dividends paid on shares in family companies should be recharacterised, in whole or in part, as the income of the main worker within that company. There is no easily available guidance on this (no tax bulletins, no press releases) and no tax cases which deal with the areas currently under attack.

5) In the light of this, the decision to back-date the new approach over several years will be seen as particularly unfair.

6) The policy does not sit very comfortably with the freedom married couples have to transfer assets for CGT and IHT without problem (the different approach here means that taxpayers will be even more startled by the position taken on income tax).

7) It is also surprising that this initiative has been taken at a time when the government is generally encouraging small businesses to incorporate; many will have done so using this 50:50 shareholding structure.

8) Small businesses believed the issue of husband/wife shareholdings was resolved by the IR35 legislation. The new approach to S660 would catch situations where the IR35 test has been passed, as well as affecting companies which could never have been at question under IR35.

If the Revenue pursue this policy it is likely to meet significant criticism. Individuals running small family businesses, who believe they are compliant with the tax system, will find they are unexpectedly branded as tax avoiders and have large, possibly unpayable bills.

We await your earliest and urgent response.

Yours sincerely,

Gareth Williams
Director of External Affairs
Professional Contractors Group

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