Andrew Hubbard on Santa's Arctic woes

Every time Father Christmas visited his tax adviser things got worse. First
there was the news that the tax allowances on his toy factory were to be
withdrawn; then he found out that the tax bill he was facing on selling the
business was going to almost double. Now he found himself accused of the
dastardly practice of income splitting.

Operating as a Father Christmas was a big job. Santa himself may actually
have delivered the parcels, but there was a whole host of behind-the-scenes work
– wrapping parcels, looking after the reindeer, maintaining the database of
children needing presents (those discs that had accidentally turned up with a
Geordie child’s Christmas wish list had been very helpful!) – so the whole
family was involved. Indeed, it was a tradition in the Santa household that
every Christmas the youngest member of the family to come of age was presented
with a share in Santa Enterprises Ltd and thus was entitled to a share of the
profits. Provided that everything was kept in the family, nobody was too
bothered about exactly how things were divided up. Until now.

Today his tax adviser had raised the spectre of a big tax problem.
Apparently, this perfectly sensible family arrangement was going to raise the
wrath of the taxman. It seems Santa had not been taking a proper commercial
salary and thus was allowing dividends to be paid to other family members. So in
future Santa would have to prove that he was taking a commercial salary or else
face having to pay tax on dividends paid to other members of his family. And
therein lies a problem: what is the proper commercial salary for Father
Christmas? Is there such a thing, and if so, how was he going to find out what
it was?

As far as he knew, he was offering a unique service. There were a lot of
impostors in high street stores, but he was the real thing. How could he fill in
his tax return if he didn’t know whether he was being paid the correct rate for
his job? The government had told him that the new rules were not onerous, indeed
they would reduce his admin burden, but as far as he could see all this meant
was more fees for his tax adviser. And while the adviser was a very
knowledgeable fellow, he was struggling to figure out how all this could be
calculated.

This was all so unfair: there he was, an honest working man, trying to do his
best to support his family in a job nobody else wanted. Admittedly the holidays
were good, but the working day was very long and the travel arduous. So at the
end of a hard day’s work the last thing he wanted was to complete a diary of
what he had done that day in case he had to justify himself to the taxman in
three years’ time.

He wasn’t as slim as he used to be, and getting down those chimneys was more
and more of a struggle. Was it worth it? Perhaps he should give it all away and
get somebody else to take things on – he might still get a good price for the
business. Then he discovered the taxman was going to get his claws into that as
well if he didn’t get out before April – and who was going to buy the business
in March with all that money tied up in stock until December? No, he thought,
let’s just throw in the towel right now. Red tape should be for tying up
Christmas parcels, not for hard-working businesses.

He went out for a well-earned drink and didn’t hear the phone ringing.
Probably just as well because it was his tax adviser calling – he got the
message on the answer phone when he got back: “Sorry Santa, forget to mention
one thing. HM Revenue & Customs want to look at your residence and domicile
status – you may have a problem under the new rules!”

Santa’s problems may seem unique, but many family businesses are going to
face real difficulties next year under the new income-splitting rules. The best
Christmas present they could get from the chancellor would be a year-long delay
before the provisions come into effect. That way there can be proper
consultation over a system for taxing family businesses that people can actually
operate in practice.

Andrew Hubbard is vice-president of The Chartered Institute of Taxation and
national tax technical director of the Tenon Group