Reply to: Starting a company - section 660 implications

[[email protected]]

S660 will not apply!

Your Mum has purchased the shares with her money (which is what you are saying) and she signs some contracts as a director. I would also make her a joint signatory on the bank account. This would show she is sharing in the risks and rewards of the business.

Also my understanding is that you haven't gifted her any shares, if you have this would be a no no!

If she actually does some work (ie. makes some payments, does some banking, chases the debtors) then the Revenue will have a hard time proving that she is purley a 'nominee' director/shareholder.

Your Mum would have to be prepared to confirm all this if there was a Revenue investigation in the future.

One important point, I would get a contract of employment drawn up for both of you stating clearly your duties and responsibilities. It should also mention your salaries (don't include the dividend payments in the contract of employment). I would also get a shareholders agreement drawn up.
There is a CD you can buy called '301 legal forms'. This has all the forms you need (save you paying for a solicitor). This CD ROM has been prepared by solicitors. I forgot the website address, if you just type in '301 legal forms' on google I'm sure it will appear on the first page.

[XLMonkey]

The Revenue have got the option to now challenge this at the House of Lords, but they will need consent to do so; it's unlikely they will get it. Instead they will just change the law like they normally do when they have a case of 'sour grapes'! If they do change the law it is reasonable to expect that any change will not apply retrospectively.

However, everyone is safe (at present) to split there dividends/salaries with their spouses or other family members; providing they setup the company correctly at it's incorporation.

Hope this helps!

Good to quote the case, Tim, but unfortunately the position on this is now out-of-date. HMRC have announced their intention to appeal this case to the House of Lords.

Therefore, if your case is similar to the Arctic case, then you are entitled to assume that s660a does not apply when filling in your tax return. If HMRC win their appeal, then they may well be able to pursue you retrospectively.

So, you can pay the divi to your mum, but I wouldn't be in a hurry to spend it....

The other complication is that, I'm not sure that the conditions of the Arctic case apply to you. Among the points that the Arctic case rested upon were:
- that ownership of the shares wasn't just a right to income
- that there was shared risk between the husband and wife in the company, even if the husband earned most of the fees
- that although the settlements legislation was designed to catch tax avoidance schemes, HMRC had no right to extend it to transactions that were clearly not in the mind of Parliament at the time of passing the law
- that Parliament has separately legislated that husband and wives incomes should be taxed separately, so it wasn't consistent for HMRC to lump them together.

From what you say, s660a might well apply to you since:
- you've given her the shares solely to generate an income
- there is no shared risk (unless she lives with you!)
- she's not your wife, so the principle of separate taxation doesn't apply.

Sandy, definitely, definitely seek advice. This is too complex an area for a discussion forum to sort out.

[[email protected]]

Here is the info for the s660 Appeal case

The court of appeal case (not high court case, my error. I was a bit tired last night!) was Revenue V Arctic Systems Ltd. The appeal took place in Dec 2005.

The Judge stated that when the company was formed the main director/shareholder was not contractually obliged to work for the company. So any subsequent decision on the part of the company to pay less than a full market salary, or to pay out a dividend, could not be part of any arrangement that existed when the company was formed. Therefore, there was no setlement for tax purposes (ie. under s660).

The Revenue have got the option to now challenge this at the House of Lords, but they will need consent to do so; it's unlikely they will get it. Instead they will just change the law like they normally do when they have a case of 'sour grapes'! If they do change the law it is reasonable to expect that any change will not apply retrospectively.

However, everyone is safe (at present) to split there dividends/salaries with their spouses or other family members; providing they setup the company correctly at it's incorporation.

Hope this helps!

[[email protected]]

The Revenue lost a case under s660!

The Revenue lost a High Court case with regard to s660.

Basically if your Mum is issued company shares from the inception of the company (called subscriber shares), at the same time you issue shares to yourself then s660 will not apply.

Under this scenario your are not giving away any assets or income under section 660 as no salary was agreed between you and the company. The Judge in this case (who employed some common sense) explained that you can't give away income you haven't yet earnt!

I also have a client who can solve any IR35 issues you may have.

If you want any further details of the above case or have any other queries let me know.

[ASB]

As I understand it, doesn't matter if the mum keeps the divvy dosh, Hector will use S660 to try and claim the extra tax due *as if* the income was all assigned back to the fee earner.

If it flows back then yes. If it doesn't no. The law does not allow that. 660A (2) takes it out.

http://www.hmrc.gov.uk/practitioners/guide_sba.pdf

[VectraMan]

Speculation here, but surely the issue of S660 is that couples generally share their joint income so paying your spouse some of your income is a tax dodge because you're effectively still getting that income even though it's in your spouse's name. The same can't usually be said of your Mum. If you don't live with your Mum, I can't see how they can argue that the extra income is yours, but if you do live in the same house and for example don't pay your share of rent/mortgage because of the money she's earning from your company, then that's clearly a tax dodge.

I have to say that IMHO the paying your spouse loophole is a bit of an obvious scam, and one that should be closed.

BTW if you didn't realise, you don't need a second shareholder or director, just a company secretary (who doesn't need to be either).

[squivy]

re if mum keeps the dosh

As I understand it, doesn't matter if the mum keeps the divvy dosh, Hector will use S660 to try and claim the extra tax due *as if* the income was all assigned back to the fee earner. So you get whacked with the extra tax bill as if you had recieved the income yourself, irrespective of who has recieved it. Subject to the legal defences of S660 of course... ( settlement, bounty... )

Oh and Mums are considered 'connected persons' for tax purposes.

[Lucifer Box]

Do you intend passing half your income to her as a tax efficient device.

That's what I assumed as he said she was a shareholder. Hence my advice that if the money goes in a big circle and ends up back in his pocket, no fancy arrangements will protect him from s660 attack (this is exactly what s660 was put in place to stop after all). If not and his mum gets to keep her dividend money, there's no problem at all.

[ladymuck]

Thing is, ssirah, your setup is not typical. I imagine very few, if any, posters here have their mum as a director in their business.

My mum is my co sec but not a director. I don't pay her because she doesn't actually do anything!

[tim123]

sandy,

I'm not sure what your problem is here.

Do you intend passing half your income to her as a tax efficient device. Or are you just going to pay her a small sum to compensate her for the work that she does?

I am sure that there are lots of companies that do the latter.

S660 is only an issue if you want to do the former.

tim

[Dr Evil]

Marry your mum and then have her put in an offshore truss.

Works for me.

No he married his mum and then put her in an offshore truss. You have to think that she needs the support.


I grant you it's kinkier than your average bear, and off topic , but one man's meat and all that. . . .

[Dundeegeorge]

Whooooooooooosh

And if that doesn't work you could always try an offshore trust instead!

That was the sound of wordplay rushing miles overhead.
Well done, err, that's right, isn't it?

[boredsenseless]

Marry your mum and then have her put in an offshore truss.

Works for me.

And if that doesn't work you could always try an offshore trust instead!

[DimPrawn]

Marry your mum and then have her put in an offshore truss.

Works for me.

[Lucifer Box]

Thing is, ssirah, your setup is not typical. I imagine very few, if any, posters here have their mum as a director in their business.

You have done the right thing to take professional advice. Everything you have there seems sensible and appropriate. There are other things that have been mentioned as regards 660 such as not having contracts of employment, although this is nearly always in husband and wife cases.

The killer question is, does the dividend money eventually come back to you? If so, you are wide open to attack no matter what other measures you put in place.