CUK’s contractor guide to s660, income shifting Part 2

(Continued from Part 1)

Q: If I run a ‘husband and wife’ business with a similar structure to Arctic Systems, how likely is it that I will be caught by s660A (the Settlements Legislation), or the proposed Family Business Tax?

A: The legislation we all know (if not love) is no longer at s660A. It has been rewritten as part of the Tax Law Rewrite process and can now be found at Income Tax (Trading and Other Income) Act 2005 (‘ITTOIA’), section 625.

If you are using the same model as Mr and Mrs Jones in Jones v Garnett [2007] STC 1536, you should not be ‘caught’ by ITTOIA s 625.  Remember that Mrs Jones had ordinary shares with full rights.

If, however, your spouse has been given, or purchased, preference shares or some other type of share with restricted rights, then you are more likely to be challenged. And if the shares have been transferred to your under-age children, there is a much higher risk.

Q: How do HM Revenue & Customs tot up a liability under the Settlements Legislation (s660/s625), and how many years can the tax authority go back in calculating the liability?

A: If you are challenged, the current rule is that HMRC can open enquiries into

• a company’s tax return for four years following the normal filing date - assuming it was filed on time (TMA s 34), and
• your self-assessment return for a year following the normal filing date (TMA s 9A).

However, these time limits are extended to 6 years if the loss of tax was caused by you being ‘careless’ and to 20 years if your behaviour was ‘deliberate’. The word ‘deliberate’ here means something akin to fraud.

HMRC can also open an enquiry after the normal deadline if they make what is called a ‘discovery’. Broadly speaking, this means that they find out something that they couldn’t have realised from looking at your tax return.

Discovery is a much disputed area, and if HMRC argue that they can make a discovery, specialist tax advice is recommended.

Q: Is the FBT effectively the successor to the Settlement’s legislation, and do you expect any changes to FBT or s660/s625 to be announced in this month’s Budget, assuming changes are recommended by the Office of Tax Simplification?

A: After HMRC lost Jones v Garnett they promised to change the rules. But the draft ‘family business tax’ legislation never became law - it was too complex and unfair.

It is likely that this area will be considered again, especially as the 50% rate of tax has increased the benefits of ‘income shifting’. However, I don’t expect that the FBT legislation will be revived.

I don’t know what solution will be suggested [to the government by the OTS], but I very much hope that, whatever it is, the new ‘three stage’ approach to tax changes is adopted. This will allow it to be properly discussed and make it more likely that any unexpected and unfair side effects eliminated.

The information contained in this article is intended to provide only a general outline of the subjects covered.  It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice.  The author disclaims all responsibility for any loss arising from any action taken or not taken by anyone relying on the information within.

Answers and guidance, as told to CUK, by Anne Redston, of Temple Tax Chambers.

Editor’s Note: This is part two of a three-part guide, designed to provide contractors with an expert opinion on their most frequently asked questions about s660 and income shifting – the Family Business Tax. Part 1 looked at the current and draft rules for ‘husband and wife’ businesses and Part 3 will focus on how the FBT could be made fairer and workable.