Editors note (Feb 2012):
The original settlements legislation dates back to the 1930s and was subsequently updated first in 1988, when it became the more familiar Section 660. It was changed again in 2005 when it was updated and rewritten into its current form as Section 624 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005. See more information on the current settlements legislation.
The Inland Revenue created a surprise at the start of the landmark "husband and wife" tax case yesterday when it reduced the £42,000 it has been seeking in back taxes.
Special tax commissioners, sitting in London, were told the Revenue was no longer claiming retrospection in the tax bill sent to Geoff and Diana Jones, who run Arctic Systems, a Sussex-based IT business.
They had been seeking taxes covering a six-year period but the commissioners heard the demand had been dropped. They were not given any explanation.
It was not clear whether the climbdown is limited to the Jones case or the thousands of other small businesses that are waiting on tenterhooks for the outcome. A Revenue spokesman said there would be no comment until the end of the case, which may go into a third day tomorrow.
Observers feel the gesture may be limited to this case because the Revenue stands to collect millions of pounds from similar partnerships if it wins.
The Revenue has alarmed small businesses with its demand that Mr and Mrs Jones are liable to pay extra tax because of the way their partnership and dividend payments are structured. Mr Jones generates most of the income, while his wife administers the company. By paying a dividend out of profits and steering some of the husband's income to his wife, the couple have been able to reduce their tax bill.
The Revenue maintains that the dividend was a device for switching income from an earner to a non-earner and was taxable.
Editors note (Feb 2012):
The original settlements legislation dates back to the 1930s and was subsequently updated first in 1988, when it became the more familiar Section 660. It was changed again in 2005 when it was updated and rewritten into its current form as Section 624 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005. See more information on the current settlements legislation.