Business News - January
Accountants Warn Family Firms On 'Income Shifting' Reform
Thousands of husband-and-wife businesses could face heavier tax bills under government proposals to put a stop to “income shifting”, warn chartered accountants Moore Thompson.
The firm, which has clients across Cambridgeshire and Lincolnshire, is advising husband and wife and other family firms, or partnerships, to seek professional tax advice after the government launched a consultation on 6 December 2007 on draft legislation designed to outlaw the tax arrangement known as income shifting, or income splitting. The new legislation is due to come into effect from 6 April 2008.
The government has acted following a four-year long case involving Geoff and Diana Jones. The couple, who jointly own the IT consultancy Arctic Systems, won a test case in the Lords in July 2007 after HM Revenue & Customs (HMRC) challenged the way they shared the income from the business as dividends, saving £50,000 in income tax.
HMRC argued that Mr Jones, who brought the most money into the business, should not be able to cut his tax bill by shifting some of that income to his wife.
In its consultation paper, the government says that if a partner in a business passes on income to a second partner who plays “no role or only a minimal role”, to reduce the tax paid, this “undermines the fairness of the income tax system.”
Mark Hildred, managing partner at Moore Thompson, which has offices in Spalding, Wisbech and Market Deeping, said: “HMRC has identified 65,000 companies, plus an estimated 20,000 two-person partnerships, where income shifting is likely to be taking place. Together HMRC estimates that it is losing out on up to £500 million in tax each year.
“The proposed legislation is broadly drafted, which means that it could potentially affect many owner-managed businesses involving husbands, wives, civil partners, other relatives and couples who live together.
“However, the proposed legislation does not affect genuine commercial arrangements or, even though income has been shifted, no tax advantage has been gained, or where the arrangement would be the same as if the parties were not connected and dealing with each other at arm’s length.
“Clearly, this legislation has potentially serious implications for thousands of small firms and anyone involved in a business likely to be affected would be wise to see the advice of a qualified professional, such as an accountant, to explore their options.”
The consultation runs until 28 February and details can be found at www.hm-treasury.gov.uk/
