What is Section 660a?
The original section 660a rules were introduced to stop you passing income to someone else in the family, or giving income or assets to someone on the basis that you will have it back. After all, this would reduce your overall income tax bill in an underhand manner. Understandable you would probably agree, but what if you apply this logic to small Companies where a husband and wife work together?
Say a husband and wife set up a Company together and decide to split the shares equally, so they own 1 share each. In our example, we shall say that the husband does the work and earns the income, and the wife takes care of the administration, bookkeeping and so on. The result is that they share income of the Company, meaning they have two lots of personal allowance and basic rate tax band to use up. This is a very common scenario, and most would agree that to operate a Company in this way is a valid way to work, and not a sinister means of tax avoidance.
A few years ago the Inland Revenue won a case in which an already established and profitable Company gave non-voting shares in their Company to their non-working wives enabling them to gain a tax advantage by using their personal allowances and basic rate tax bands. This victory seems to have given them the ammunition to attack the scenario we described above. This has led to the Arctic Systems case (Geoff and Diana Jones), which we have covered in our S660 news.
The Revenue's argument is that if the wife's income comes from the husband's work, and that he has given her a right to his income, for example, the dividends that she gets on her shares in the Company, and due to this the payments should fall under Section 660a as a settlement.
More on S660.