Editors note (Feb 2012):
Section 660 was replaced by the settlements legislation in 2005, as Section 624 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005. For more info see settlements legislation.
Introduction
On 18th June 2003 IR35Calc attended the Section 660 seminar presented by Shout99. The seminar provided excellent information and analysis of the current situation, together with advice and guidance on specific actions individuals take to mitigate their risk against section 660. The speakers were Simon Sweetman, a tax consultant; Carl Whittaker, a tax consultant, and Kevin Miller, an accountant from Shout99.
What is Section 660?
Section 660 is aimed at companies where there is one revenue earner, with a spouse or family friend as an employee, and/or a shareholder.
How has is arisen?
The legislation has existed since 1990 and was re written in 1995. It is not something new. However, over the last 10 years the number of Personal Service Companies has increased as a result of the advantages tax position and also as a result of the demand by agencies to only deal with limited companies.
Is it related to IR35?
Many companies have managed to protect themselves against IR35 by having IR35-Friendly contracts. HMRC then looked at the working practices, which in some cases, has further been mitigated by companies by both parties signing a set of working practices. It was expressed that although there is no direct link to IR35, it was thought that HMRC might be attempting to use Section 660 in cases where the company had protected itself against IR35. Carl stated that he in his view they were ‘Using it as an add-on tool the IR35 argument.’
Should I panic?
Not yet. Section 660 is not a crusade by HMRC (yet!). The legislation is only currently being applied in this manner by a few offices. Bristol and Manchester were mentioned. However, that is not to say that it will not spread. Kevin Miller stated that is was ‘Safe to assume that it would spread’.
How widespread is it?
Simon stated that there “were currently only 50 known cases.”
Will it effect me?
It depends. If you are running a family business where each shareholder is an active part of the business then there is nothing to worry about. The targets tend to be cases where there is one revenue earner, and a spouse, or family member who does not have a significantly active role in the business but receives a large dividend. The relatively non active shareholder would also need to hold shares that does not give them any financial risk, right to vote or right to capital of the company. Ordinary shares, which the majority of single man PSC’s have, do ensure the shareholders have all those rights.
What should you do now?
Firstly, don’t panic, but do assess your situation. Shout 99 has some excellent material that can help you do this. There are some steps you can take now to mitigate your risk which are discussed in the material. Monitor the situation going forward and ensure that if the revenue targets you on a section 660 basis you engage the use of professionals to defend your case.
How much could it cost me?
This depends on individual cases, but estimates are that it could be up to £42,000 if the revenue attempt to go back 6 years. However, Carl expressed that because companies has fully declared their situation each year there was a string argument against the revenue having the right to go back 6 years to apply this legislation.
What will happen next?
It is unsure. The next 6 months will make things clearer once a few test cases have gone through. Watch this space.