Contractors splitting dividend income from their contractor limited company with their husband or wife (or same-sex married partner) are still at risk of HMRC applying the settlements legislation known as Section 660a. But a recent ruling based on the Arctic Systems case suggests the courts are becoming more sympathetic to married teams in business together.
In Patmore v Revenue & Customs, tax tribunal judge Barbara Mosedale ruled that the dividends paid to the wife of businessman David Patmore did not qualify as a ‘settlement’, under Section 660a, overturning HMRC’s demands for additional taxes of almost £20,000.
Judge Mosedale applied the precedent created by the Arctic Systems case, which requires tribunals to take ‘a broad and realistic view’. She said in her ruling that: “It certainly seems to me that this is a case where HMRC has not done so.”
Mr and Mrs Patmore bought a small engineering firm, for which Mr Patmore had worked for many years, and the husband and wife team used a mortgage on their jointly owned home to raise some of the capital for the purchase.
Although Mrs Patmore was equally liable for the loans used to raise money for the purchase, she received a much smaller percentage of the shares in the business compared to her husband.
HMRC had previously acknowledged that Mrs Patmore equally shared the risk in buying the business, but did not accept that this should entitle her to half the shares and a fair share of the dividends.
Clearly the type of business is not an issue in S660a cases. Although the firm bought by the Patmores was well established with 18 employees and a factory, and therefore clearly not a contractor limited company or personal services company, Judge Mosedale wrote that this fact was not relevant to her decision: “The Tribunal does not see this is a distinction with any relevance.”
In her final decision, Judge Mosedale concluded that not only was Mrs Patmore not the subject of a settlement by her husband, as claimed by HMRC, but also that Mr Patmore had significantly overpaid tax on his dividend income, a proportion of which should have been paid to his wife.
Clearly, contractors who share business risk with their spouse from the outset have an increased chance of beating any Section 660a investigation by HMRC. But it is also clear that HMRC continue to be active in applying the settlements legislation to husband and wife businesses.
Published: Wednesday, August 18, 2010
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