Section 660a was first introduced back in the 1930s, and is a piece of tax legislation contained within Part 5, Chapter 5 of Income Tax (trading and other income) Act 2005. The aim surrounding these rules is to prevent limited company contractors from passing income to someone else in the family who pays at a lower tax rate on their earnings, in order for the contractors themselves to also pay lower tax.
HMRC started using Section 660a as a weapon against contractors in the early 2000s but this was short lived following the 2007 House of Lords judgement in the ‘Arctic Systems’ case. HMRC had argued that the establishment of a company with a spouse as shareholder was an “arrangement” within the meaning of the legislation and that Mr Jones sought to confer a benefit on his wife by diverting dividends to her to use personal allowances and lower/basic rate bands.
Initially Mr. & Mrs. Jones lost their case but after taking it up the chain of appeal to the House of Lords, the initial decision was overturned, bringing into play the ‘spousal exemption’.
Section 660a can apply to any contractor who has more than one shareholder within their company, but can also apply to a Limited liability partnership (LLP). It will not, however, apply to all contractors who are dividing their income if, for example:
a contractor whose spouse/civil partner performs a significant amount of the work for the company and brings income equivalent to the number of shares that they hold (although not always the case)
Spousal Exemption – Under Section 626 ITTOIA 2005, the legislation does not apply to an outright gift of assets between spouses and partners provided that: the gift is unconditional, the gift carries a right to the whole of the income and it is not substantially a right to income.
Alphabet shares are often set up in order to pay different rates of dividends on the shares. The rates of dividends can be manipulated to pay less tax.
Such shares only give a right to income but with none of the voting rights. Where such shares are provided, HMRC may well be dubious, because such shares will provide a benefit to the recipient and therefore there will be a bounteous arrangement.
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