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Section 660 - Background Information on the Tax Rules

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The Section 660 rule, has been UK legislation since the 1990's. Its primary aim was to prevent people passing across assets and income to family members in an effort to reduce their tax liabilities, whilst intending to reclaim those assets at a later date. However, this rule was not, until recently, applied to company dividend payments.

Now known by many as the 'married couples business tax', the Revenue have recently begun to claim that the Section 660 rules can be applied to dividend income received. In other words, where a limited company director has his non-fee earning spouse as a joint-shareholder, any dividends she receives from the company should be taxed as her husband's income. Although this tax is being fought vigorously by several pressure groups, some people have received tax demands amounting to tens of thousands of pounds, backdated several years.

The Inland Revenue are believed to have targeted personal service companies (particularly 'one man band' freelancer companies). You may be targeted for Section 660 payments if any of the following apply;

• You pay dividends to family members who are not actively involved in the running of the company
• The amount of income you and your spouse bring into the company are not in proportion to the number of shares issued to each person.

The Inland Revenue have issued guidance on Section 660 (PDF Document) , however resistance to the new application of the Section 660 rules is strong.

Arctic Systems successfully challenged HMRC's application of the Section 660 rules to husband and wife businesses, winning its landmark case at the Court of Appeal in December 2005. Since then, we have learnt that HMRC intends to take the case further - to the House of Lords, so the story isn't over yet.

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Posted March 8, 2006