Husband and Wife Businesses face large tax bills as the Inland Revenue drive to enforce settlement legislation

Martin Carter, principal at West Sussex Accountancy firm, Morris Palmer, warns husband and wife business owners to watch out for new Inland Revenue drive to enforce Section 660a.

With many stories in the press recently about a mystery tax law entitled section 660a, some family run businesses are beginning to panic that they may receive a huge tax bill. Firstly the legislation needs to be understood, which is proving difficult for even top tax consultants. Basically, the section is aimed at companies where there is one revenue earner, and a spouse or family member is also a shareholder. If you are running a family business where each shareholder plays an active part in the business then there is nothing to worry about. The targets tend to be cases where there is one revenue earner and a spouse or family member, who does not have a significantly active role in the business, receives a large dividend.

Cases where small businesses have been targeted, (and asked to pay £42,000 in one instance), have caused so much confusion that the Chartered Institute of Taxation demanded that the Inland Revenue clarify its view straight away. The Inland Revenue recently issued a statement confirming "The settlement legislation is intended to prevent an individual from gaining a tax advantage by making arrangements which divert his or her income to another person liable to a lower rate of tax".

With over one million family businesses in Britain, many of them structured in a way that could be affected by this legislation, the implications of section 660a could be overwhelming, leaving some businesses branded as tax avoiders and having large bills to pay. Many have been unaware that the Inland Revenue was going to take this approach, and it has come as a nasty surprise to some. However, there is light at the end of the tunnel, with many professionals believing that the Revenue’s approach is legally flawed, unprecedented, and will be seen as an unfair targeting of existing legislation on small businesses.

The tax investigation insurers Qdos are preparing cases regarding section 660a, and will challenge the Inland Revenue’s attack on family businesses. Many take the view that until the cases are heard and settled it is difficult to recommend a suggested solution. Therefore the only option is to carry on as normal, but keep in regular contact with your accountant and allow the accountancy firm to monitor the situation, and update you accordingly.

For further information, please email us on solutions@morrispalmer.co.uk or call us on 01403 750 444