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Hector rides again

Hector rides again

You may recall a while back that Arctic Systems was major news. A case that was taken all the way to the House of Lords where, to the great relief of many, HMRC’s assertion that a husband and wife could not share the profits of their company was comprehensively thrown out. S660a does not apply between spouses; end of. So I was more than a little surprised to read this week that HMRC had just lost another S660a case on appeal.

So just what the hell is going on?

The difference between Arctic and this later case – Pattmore vs HMRC – is to a rational mind utterly trivial. Whereas in Arctic the shares were identical, in Pattmore they were non-voting shares. In other words, they were purely a source of income for the spouse. This, it seems, warrants prosecuting the Pattmores under S660a and demanding they pay £20,000 more in taxes.

Luckily, the judge at the Tier 1 Tribunal ruled that the circumstances of the share ownership did not fulfil the criteria for an S660a settlement. Therefore Mr Pattmore was not liable for the tax HMRC said he owed on Mrs Pattmore’s dividend income. Gosh, who’d have thought it…

OK, so good news for the Pattmores, but slightly more worrying news for the rest of us small businesses. That HMRC feel they are justified in pressing this case in the face of a very solid ruling from the highest court in the land almost beggars belief.

I don’t know about you but I thought that HMRC’s duty was to collect taxes owed in line with the legislation in place. Not to chance their arm pressing a case that any sane person would have thought impossible to win, and one that would seem to be vindictive at best.

However that is not the only concern. In the last budget, Osborne raised the spectre of a General Anti-Avoidance Rule, or GAAR for short, which aims to simplify the boundary between acceptable and unacceptable avoidance. Now this might be something worth doing if it is to be applied consistently and fairly and if the boundaries are clearly defined. The bit that worries me is that phrase “applied consistently”: I really don’t have a lot of faith that an organisation that would bring the Pattmore case should be entrusted to apply what would be a largely subjective assessment. And come to that, an assessment that almost certainly would be disputed and so need a court case to establish the answer. Déjà vu, anyone?

And finally, just to confuse things even further, there are mutterings in the press about HMG relaxing their stance on avoidance in general. No idea what that means yet, but we will no doubt find out soon. If true, it would be welcome; there are far more worthy targets than UK’s 4.2 million freelance workers.

But the obvious conclusion to my mind is that Mr Osborne needs to look at the mindset of HMRC very carefully before he starts giving them something as potentially dangerous as the GAAR to play with. Hector needs to re-learn what he is there to do. Chasing un-winnable cases is not it.

Alan Watts can found at LinkedIn.
© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: dude_wtf by caseyhelbling

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