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PCG supporting s660a tax test case for husband and wife business

The first hearing of a Section 660A case by the Special Commissioners of Income Tax will begin on Monday 14 June 2004.

The case concerns Geoff and Diana Jones of West Sussex company Arctic Systems and could have massive implications for thousands of family businesses. It is being funded by the Professional Contractors Group (PCG). The legal and advisory team will include Malcolm Gammie QC and Dave Smith from Accountax Consulting.The hearing will take place at the offices of the Special Commissioners on 14 June.


Thousands of family businesses could be affected by a new interpretation of a very old tax law which is increasingly being applied by the Inland Revenue and has the potential to be more significant than IR35.

Section 660A (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 that of another 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%.

PCG member Geoff Jones and his wife Diana run a small IT consulting business, Arctic Systems. The Revenue is seeking to apply the settlements legislation over each of the last six years, amounting to an additional tax bill of around £42,000 for the couple.

S660A legislation is wide-ranging, and in basic terms deals with situations where income arises from something, for example shares, given by one person to another. This is called a “settlement”; the aim of the legislation is to prevent people from settling their income on another person who pays tax at a lower marginal rate.

The maximum benefit achieved by redistributing the company’s income in this way is obtained when the non fee-earning spouse has no other income at all and his or her entire basic rate tax band is utilised. This gives a maximum possible exposure to S660A of between seven and eight thousand pounds a year or so: a substantial sum.

PCG believes that if both spouses subscribed for shares at the outset, then no gift has taken place and the settlements legislation cannot apply. Both partners take an equal risk on starting the business and are thus morally and legally entitled to equal reward from its success, in just the same way as the owners of any other business.

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.

Published: Wednesday, June 9, 2004

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