Section 660 became known as the business tax for family and friends. The issue is the Settlements Legislation.
The leading case concerns Mr and Mrs Jones who set up their company Arctic Systems Ltd with each owning one share. Mr Jones worked full time in IT and his wife worked a few hours each week running the company.
This is of course a structure common to many small businesses. For the most part, Mr and Mrs Jones received fairly low salaries and distributed profits in the form of dividends. HMRC contended that the dividends received by Mrs Jones were settlement income under TA 1988 s660A or effectively Mrs Jones had a right to Mr Jones’ income and as such her income should be treated as the income of Mr Jones and consequently much higher rates of tax should be paid.
This case ran for some four years and was appealed by both parties at the commissioners and the courts, finally being decided by the highest court in the land, the House of Lords; where the decision of the Court of Appeal was upheld in favour of Mr and Mrs Jones.
This was a complex case but a unanimous victory for the taxpayer. However the victory is short lived. The government has announced in the pre-budget report (October 2007) that it wishes to address this issue and a consultation paper will be issued to cover what is described as 'income shifting'.
Income shifting legislation has been delayed following unanimous disapproval of the proposed legislation outlined in the consultation paper.
Most people can take comfort in the Arctic decision until 5 April 2010 and this site will provide further information on income shifting as and when it becomes available.
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