In a recent tribunal between Patmore and HM Revenue & Customs, judge Barbara Mosedale ruled in favour of David Patmore, stating that dividend income paid to his wife did not qualify under Section 660a as a settlement. This ruling indicates that the courts could be becoming sympathetic to husband and wife partnerships in business.

When income is gained by one person and is given to another person, it is referred to as a ’settlement’. The legislation is to stop someone paying dividends to their partner and paying less tax on their income. The recipient must have an equal liability to the business to qualify for the income.

The Arctic Systems case set a precedent requiring tribunals to take ‘a broad and realistic view’. In this case Judge Mosedale didn’t think the HMRC had done this. It also appeared that although Mrs Patmore had taken an equal liability for the loans used to purchase the business, she had received far less than her husband. HMRC did not agree that this liability entitled Mrs Patmore to half the dividends and shares.

The business in question was established with 18 employees and a factory, so therefore not a personal services company or contractor limited company. Judge Mosedale said this wasn’t a factor in her decision:

“The Tribunal does not see this is a distinction with any relevance.”

The judge declared that Mrs Patmore was not in receipt of a ‘settlement’ from her husband, and that Mr Patmore had overpaid his taxes. This case shows that HMRC is still actively applying the legislation to husband and wife businesses.

If a company falls within IR35 legislation, Section 660a does not apply as all income is paid as salary. The regulations only apply to the non fee earner, which is not possible under IR35 legislation.