4. Section 660A. What is it? Will I get caught? What will it cost me if I am caught?

The s660 rules (or settlements rule) that the Revenue are using have been in place for many years. However in the last couple of years they are using them in a way which had never before been considered as being under the remit of S660.

The original rules stop you passing income to someone else in the family, or giving income or assets to someone else on the basis that you will have it back later, all in an effort to reduce your overall income tax bill. Understandable you would probably agree, but what if you apply this logic to small Companies?

Say a husband and wife set up a Company together and decide to split the shares equally, so they own 1 share each. For arguments sake the husband does the work and earns the income, and the wife takes care of the administration, bookkeeping and so on. The result is that they share the income of the Company, meaning that they have two lots of personal allowance and basic rate tax band to use up. This is a very common scenario, and most would agree that to operate a Company in this way is a valid way to work, and not a sinister means of tax avoidance. Not the Revenue though.

A few years ago they won a case in which an already established and profitable Company gave non voting shares in their Company to their non working wives enabling them to gain a tax advantage by using their personal allowances and basic rate tax bands. That victory seems to have given them the ammunition to attack the scenario we described above. This has lead to the Arctic Systems case (Geoff and Diana Jones), heard at the Special Commissioners recently.

The Revenue's argument is that if the wifes income stems mostly from the husbands work, then he has given her a right to his income i.e. the dividends that she gets on her shares in the Company, and therefore this should fall under S660 as a settlement.

Controversially, Artic Systems lost their case even though the decision was not unanimous. Expert advisers are now calling for the ruling to be challenged since the presiding Commissioner had a casting vote which they believe should not have effectively counted as two votes; the PCG are raising funds to appeal the decision.

Will I get caught?

If you have set up a Limited Company, are a knowledge based worker and your spouse, parent, or sibling owns any shares in that Company, but do not actually earn income for the Company, then yes, you could potentially get caught. Having said that, there are only about 50 cases a year that are actually enquired into at present. The Inland Revenue has also recently vowed to clarify tax rules for the hundreds of thousands of husband and wife companies that use dividend payment as a means of income.

What will it cost me if I am caught? If you do get challenged by the Revenue then to work out how much tax they will be asking for, just check to see how much your tax your spouse has paid on her income in the last 6 years at either the zero or basic rate of tax, then multiply that by 25%. Add to this interest compounded at about 6% a year on the outstanding amount and you will have a rough idea.