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Section 660 - Overview of the tax legislation

Published on Feb 17, 2006 |

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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.

HMRC are believed to have targeted personal service companies (particularly 'one man band' contractor and 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.

Section 660 Defeat

HMRC suffered a series of legal defeats in the famous Arctic Systems saga, including a final defeat in the House of Lords in 2007, in which it failed to demonstrate that the 'Section 660' rules should apply to family businesses.

The birth (and delay) of 'income shifting' rules

Not soon after the Arctic Systems defeat, HMRC swiftly announced its intention to clamp down on 'income shifting' - whereby business owners may split their income in order to reduce their joint tax burden.

Plans to implement the new income shifting measures have been delayed - firstly in Budget 2008, and then indefinitely in the November 2008 Pre-budget report.