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Shout99 - Freelancers, FO35, Section 660
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Shout99 - Freelancers, FO35, Section 660
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Review 2008: Income shifting (1)
by Susie Hughes at 11:59 29/12/08 (News on Business)
2008 continued a trend which has been operating for freelancers for nearly a decade - that of 'shifting goal-posts'.
In some cases, such as income shifting, this was good news, in others, such as several high profile IR35 court cases, not so good, and in yet more, the familiar case of not being sure where the goal posts are!

But whatever happens, it would seem that freelancers remain under the Government's spotlight - not as entrepreneurial, legitimate businesses, but as a sort of hybrid employee/business/tax dodge which doesn't 'fit' the ideal of a genuine small business.

Until that mind-set is replaced or removed, freelancers can expect measures which encroach on their ability to run a business like, for example, a small manufacturer.

In the next few days, Shout99 will be looking at some of the developments in 2008 which have affected freelancers. We'll start with Section 660, aka income shifting, aka the married couple's business tax.

Income shifting
Freelancers began 2008 with the 'Sword of Income Shifting' dangling over their heads.

After the House of Lords ruled that Arctic Systems - a test case involving a husband and wife owning a small IT consultancy - was operating in a legitimate manner by splitting dividends, the Government decided if they couldn't win in the courts they could change the law.

The Treasury announced it intended to introduce legislation which would prevent this common practise...the problem was that its proposals were universally criticised as unworkable. Freelancers would have been faced with trying to assess how much income had been 'shifted' from one party to another.

The proposals had the distinction of being both complex and vague, rendering them unworkable and arbitrary.

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The professional and representative bodies cried 'foul', thousands of freelancers signed petitions and there were even reports that Treasury mandarins were urging their political masters to rethink the policy. Eventually the Government was forced to back down on the means if not the end and the principle.

In the March 2008 Budget, the Chancellor made no reference to the now controversial 'income shifting' proposals in his speech, but there was a statement in the accompanying documentation which stated that there would be further consultation and the new legislation would be delayed until 2009.

This gave freelancers a stay of execution, but the income shifting proposals remained a cloud on the horizon.

In the Pre Budget Report of November 2008, the Government effectively ditched the proposals, blaming the current economic climate...but with the proviso that they would 'keep them under review'

A statement from the Treasury at the time said: "The Government firmly believes it is unfair to allow a minority of individuals to benefit financially from shifting part of their income to someone else who is subject to a lower rate of tax - known as income shifting.

"The Government has consulted on this issue, but given the current economic challenges is deferring action on income shifting and will not bring forward legislation at Finance Bill 2009. The Government will instead keep this issue under review."

Future
The problem facing the Government is the 'how' not the 'why'. It is clear that the Government sees the common practice of sharing the profits of a small business between husband and wife or close partners as a 'tax dodge'.

Despite once recommending this practise itself via one of its small business advisory bodies, it sees the procedure of sharing dividends as a means of 'shifting' income which was generated by a higher rate tax payer to his or her lower rate tax paying partner - as a tax dodge.

It is obvious that on a point of principle, it wants to stop this practice being used by freelancers - the problem is the 'how'.

Anything specifically targeted at freelancers is too problematic and unworkable - any wider solution would also affect what the Government sees as 'genuine businesses'.

So for the time being, income shifting is gone but not forgotten. The phrase 'keep this issue under review' probably means it's still sitting in a Treasury official's in-tray.

Freelancers will be hoping it is buried deep there and doesn't rise to the top again in 2009.

For more information, see Shout99's news and information on Section 660/income shifting

Tomorrow, Shout99 will look at the developments in 2008 which affected IR35.

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Susie Hughes Shout99 2008

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