Tax anger sparked over damning S660A rules

The Inland Revenue has come under small business fire from advisors and accountants after publishing its S660A guidance, telling family firms not cut their tax bill by dividend payment.

The guidance on settlement law was issued last week in a bid to clarify tax uncertainty since April of last year, when IT firm Arctic Systems was attacked for the transfer of assets.

But tax advisors and accountants have condemned the so-called 'guidance', saying it collides with the government's pledge to enterprise, made last year by Gordon Brown.

Angela Wong, Director of Tax Relief, told Freelance UK: "The Chancellor should be giving couples and families incentives to create more wealth and business success, and rewarding industriousness and creativity, instead of penalising couples in this way: I believe this [guidance] shows breath taking short-sightedness."

She described the renewed clampdown on small family-run businesses as an "almost Orwellian" abuse of the tax system that was a "destructive, demotivating and negative" move against thousands of businesses.

"Instead of 'all people are equal but some people are more equal than others' we have: The taxman will treat taxpayers impartially as long as the taxman gets to take more tax," said Wong.

"This will be a deeply unpopular move on the part of the Revenue, and we intend to take the government up on this as one of a number of tax laws which abuse taxpayers' rights."

The Revenue have said they will look through individual cases of settlement law and decide themselves, on a case-by-case basis, when husband and wife companies are outside S660A by considering the "whole arrangement."

They say no scientific formulae is available for interpreting the 1930s settlement law as every case will be judged "on its particular facts" and acted upon accordingly.

At present, the Revenue is handling 100 cases where it believes husband and wife companies are breaking the law, but said others went undetected, owing just small amounts of backdated tax.

"The Revenue promises to treat taxpayers fairly and impartially," said Tax Relief. "But in practice tax laws are fine as long as they are weighted in favour or the Revenue and against the taxpayer. "Loopholes" are frequently closed to divert more tax away from the taxpayer and towards the Revenue, but how often have you heard of loopholes being closed to stop the Revenue from taking too much tax? Never."

Anne Redston, tax partner at Ernst & Young, agrees there is no reason for the Revenue to tighten the rules governing husband and wife companies.

"There's absolutely no doubt that Parliament knew perfectly well that if you gave assets, such as ordinary shares, that also allowed income from those assets to subsequently flow to your spouse, that was perfectly acceptable. So there's no reason for the Revenue to seek to extend the settlements legislation in this way."

Meanwhile, one of the big three accounting firms did support the Revenue guidance, saying their clients would not have been advised to pay deflated salaries and full dividends across both partners, as a means of lowering the tax burden.

Speaking to the Daily Telegraph, Stephen Herring at BDO Stoy Hayward said: "People could not have been advised that paying themselves a minimum salary would not be open to attack."

Yet, this is disputed by the majority of accountants who have called for an urgent parliamentary review into small business taxation and inspection.

Ms Redston said: "Ninety nine per cent of tax advisers would say take a small salary and the rest as dividend."

The call for review has been backed by enterprise groups and tax advisors, who say the scrutiny will compliment a small business tax document, to be released alongside the Pre-Budget Report on December 2.

Tax Relief told Freelance UK: "We are asking for an urgent parliamentary review because we don't believe the government fully understands the impact of the wide range of injustices perpetrated by a large number of tax laws as well as collection and inspection practices."


23rd November 2004

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