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12 Mar 2008
The government's delay in introducing controversial new rules on family business tax has been welcomed, but altering the legislation to make it work will be a massive task commentators have warned.
The profession said delaying the rules on income shifting, proposed after HM Revenue & Customs lost in the courts against Arctic Systems, would create a window for much needed consultation.
The proposals had been widely criticised for being impossible to administer and would create red tape for owner-managed family businesses.
'As they stand, the income shifting proposals fail the certainty and practicality criteria that are necessary for a workable tax system,' said Kevin Nicholson, UK head of entrepreneurs and private companies, PricewaterhouseCoopers.
'If the legislation is to work, it must take into account the type of small businesses that it is targeted at.'
Lisa Macpherson, national director of tax at PKF, said: 'It had all the makings of a red-tape nightmare for SMEs as well as costing them more tax. Presumably the chancellor has sought to save face by not including it in his speech.'
'If the legislation is to be introduced in a year, HMRC must set out hard and fast guidelines on exactly what records are needed to establish the market rate of return for each person involved in the business; in addition, the government needs to consider carefully the policy issues involved - they need to clarify when the 'income shifting' rules will be applied.'
Michael Izza, ICAEW chief executive, welcomed the decision but said he had hoped the budget would go further in helping businesses and taxpayers across the country at a time of economic downturn
'Today’s budget does nothing to address the falling competitiveness of the UK nor to restore confidence overseas in the UK as a place to invest and do business,' said Izza.
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Fairer legislation for Income Shifting
The reality in the case of married couples is that if a 'non-working' wife was divorcing her husband, she would be entitled to 50% of everything on the basis that she had contributed to their accumulation of wealth by running the household for him. There have been many high profile settlements made in the past few years on that basis. So why doesn't this apply to income shifting within husband and wife small businesses?
I appreciate it is tricky to precisely evaluate the spousal contribution, but you can still say to the person earning the money: 'well if you didn't have your wife helping with the kids, house, socialising and networking etc, what impact would it have on your earning potential?' It's impossible to value that and I think trying to place a specific value or percentage on the contribution isn't the right way to go. The Revenue has to use the announced further consultation period to put proper legislation in place with clear guidelines on how to deal with it.
Perhaps the way forward is a compromise and they say that only 25% of the unused basic rate band can be utilised? Or perhaps they introduce some kind of transferable allowance? In my view this would be the fairest approach. And let's face it, all we as tax professionals were doing when we recommended paying dividends to a non working spouse was finding a way to use their basic rate band and their unused allowance?so why not legitimise it in a structured way?
For instance, in the Isle of Man they have transferable allowances between jointly assessed couples. Now maybe for the UK they legislate that you cannot transfer it all, maybe you are restricted to say 50% of the basic rate band. Or maybe they should introduce a family threshold which can be graduated. For example, if you have 2 kids or more you can transfer it all whereas couples without children can only transfer 50%. Of course it is not going to be popular universally but ultimately that's the best way to address it. In my view this is much better than introducing some grey, wishy washy legislation which says 'depending on what they do they may be eligible, but doesn't spell out what is covered.'
Posted by: Paul Webb, 13 Mar 2008 | 00:00