The Treasury has estimated that the extra cost of tax rules introduced in the wake of the Arctic Systems case will be zero ­ a claim that has stunned advisers.

The government last week unveiled new rules to prevent ‘income shifting’, the practice employed in many family businesses where dividend and salary
arrangements are structured to maximise the use of allowances and minimise tax.

Advisers have already said that the system will be a compliance nightmare, and that the Treasury’s belief there will be no cost implications is laughable.

Under the rules, hundreds of thousands of businesses will have to keep records of each family member’s efforts in the business to enable them to pay the right tax. That is likely to mean timesheets and professional advice, not just at the outset but each tax year.

The Treasury admits in its legislative consultation that businesses will face a greater administration burden, but in its impact assessment within the same document it calculated that businesses would face no annual cost for meeting that burden.

‘It’s extraordinary, especially saying the opposite in its text,’ said Anne Redston of the ICAEW tax faculty. ‘It defies understanding.’

Redston also heavily criticised the Treasury for claiming that an already resource-strained HM Revenue & Customs would face ‘negligible’ costs in policing the new regime.

The new rules place a burden of judgment on HMRC for each business, as clear criteria for tax compliance were not included in the legislation.

‘Judgment-based enquiries are resource-intensive, so it’s astonishing the cost to HMRC of policing this is described as negligible,’ she added.

The consultation for the new rules runs until 28 February 2008.