Rules designed to stop husband-and-wife businesses ‘shifting income’ will
cause a red-tape nightmare, advisers have warned.
The rules, in consultation, intend to make sure all family businesses split
income and dividends fairly for tax purposes. The businesses will have to
calculate individual stakeholder’s efforts for their company to enable them to
pay the right tax.
But advisers have come out en masse to warn that the legislation is poorly
drafted; will increase business red tape; create uncertainty about their tax
position; and will be difficult for HM Revenue & Customs to enforce.
There are four conditions that have to be met for the taxman to have a chance
of classing the arrangement as tax avoidance: an individual is party to, or has
power over the relevant tax arrangements; they forgo income and the forgone
income is for the other individual’s relevant tax year; the first individual has
the power to control the amount of income shifted; and the shifted income
consists of distributions of a company or profits of a partnership.
Anne Redston of the ICAEW tax faculty said the proposed legislation was
‘riddled with problems’ about each business proving the extent of work
undertaken by each family member.
‘This will affect all family business. There’s a big red tape issue to prove
[a family member has done a certain amount of work] correctly,’ says Redston.
Andrew Hubbard, technical tax director at Tenon concurs: ‘The government says
that the new rules will not impose any significant additional record keeping
requirements, but it is very hard to see how this can be the case where clients
are going to need to know, and be able to prove, the contribution which each
person makes to a business.’
Examples of family business structures provided by HMRC in its consultation
are ‘very simple’, says Grant Thornton’s Francesca Lagerberg, not taking into
account real-life complexities.
‘Many spouses do not have formal meetings to discuss their business
arrangements, they just have their own way of working together. Owner-managers
will need to try and establish whether their existing dividend or profit
allocation is still acceptable and for many businesses this will be no easy
task,’ says Lagerberg.
‘The government intends to work with businesses and their representatives to
ensure the legislation is clear and workable. We want to minimise admin burdens
for business,’ said an HMRC spokesman.
‘Individuals should not lower their tax burden through sharing income. The
majority of individuals [all employees and most business-owners] cannot shift
The consultation runs until 28 February 2008.
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