Taxation logo taxation mission text

Since 1927 the leading authority on tax law, practice and administration

Income shifting: the reactions

06 December 2007
Categories: News , Arctic Systems , Jones v. Garnett , Companies , Income Tax
Response to the Treasury's new consultation document on income switching was swift and forthright. Here we offer a selection of the most notable remarks

John Whiting, tax partner, PwC

'It is understandable that the government sees it as necessary to have rules that prevent a free-for-all in terms of moving income around for tax purposes.

'However, given the volume of small businesses that are run jointly, typically by husband and wife, simple and easy-to-operate rules are needed in this area.

'This seems to shift the onus for judging tax bills firmly to the taxpayer and on the surface would appear to fail the certainty test that is necessary for a workable tax system.'

Association of Chartered Certified Accountants

'If the new arrangements come into place, then it could deter people from setting up a business together: husbands and wives, friends and relatives.

'It is thought some 30,000 small companies would be affected, and SMEs represent over 99% of UK businesses. Legislation could stifle dynamic entrepreneurship.

'The Government says with these new proposals that it wants to take account of the realities of running a business. ACCA hopes this is the case.

'If the intended outcome of the proposed legislation is to undo the structures and arrangements which are currently in place in order to effectively run a business, then ACCA hopes it will not be to the detriment of modern enterprises.

'The proposals as they currently stand will mean businesses which fall with in the scope of the legislation going through a serious of "hoops" in order to demonstrate that their arrangements are as though they were unrelated third parties — much as large companies need to do for transfer pricing purposes.'

Peter Harrup, tax partner, PKF (UK)

'If this draft legislation is enacted as it stands, many family businesses will have to keep much better records to prove that they are not shifting business income between family members to save tax.

'While many families will seek to extract as much cash from their businesses as they can before 5 April, care must be taken by company owners: it is illegal to pay out dividends that exceed the company's distributable reserves.

'Some thought that the Government would also try to level the playing-field between small compan ies and the self-employed, so it is perhaps surprising that it has not taken this opportunity to address the issue of national insurance contributions and dividends.

'Ignoring the income shifting issue, for now, it is still advantageous to set up a company and pay yourself in dividends because of the NIC savings.'

Institute of Directors

'The Government has a legitimate concern about spouses agreeing to share income from a family business in order to save tax. It was inevitable that some changes to the law would be proposed following the Revenue's overwhelming defeat in Jones v Garnett (the Arctic Systems case).

'The problem is the state of the draft legislation. The consultation document presents it as only likely to apply rarely (paragraph 1.16). But the legislation is put together in a way that will make it all too easy for the Revenue to demand extra tax.

'Taxpayers will have to satisfy all of the conditions on commerciality set out in section 681E in order to be safe from the legislation. Fall at any one hurdle, and you are at risk.

'Worse, the conditions include one relating to "arm's-length terms", and the next section talks about it being reasonable to expect one party to receive the income shifted. These expressions are hopelessly vague.'

Professional Contractors' Group

'This will be a nightmare for family businesses. The Government seems to think that fees paid to big businesses are fine, but fees paid to small businesses are really just “income” that is “shifted”.

'This measure will impose a horrific burden on hundreds of thousands of small family businesses, which will make it impossible to self-assess tax bills with any certainty.

'It is also deeply unfair: the Government has been encouraging people to set up businesses under joint ownership for years; now they are hammering the people who have followed their advice.

'A married couple who jointly own a business would have to split its value 50-50 in a divorce; yet while they are married, the Government says they are not entitled to share the profits.

'This is another kick in the teeth for small businesses in the UK.'

Andrew Hubbard, national tax director, Tenon

'Even if this arm's length approach is the right answer in principle, and I am not convinced that it is, the practical application of the new rules is going to be a nightmare for many entrepreneurs and their advisers.

'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.'


Sections - corporation tax

back to top icon