Section 660a settlements legislation: FSB advice for family firms

Until recently Section 660a was an obscure piece of legislation, designed to stop people passing their income on to another person who pays tax at a lower rate.

However, a test case has controversially ruled that this law must be rigidly and retrospectively enforced against husband and wife businesses.

The decision will be appealed in the High Court. But if the appeal fails, the ruling becomes legally binding.

A final decision will not be reached before 31 January, so family businesses must file their tax returns with the case still undecided.

Simon Sweetman, Vice Chairman of the FSB’s taxation unit, has the following advice for Britain’s 200,000 family businesses:

“The settlements legislation could affect any family business where a family member receives a share of profit from the business (whether as a dividend from a family company, or as a member of a partnership), which is different to what might be paid to somebody who is not a family member for the same work.

“If you are unsure whether this might mean you, you should talk to your professional adviser.

“If you have not filed your 2004 return yet, you have a choice.
You can prepare your return in a way that reflects section 660a - but add a covering note that you are aware that the decision is not final.

“Or prepare it without applying the settlements legislation and make the Inland Revenue aware that you have done so. On the form or a covering letter you need to say: “if the decision in the Jones v Garnett case becomes final, then there will be income arising under the settlements legislation.”

“If you have filed already, you may feel that you want to make a correction to your return by writing to the Revenue and saying the same things.”