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Family Businesses attacked using Settlements Legislation

We have recently become aware of the Inland Revenue attacking Husband and wife companies under what is known as the "settlements legislation".


The settlements legislation is intended to counter arrangements made by individuals to obtain a tax advantage

by diverting their income to another person who is not liable to tax or pays tax at a lower rate. The term "settlement" is defined very widely and will basically cover almost any arrangement or transfer of assets including a series of transactions taken together. However, the courts have held that there must be some element of bounty present. ( 660A - 660G of ICTA 1998 )

Some of the key factors present that the Revenue is looking for are:

• the main earner taking only a low salary so as to enhance profits from which dividends can be paid to family members or friends;
• disproportionately large returns on capital invested;
• different classes of shares to allow dividends to be directed to shareholders liable to lower rates of tax;
• dividend waivers enabling higher dividends to be paid to lower rate taxpayers;
• income being transferred from the main profit earner to a lower tax paying family member or friend.

We do not believe that the Revenue's arguments will stand up to scrutiny, but the Revenue believes this as good grounds for starting enquiries. The above arrangements are commonplace and in our opinion it will be a number of years before matters are finally clarified.

Private Fuel on Mileage Allowance

Following the recent Budget there are new scale charges to apply in respect of fuel used for private motoring in business cars. Reflecting changes in fuel prices the scale charges were actually reduced last year. However there are increases this year and, overall; these bring the charges back almost to the levels they were at two years ago.

The new rates should be used in the first VAT return period commencing after 5 April 2003. The amounts payable in relation to quarterly VAT returns are set out in the table below and for most businesses submitting quarterly returns the first period affected will be the quarter ending 31 July 2003

	DIESEL		PETROL
Cylinder Capacity	Charge per car	VAT	Charge per car	VAT
	£	£	£	£
Up to 1400cc	225.00	33.51	237.00	35.29
1401 to 2000cc	225.00	33.51	300.00	44.68
Over 2000cc	283.00	42.14	442.00	68.82

Input Tax on Mileage Allowances

Many businesses and indeed their advisers believe that input tax can only be recovered if a proper VAT tax invoice is held. There are, however, some limited circumstances in which VAT can be claimed without a tax invoice.

One of these often forgotten circumstances relates to business mileage payments to employees. VAT can be reclaimed on the petrol element of any mileage claim in respect of business journeys. In order to simplify matters Customs accept the Revenue's fuel only mileage rates which are as follows:

FUEL ONLY MILEAGE RATES
	£	£
Up to 1400cc	10p	9p
1401 to 2000cc	12p	9p
Over 2000cc	14p	12p

Many company directors and employees have changed over to private car ownership to avoid benefit in kind charges and have been claiming business travel at the authorise mileage rates. We are advising all our clients to review the last three years returns as such a review may yield a reasonable sum.