Contractor Accountants - S660 Settlements
The s660 rules (or settlements legislation) have been around since the 1930s. The original rules stop you passing income to someone else in the family, or giving income or assets to someone else in an effort to reduce your overall tax bill. This is called a "settlement", and the aim of the legislation is to stop people settling their income on another person who pays tax at a lower rate.
Husband & Wife Companies
In such companies a husband and wife may, for example, each own an equal number of shares with one of them the main fee-earner and the other responsible for relatively little or no fee income. By paying out the profits by way of dividend, income earned by one of the couple can be partly received and taxed on the other resulting in an overall saving on tax since there will be two lots of personal allowance and basic rate tax band to use up. This is currently a very common scenario with thousands of husband and wife companies using what had always been deemed acceptable tax planning.
The last few years has seen uncertainty and confusion surrounding the taxation of family businesses with the case of Arctic Systems Ltd (Geoff and Diana Jones). The Revenue's argument was that if the wife's income stems mostly from the husband's work, then he has given her a right to his income i.e. the dividends that she gets on her shares in the Company, and therefore this should fall under S660 as a settlement.
The "husband and wife" companies most at risk of being targeted by the Revenue were those viewed as openly abusing the dividend system; particularly where the main earner provides personal services and does not draw a market value salary and dividends are paid to shareholders paying tax at lower rates.
The legislation falls into difficulty when the company formation and the profit generated from the companies income is shared between spouses usually by not exclusively on an equal basis. In this scenario the primary income-generating spouse takes a small salary to maximise the dividend shared with the other spouse.
The settlements legislation normally applies where the individual in receipt of the income is the spouse or civil partner of the settlor (unless such a gift is outright and unconditional, and of the capital and income from that share).
Broad enough to cover cohabiters’ arrangements, the settlements legislation would normally apply when:
- the settling party has retained some “reversionary interest” over the shares that have been issued
- been issued or given to the cohabitee (for instance a right to acquire the shares back or the right to enjoy proceeds from, or the income from, the shares given away).
If for example a non-working cohabiting party receives a dividend paid direct into a joint bank account, or pays a share of a joint mortgage, then the cohabite would be considered to have retained an interest. The best way to be sure of avoiding an issue is to make the jointly owned company, or partnership, as commercial an arrangement as possible.
The Inland Revenue does however acknowledge-
Where a business has real substance with employees, premises and the profit earning is not just down to one shareholder, s660A should not apply. In other cases there are some simple steps that can be put in place to provide some protection:
- Avoid having differing classes of shares. Preferably, all shares should have the same income, capital and voting rights.
- Where possible both parties should contribute to the company’s business and there should be documented evidence of this.
- Both parties should subscribe for shares from their own resources and introduce real value to the business
- Dividend waivers should be avoided.
Every business arrangement needs to be looked at on its own merits and taxpayers who are married, in civil partners or cohabiting and are looking to establish a joint business should seek expert advice.