My client is a sole trader musician, his wife earns very little, which is taxed under PAYE.
My client has recently received a booking which will result in over £100,000 being earned before 5th April 2008, obviously putting him squarely into the 41% tax bracket.
If he forms a partnership with his wife and shares profits 50:50, do HMRC have any grounds to allocate income to the principal income generator. I am aware that the House of Lords found in Arctic Systems that the gift of a share in a limited company was a bounteous gift, but ruled that is was not soley a right to income. Does that have any relevance to a partnership?
Any guidance would be gratefully received.
John Lewis
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Replies (4)
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Fair share
I have absolutely no qualification in this area, but would say that it's always advisable that both parties can demonstrate a valid contribution to the business in some way, the classic being that the non-fee-earner is the admin/bookings/back office worker.
The wages paid should perhaps bear some relation to hours dedicated to the business, and the same might go for profits split.
It might also be worth considering using a limited liability partnership (LLP) in order to give the setup an independent legal existence which may help if status is disputed, but which can also be a 'firewall' if the business ever had any legal/tax problems.
Partnership ceasing on 5 April 2008 ?
John
It might be worth exploring the tax implications of a husband and wife partnership which ceases on 5 April 2008.
The profit shares should not be attacked by HMR&C in respect of 2007-08, although obviously 2008-09 would be an entirely different matter because of the new "income shifting" proposals.
David
P.S. If you are not aware of it already, the Treasury has said this:-
"Income shifting
The Government recognises the contribution that small businesses make to the economy and that business owners should profit from the success of their business. However, the Government believes it is unfair for one person to arrange their affairs so that their income is diverted to a second person, subject to a lower tax rate, to obtain a tax advantage (income shifting). The vast majority of individuals cannot shift their income and income shifting runs counter to the principle of independent taxation.
The Government will be consulting, shortly after the Pre-Budget Report, on draft legislation to take effect from 2008-09 to address income shifting. The legislation will work alongside the existing rules on businesses deductions and settlements, and will seek to remove the tax advantage obtained from income shifting. It would only apply when the income is in the form of distributions from a company (dividends) or partnership profits. Income from employment, interest on savings and any other source will not be affected.
HMRC will draw on the wide range of commercial experience available across the advisory community in framing practical guidance that minimises burdens, and makes it as easy as possible for individuals to understand their position. Relevant factors to consider when establishing whether or not income shifting has taken place could include the work done by the individuals in the business, the investments made and the risks to which they are subject through the business."
limited company
Musicians have an up and down life and I can't help feeling there is a lot more scope for splitting dividends between personal tax years to delay any 41% years, and even with the end of taper relief, and whatever rules might apply in the future, such as ESC16, I would seriously think about a limited company, with his wife having some shares, if not the 50%.