The government's post-Arctic family business tax proposals will wipe out the government's progress in cutting red tape, the Chartered Institute of Taxation has said.

In an open letter to financial secretary to the Treasury Jane Kennedy, president Rob Ellerby said: 'The Chancellor has set out his vision of simplifying the tax system, but these proposals fly in the face of that vision. The Administrative Burdens Advisory Board has the task of reducing admin burdens of business, but these proposals are, if enforced, likely to wipe out any gains made by that body.'

The ABAG was set up in the wake of a KPMG report into the burden of complying with tax in the UK for small businesses.

The 'income-shifting' proposals, as they are known, see elements of arms-length transfer pricing rules applied to family-owned businesses. Husbands and wives will have to separately record their contributions to the business and be paid a market rate for their work, preventing dividend and salary structures that maximise the use of available tax allowances.

Institute president Rob Ellerby said there was 'extreme disappointment' over the quality of the goverment's document, which discusses new legislation to deal with income shifting between familiy members as was highlighted by the Arctic Systems tax battle.

Rather than solving the problem the document would 'unleash enormous administrative burdens for thousands of family businesses'.

While agreeing that small business tax was unsatisfactory, and in need of reform, a proper and thorough review was required.

'The proposals seem to us to fail the tests of workability, practicality and certainty. They display little understanding of the businesses that Government seeks to tax,' said Ellerby in the letter.

'We trust that you will be open to a proper discussion with representative bodies on these proposals, which in their current form are simply not “fit for purpose".'

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Arctic rules don't add up