Dealing with the Inland Revenue can be a very daunting prospect for freelancers and consultants. PCG and Accountax have developed an online risk analysis tool called SARA (Self Assessment Risk Analysis) to help them understand their exposure to Section 660A (S660A). This is in recognition not only of the growing level of concern by small business owners about dealing with the authorities, but also of the complexity of the S660A rules.
S660A, known as the “settlements legislation” dates from the 1930s, though its current incarnation is through the Income and Corporation Taxes Act 1988 and some changes in 1995. Its aim is to prevent re-characterisation of one person’s income as another person’s income for the purposes of avoiding tax.
The Revenue has recently argued that dividend income received by a non fee-earning spouse or other connected person should be taxed as the main fee earner’s income, typically at the higher rate of 40%.
Members of the freelance small business community may be at risk from an Inland Revenue challenge on S660A if any (or all) of the following apply:
- There is a limited company (or partnership)
- Ownership is shared with someone else (e.g. spouse)
- The freelancer is the sole or main fee-earner
- The other owner receives dividends or profit share
Section 660A is arguably more important for freelancers than IR35 as it relates to the individual rather than the company and can therefore be applied independently of any company changes or closures.
There are two versions of SARA to account for the difference between the cases where shares were gifted from one partner to another, and those where both partners owned shares from the outset. Both versions contain a series of about 35 questions.
The questionnaire takes around 20 minutes to complete, and results are available immediately. SARA enables one to understand and take relevant action to identify whether one’s circumstances indicate that the Inland Revenue is likely to challenge and secondly, if the Revenue does challenge, one’s level of risk. SARA calculates and displays a risk factor, on a scale of 1 to 10, with explanatory text.
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.