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Cardwell Management Services UK Limited
Regency House, 45-51 Chorley New Road, Bolton, BL1 4QR
Cardwell Management Services UK Limited
Regency House, 45-51 Chorley New Road, Bolton, BL1 4QR
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Just4contractors.com > Help & Advice > Legals
What are my legal considerations?
As a Professional Freelance Contractor, there are a whole range of laws that you need to be aware of that affect you and your business. Many have been covered in other parts of this website, such as your responsibilities for having formal business insurances or the differences in operating as a limited company or as a sole trader etc.
In this section, we will cover off the issue of the S660 rules (or settlements legislation) and look at how it affects you.
S660 effectively stops you passing income to someone else in the family, or giving income or assets to someone else in an effort to reduce your overall tax bill. This is called a “settlement”, and the aim of the legislation is to stop people settling their income on another person who pays tax at a lower rate.
In many companies, a husband and wife each own an equal number of shares with one of them the main fee-earner and the other responsible for relatively little or no fee income. By paying out the profits by way of dividend, income earned by one of the couple can be partly received and taxed on the other resulting in an overall saving on tax since there will be two lots of personal allowance and basic rate tax band to use up. This is currently a very common scenario with thousands of husband and wife companies using what had always been deemed acceptable tax planning.
Over recent years, HMRC have started to crack down on these cases. The Revenue's argument is that if the wife’s income stems mostly from the husband’s work, then he has given her a right to his income i.e. the dividends that she gets on her shares in the Company, and therefore this should fall under S660 as a settlement.
The "husband and wife" companies most at risk of being targeted by the Revenue are those viewed as openly abusing the dividend system; particularly where the main earner provides personal services and does not draw a market value salary and dividends are paid to shareholders paying tax at lower rates.
Income Splitting’ legislation
The UK Government has announced plans to bring forward ‘income splitting’ legislation to nullify the tax advantages that had been gained by these 'husband and wife' companies.
In December 2007, the government published draft legislation “focused specifically on income shifting arrangements that make use of companies or partnerships to gain a tax advantage.”
Draft legislation stated the new rules would not apply if there was a "genuine commercial arrangement" and HMRC believes tax reduction was “not the main or one of the main purposes” of the arrangement.
Otherwise the rules, which are under consultation at the time of writing, will apply where one person 'shifts' trade or business income to another, with the effect being that less income tax is paid.
Under the legislation, taxpayers must detail how much income they have ‘foregone’ by making a comparison with how the business would have operated, had all their work been done independently on a fully commercial basis.
See Also
HMRC Compliance
Taxation
Trading Structures
Recommended Links
In this section, we will cover off the issue of the S660 rules (or settlements legislation) and look at how it affects you.
S660 effectively stops you passing income to someone else in the family, or giving income or assets to someone else in an effort to reduce your overall tax bill. This is called a “settlement”, and the aim of the legislation is to stop people settling their income on another person who pays tax at a lower rate.
In many companies, a husband and wife each own an equal number of shares with one of them the main fee-earner and the other responsible for relatively little or no fee income. By paying out the profits by way of dividend, income earned by one of the couple can be partly received and taxed on the other resulting in an overall saving on tax since there will be two lots of personal allowance and basic rate tax band to use up. This is currently a very common scenario with thousands of husband and wife companies using what had always been deemed acceptable tax planning.
Over recent years, HMRC have started to crack down on these cases. The Revenue's argument is that if the wife’s income stems mostly from the husband’s work, then he has given her a right to his income i.e. the dividends that she gets on her shares in the Company, and therefore this should fall under S660 as a settlement.
The "husband and wife" companies most at risk of being targeted by the Revenue are those viewed as openly abusing the dividend system; particularly where the main earner provides personal services and does not draw a market value salary and dividends are paid to shareholders paying tax at lower rates.
Income Splitting’ legislation
The UK Government has announced plans to bring forward ‘income splitting’ legislation to nullify the tax advantages that had been gained by these 'husband and wife' companies.
In December 2007, the government published draft legislation “focused specifically on income shifting arrangements that make use of companies or partnerships to gain a tax advantage.”
Draft legislation stated the new rules would not apply if there was a "genuine commercial arrangement" and HMRC believes tax reduction was “not the main or one of the main purposes” of the arrangement.
Otherwise the rules, which are under consultation at the time of writing, will apply where one person 'shifts' trade or business income to another, with the effect being that less income tax is paid.
Under the legislation, taxpayers must detail how much income they have ‘foregone’ by making a comparison with how the business would have operated, had all their work been done independently on a fully commercial basis.
See Also
HMRC Compliance
Taxation
Trading Structures
Recommended Links