The Government has just published a 44 page consultation document on how it intends to introduce new legislation with effect from April 2008 to attack the common practice of sharing dividend payments between two individuals in small companies.
The Treasury said: "The legislation would apply only where a tax advantage is gained through non-commercial arrangements and where the shifted income is in the form of a company distribution or share of partnership profits.
"The legislation aims to ensure that genuine commercial transactions are not affected, and that administrative burdens are minimised."
The move follows the Government's defeat in the Section 660 Arctic Systems (Jones v Garnett) case in the House of Lords, when HMRC failed in its attempt to ensure that dividends received by co-owner and shareholder, Diana Jones, were taxed as if they had been received by her husband, Geoff Jones.
Within 24 hours of the court defeat, the Government stated its intention to act against what it dubbed as 'income shifting'. This consultation paper sets out how it intends to do it. Experts will be studying the details, but immediate reactions were that it was a 'kick in the teeth for small businesses'.
The paper says: "...Current business structures have presented opportunities to shift income in order to gain a tax advantage. The Jones v Garnett case looked in detail at one such situation. In this case, which considered the distributions made to the joint owners of Arctic Systems Ltd, HM Revenue and Customs (HMRC) sought to apply the settlements legislation to deem the dividends received by one shareholder as those of the other shareholder for income tax purposes. HMRC lost this case in the House of Lords.
"Following the House of Lords decision, it is now clear that the settlements legislation is not sufficient to address all cases of income shifting. The Government is committed to ensuring that, with clear and modern legislation, such cases can be dealt with effectively and that clarity can be given to businesses and their advisers. Therefore the Government is proposing to introduce new legislation effective from 6 April 2008, focused specifically on income shifting arrangements that make use of companies or partnerships to gain a tax advantage."
Kick in the teeth
Freelancer trade body, the Professional Contractors Group (PCG) reacted angrily to the Government's proposed new tax on 'income shifting' and has stated its outright opposition to the measure in a 'strongly-worded' letter to the Chancellor.
PCG's managing director John Brazier said: "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 have 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.
"Following on from the Arctic Systems case, IR35, the MSC rules, CGT changes and the rise in corporation tax, this is another kick in the teeth for small businesses in the UK."
The consultative document is available online (pdf):
Income shifting: a consultation on draft legislation.
Shout99 will shortly be inviting its members to contribute to the consultation.
Shout99 has followed the events relating to Section 660. You can also read more about the background to this case and the issues at stake in Shout99's Section 660 resource centre.
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Susie Hughes © Shout99 2007