Back in 2007 the ‘Arctic Systems case’ of Jones V Garnett (HMRC) brought terms such as ‘section 660a’, ‘income shifting’ and ‘family business tax’ into the limelight.
Section 660a and Arctic Systems
‘Section 660a’ refers to the section in the Income and Corporate Taxes Act 1988 that dealt with the taxation of income arrangements made specifically for the purpose or saving tax rather than for commercial purposes. It has more recently been incorporated into The Income Tax Trading and Other Income Act (2005).
In very broad terms, it states that if the person generating the income gives that income or rights to it to another individual, the person doing the giving should be taxed for it if they continue to benefit in any way from it. So HMRC argued that in the case of a company like Arctic Systems Ltd where: the shares are jointly held but only one of the shareholders is generating any significant income for the company; and the income distributed from that company although paid out separately is for the mutual benefit of the family or couple as a whole, the person generating the income for the company should be taxed for all the distributions. This would take away the tax benefit of making use of two people’s lower tax thresholds for dividend payments.
However, ‘section 660’ has a rather specific exception which is now laid out in section 626 of The Income Tax (Trading and Other Income) Act 2005. Again, in broad terms, this exception states that a gift made by one spouse or civil partner to the other is exempt from the above treatment provided that the gift carries the right to all of the income and that the gifted amount is not wholly or substantially a right to income.
It was therefore found in the appeal at the House of Lords that although Mrs Jones bought the share for a nominal value at the same time as her husband her ownership of the share was in substance a gift from her husband. As the share was an ordinary share which brought with it the rights of an ordinary shareholder it was not seen to be ‘wholly or substantially a right to income’ as it carried the right to vote in company decision making. HMRC therefore lost this case at appeal.
‘Income shifting’ and the ‘family business tax’
Whilst the victory of Arctic Systems in the court of appeal was seemingly great news for the taxpayers in a similar position to Mr and Mrs Jones the case did not go in the direction that HMRC and the government had wanted. In its response to the case the then government acknowledged the decision made by the House of Lords at appeal but stated that the case had highlighted the need for greater transparency regarding the tax treatment of income splitting; where it was the government’s view that the individual generating the income should be subject to any taxes upon it. So a moment of victory for tax payers soon gave way to the shadowy threat of new ‘family business tax’ legislation; making the subject as contentious and uncertain as ever.
Originally planned as a subject for inclusion in the Finance Bill 2009 the concept of the ‘family business tax’ was withdrawn from inclusion in that Bill in November 2008 and the then Chancellor Alistair Darling said that it was to be kept under review. Then in the 2010 budget there was no mention of it, and then, we had a change of government and the Office of Tax Simplification (OTS) was born but the subject of ‘income shifting’ fell quiet.
So how should a limited company be structured and is it safe to make use of spousal tax allowances?
Well, as is so often the case in UK law, there is no black and white answer to that question. Case law indicates that there is a legal precedent in the Arctic Systems case to support a ‘husband and wife’ company arrangement; the reaction of the government at the time and the existence of the case in the first place indicates that HMRC and the government are keen to prevent such arrangements; silence on the matter does not indicate that it has been forgotten and there is a risk that any new legislation could be applied retrospectively.
So any arrangement other than 100% of the income from the company going to the person generating it brings with it a level of risk and the more beneficial an arrangement becomes in terms of tax savings the higher that risk.
The structure of a limited company should therefore not be a decision that is taken lightly and it is advisable to seek our advice in this area.
Why Integro Accounting?
Integro Accounting is the UK’s only specialist provider of fixed fee, limited company accountancy services for contractors, consultants and freelancers that was established to an award winning standard – our Practice Manager, Maria Hickmott FCCA, won The British Accountancy Awards’ ‘Accountant of the Year’ in 2011.
We were set up with the vision of providing a service that is the ultimate for the dynamic, busy professional of today in a language you understand.
Integro Accounting have designed a bespoke service for the contractor who is always on the go; never forgetting that one size will never fit all.
The relationship you have with your accountant is the most important factor in our service which is why we will always offer unlimited contact with your own personal accountant; whether that contact is via the phone, email or face to face.
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If you have any questions about contracting or would like to find out more about how Integro Accounting can help you and business please call Christian on 01525 303984, email email@example.com or request a callback.