PCG seeks donations for 'settlement' tax appeal

The Professional Contractors Group (PCG) issued a call last week for funds to help support a case which, it says, has huge tax implications for tens of thousands of IT contractors and other small businesses.

The money will be used to appeal a landmark decision by the Inland Revenue that in effect stops the re-characterisation of one person's income as that of another to avoid paying tax on it.

Section 660A of the Income and Corporation Taxes Act 1988, also known as "settlements legislation", was brought before the special commissioners for income tax in June by a small IT consultancy called Arctic Systems, run by Geoff and Diana Jones of West Sussex.

Although the case, which was backed by the PCG, failed, it did so only after the two special commissioners hearing the case reached deadlock; one had a casting vote and used this on behalf of the Revenue.

The PCG's legal advisors think this use of the casting vote was inappropriate, and the organisation wants to appeal because, it says, the case has such large implications for small contractors across the UK.

S660A legislation is wide-ranging, and in basic terms deals with situations where income arises from something, for example shares, given by one person to another. This is called a "settlement". The aim of the legislation is to prevent people from settling their income on another person who pays tax at a lower marginal rate.

The maximum benefit achieved by redistributing the company's income in this way is obtained when the non-fee-earning spouse has no other income at all and his or her entire basic rate tax band is utilised. This gives a maximum possible exposure to S660A of up to £8,000 a year.

The PCG said it believes that in the situation where both spouses subscribed for shares at the time when they jointly founded a company, then no gift has taken place and the settlements legislation cannot apply. In its argument, both partners take an equal risk on starting the business and are thus morally and legally entitled to equal reward from its success, in just the same way as the owners of any other business.

Usually the Revenue itself funds appeals if it thinks they will affect a large number of taxpayers. But despite the fact that this is a test case, and that there is controversy over the use of the casting vote, the Revenue has refused to fund this case.

Anne Redston, tax partner with accountants Ernst & Young, said "I am astonished that the Revenue considers that this case is not of significant interest, and that S660A is not in need of clarification. The use of this obscure legislation against husband-and-wife businesses may affect hundreds of thousands of taxpayers, and the test case has been taken because most professionals disagree with the Revenue's interpretation of the law."

Donations to the legal fund will be used for this and other cases supported by PCG and should be made payable to "Professional Contractors Group Ltd" and sent to Legal Department, Professional Contractors Group Ltd, Sovereign Court, 635 Sipson Road, West Drayton UB7 0JE. Please email kevin.stearns@pcg.org.uk or telephone 0845 125 9899 if you wish to send your donation via BACS.

Matt Loney writes for ZDNet UK.