The government faces an ‘impossible task’ to create a fair tax regime for family businesses despite delaying the introduction of controversial income shifting rules, warn advisers.

Plans to introduce new family business tax legislation, following HM Revenue & Customs’ loss against Arctic Systems in the courts, has been delayed until April 2009 after furious lobbying by advisers and the SME community.

The delay has been welcomed by tax advisers, concerned about the introduction of red tape and opaque rules, but they warned that a massive push would be needed to create a fair and simple regime by next year.

‘They’re trying to do the impossible, but I’m delighted the government is delaying,’ said Anne Redston, visiting professor at Kings College London.

‘But it’s unlikely we’ll get to a position where there are workable rules. Provisions at the moment are broad-brush, and clearly unworkable,’ she adds.

KPMG’s UK head of the middle market, Tom McGinness, said the delay was welcome but other tax plans for SMEs, announced in the Budget, such as altering the R&D tax credit rules and changing who can claim tax relief on share options, was making life ‘more complicated’ for SMEs.

‘They’ve done well deferring income shifting rules, but more red tape is coming through,’ said McGinness.

Smith & Williamson national tax director Richard Mannion said that rather than update legislation on family business taxation next year, a ‘root and branch review’ of the tax rules for owner-managed businesses was required.

Budget 08 Special Report