S660: Impact of Artic on Company Set-ups?

[eAZy]

What is impact of Artic on different company set-ups & scenario’s. Some views below (IANAL). Any Comments ?

1.0 Single Fee Earner & Dividend Splitting

1.1 What is the situation if the non-earning spouse actually controls the company?

Spouse holds majority of the shares or is the only Director.
That spouse would then be the one who decided on salary and dividend levels. Is there then still a bounteous arrangement? If you read the judge's comments on Crossland v Hawkins then clearly there still would be, as Jack Hawkins owned no shares at all in the company but was still regarded as the settlor, and he regards that case as effectively deciding this one.

1.2 Two Directors (Fee Earner & Spouse)
Mixture of 1.1 & 1.3

1.3 One Director (Fee Earner only).
As per Artic

1.4 Zero Directors (Composite Company)
Cannot pay dividends to spouse as it cannot be argued that the spouse carries out any duties for the company.

1.5 Share Split Ratio [80:20, 50:50 etc]
One possibility would be to adjust the shareholding to a level that equates to the input of the shareholders: that will depend on the facts in each case, but one could take the view that where it is 75/25 or 80/20 it is unlikely to be challenged in most cases.

1.6 Share Gifting / Share Subscription
According to Parkes not important, if shares were gifted or subscribed.


1.7 Subscription by spouse (10K for 50% instead of £50)
If the non-earning spouse has invested a significant amount of capital in the business. If annual dividends are significantly above this level, than IR would claim that ‘part of this’ caught.

If a spouse is getting a disproportionate return on their investment, then the legislation applies?


1.8 Company assets / property
Park intimated that businesses that own significant assets should not fall foul of the 'settlements' legislation. This could remove shopkeepers, for example, from the Revenue's radar.

If the income from property is lower than the spouse dividend than this would be argued by the IR that the surplus would be caught by S660A.


1.9 Substantial Retained Profits
According to the IR guidance (TSEM4355) the presence of significant capital in the company removes the application of 660A. What is significant capital?

1.10 Salary Levels (MRS)
The judge said that if Fee earner had paid himself 'going rate for employees' it would have been far harder for the Revenue to establish a case.

No doubt each of us will have our own definition as will the Revenue. There seems to be no sensible answer to this one. Perhaps another starting point could be value of the contribution of the 'subordinate contributor' and allocate the balance to the 'main contributor'. There may be some recognition of the duties performed by non fee earning spouse.


1.11 Ordinary Shares
Are wholly or substantially a right to income according to the judge ?

1.12 Dividend Waiver’s / Preference Shares
Dividend Waivers - Arctic has confirmed thoughts that dividend 'waivers' will now always be regarded as a 'settlement'. A 'waiver' allows others to receive a potential 'bounty'. Similar Arguments for preference shares.


1.13 Connected Persons - another family member with no retained interest
The Judge did however remark that, "...if Mr Jones' co-shareholder was not his wife but say his sister, he could not be taxed on her dividends." This comment by the judge was 'obiter' - an aside, that cannot be relied on as legal authority.

The s660 rules are different for (a) spouse, (b) own minor children, and (c) others. So different rules would apply, and it would be necessary to look at the situation in detail to form a view.

In the eyes of the Revenue the 50% shareholding of your ex-wife could have been a ‘settlement’ giving a bounty to your ex-wife and, therefore, may have been caught under Sec.660A. Sec.660B applies to situations where income is paid to minor unmarried children of the settlor. Therefore, if your ex-wife transferred her 50% shareholding to your adult daughter under a divorce settlement and you did not retain an ‘interest in the property’ then the legislation should not apply.


[b1.14 [Partnerships[/b]
The Revenue have previously stated in their guidance notes that where a partnership is used to divert income to another person, then such arrangements come within the ambit of S.660A. When looking at the whole arrangement, if a spouse is getting a disproportionate return on their contribution, then the legislation applies.

It is not, however, just the potential to earn profits for the business that needs to be examined. If the non-earning spouse has invested a significant amount of capital in the business and takes on the risks of the partnership liabilities, then it may be possible to justify a share of the profits.

If you can show that the risks are real, so much the better. BUT never lose sight of the commercial fact that these may be real risks...


2.0 Multiple Fee Earners & Dividend Splitting
If Proportion of the fees being generated by the spouse are considerably smaller than her dividends than IR c

[malvolio]

Errm...

If there were clear answers coming out of the various hearings to date, do you think the PCG would still be appealing?

Disregard corporate structure. The ruling as it stands adds absolutely no clarity to anything.

Be the only shareholder if you're a one man band. Anything else, on the arguments given to date, can be construed as being within the settlelments legislation if shares or equivalent are held by someone to whom you are in some way connected.

[tim123]

Re: Errm...

You're not going to like this comment but IMHO the ruling is eminently clear.

The judge has basically said that if you attempt to share your company's income with someone disproportionatly to their commercial value to the company, you can expect a tax charge.

Just because someting isn't in your favour, doesn't make it unclear. As far as I can see, unless an appeal is won, the era of dividend splitting with a non-fee earning spouse is over.

tim

[malvolio]

If only

..it were that simple.

Firstly, define proportionate. Diana Jones did real work for Arctic, and she paid for her share in cash at the outset. My other half has a well paid job and, at the beginning of my company's existence, paid in a significant amount of money to keep us in beer and skittles until I actually earned some real income. There are a lot of corner shops, chippies, newsagents and pubs where one half stays home and guards the kids while the other earns the money. Where, exactly, do you draw the line about "input to the company"??

Secondly, Parks J introduced, out of thin air, the concept of a market rate. Just what the h*ll does that mean?

Finally, the original judgement was perverse in that, faced with a diametrically opposite verdict from herself and the other commissioner, Nuala Brice used a casting vote to support her own viewpoint, against all rule and precedent.

And this is clarity?? I think not.

[ASB]

Re: Errm...

There is certainly some clarity. It gives a sort of "feel" for some things which may be caught. But lots of situations are different.

Mine for example; shares are owned 50/48.

When the 40% was sold to sombody (who I later married) she paid a fair commercial price for them, and generated about 40% of the fees. Clearly not caught.

But now I generate all the revenue. Is it caught now? Should it be?

If it is not caught then why should the Jones be?
If it is caught then it is simply arbitrary taxation. How can something become a settlement which wasn't originally simply because of future changes in circumstance?

I accept the 8% I gave my wife after we got married as caught and will declare those divis on my SA form. But not the rest.

[tim123]

Re: Errm...

1) "define proportionate". Why do I need to, what do you not understand about the dictionary definition :-). Do you mean, "define the proportions". OK so there is some lack of clarity here, but I don't think that it is very large. Look at it this way, take the worth to the company of the job that each of its employees actually does and multiply by the hours that they do. Mrs Jones did a job worth 5 pph (you might make a case for 8, but no more), for 5 hours a week. Mr Jones did a job worth at least 20 pph for 40 hours. This gives 5*8:20*40 = 40:800, or 1:20. lets be generous and call it 1:10. There are other ways of defining the proportions but do you really think that if you stood up in court and tried to justify more than this that you would win?

2) "Mrs Jones did real work". Yes she did, but it was purely admin work and she was fully compensated for it via a salary. Anybody could have done it. The company wouldn't have gone broke tomorrow if she hadn't done this work (whereas it would have if Mr Jones ceased working, or indeed if Mrs Jones' marketing effort was cold calling end clients rather than just fielding calls from employment agencies). The test the courts will apply is "if just anybody *had* done this work, would the fee earner still have diverted such a large proportion of their income to them", no of course they wouldn't have and you are fooling no-one if you claim otherwise.

3) Capital Input. Of course someone is entitled to a return on their capital input. But it has to be a reasonable return, 10 perhaps 20%, but not 100s. Mrs Jones invested one whole pound. Do you really think this entitles her to an income stream of 10K pa? Once again, as it is Mr Jones who is controlling the amount of the dividend, the question the court will ask is "if the fee earner didn't expect to retain an interest in the money, would they still declare such a dividend per share", and again you would be fooling nobody by claiming yes.

4) "Staying home to look after the kids". Rightly or wrongly this is not a valid business reason for diverting a proportion of your income to your spouse. This justification could equally apply to hundreds of thousands of perm employees who couldn't do their jobs if they didn't have a wife at home. Some have even tried to divert some of their salary to their spouse - and failed. There is no lack of clarity here. I believe that this is a factor that is completely ignored. I know there are some people who disagree with me on this. I look forward to this issue being brought before the court for a decision (though personally I don't think you'll find a brief who will give you odds on winning).

5) "market rate", No the judge did not get this out of thin air, it was in the Revenue's case. And he didn't leave it undefined either, he said "paid the going rate for employees carrying out the sort of work which he does". I think that everyone knows what this is at the lower end (pretending that you don't is disingenuous). It means about 40K (remember Mr Jones is an experienced practitioner, he isn't a raw graduate). I know that there is a claim that it is much higher than this. But if you do the maths this difference is irrelevant. By the time you have paid a salary of 40K, you have paid more in extra NI, than you can save in HRT by Dividend Sharing, so there's no point paying a 40K salary and dividend sharing, the best compromise is to continue with a low salary and live with a lower ratio of dividend sharing (even if that ratio is 100:0). And I don't think the argument that we should use the "market rate for owners of SMEs" works, because the judge specifically said something different.

6) Perverse judgment. This is now irrelevant. We have reached a higher court. The PCG could have argued for the High court to send the case back to lower court to reconsider their verdict, but everyone accepted that the case would still have come back to the High Court if they had, so they chose not to do this (this action would have made a difference to the PCG’s costs and the timing of the result, but that is all). The PCG chose not to peruse this and the issue is now dead. It cannot be argued again. As to the point that the legislation is unclear because two professionals disagreed, then Park’s judgment has solved this dilemma. He has said that Brice was right and Powell was wrong. He has ruled that, as a matter of law, an agreement by a couple to jointly run a company so that they can dividend share is an arrangement, and that if the split is wholly disproportionate to the individual’s commercial value to the company that there is a bounteous settlement potentially subject to a tax charge. Unless an appeal on these issues is won, this is now cast in stone and is the new world in which you have to work. This seems clear enough to me, something in law is not unclear simply because it is different to what *you* though it was (or ought to have been). The only item left unclear by the judge is the issue of: what is the level of disproportional sharing that will not be bounteous. I think that I’ve covered this issue already.

I note that the PCG have announced that they will appeal. They will be doing so on the points of law that Park established. An appeal will not result in any clarity on the points left unclear by Park. Another test case will be necessary for that (because that is the way the law works).

tim

[malvolio]

Re: Errm...

OK. You're talking b****cks, but it's a free country. For example most people would consider "looking after the kids" to be a fairly valuable contribution to support someone running a one-man business but I'm not inclined to argue the detail. Let's try it in words you might understand...

The Swedish guy who owns IKEA is a UK resident who earns around £137 million a year. He sends it all to his wife via her 100% IKEA shareholding. She is a Monaco resident who pays no taxes. She owns a house in London which she loans to him rent free. She also pays an allowance of around £130m pa to support the house and his incidental expenses. There is no question that this is a bounteous arrangement in the same way that Geoff and DIana Jones are found to have set up. So why is Geoff being prosecuted for an entirley legal corporate structure and Mr Ikea, who is earning £137m pa tax free, is not? That's what I mean by consistency and proportionality.

[tim123]

Re: Errm...

I am not talking B'********. (quite how you can say this because you disagree with one line is ridiculous)

Whether looking after the kids is a valid contribution to a business has got nothing to do with what I think.

It is what the law thinks that's important, and the law thinks that it should be ignored.

Point me to a case where anyone has successfully argued that it is a valid reason for paying a wife part of you earnings (I am sure that you won't find one). And if it is so clear cut that it is an important contribution, why is the brief in the Arctic case not using it in his evidence?

tim

[malvolio]

Re: Errm...

So you can diagree with me and I can't disagree with you? OK, I can live with that

And if it is so clear cut that it is an important contribution, why is the brief in the Arctic case not using it in his evidence?

He did. Parks J and Dr Brice both chose to ignore it (in fact Parks seems to have ignored quite a lot of the evidence that disagreed with his apparently pre-decided conclusions).

That doesn't make it right, in fact it strengthens the needs for appeal to bring clarity to whatever the "acceptable position" really is. It's not about Arctic any more, it's about any small Ltd Co run by husband and wife. Understand now??

[mailmannz]

Re: Errm...

"We are campaigning for clarity, consistency and common sense in regulation and legislation," Dr Juden added, “and are pleased to have the generous support of leading tax barrister James Kessler QC, who believes that family businesses are being put in an impossible situation.”

A common sense approach would be that if both commissioners couldnt agree then the case would go in favour of the "accused".

What Im particularly disappointed about is how the Judge completely and utterly ignored the process used by the Commissioners in how they came to finding the "accused guilty".

He had a golden opportunity to ensure the IR revied all cases in an open and honest way but he chose to completely ignore this and just followed the party political line of finding the "accused guilty".

The other thing I find interesting Tim is...just what is a "market rate" and who determines what that is? The IR?

Mailman