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Budget 2008: Income shifting legislation postponed
In his first budget Alistair Darling announced that the government will not be enacting its proposed legislation to combat what it terms as "income shifting". Instead, new measures will be postponed until 2009, pending further consultation to ensure that any legislation will provide "clarity and certainty" for businesses and their advisors.Small businesses and their advisors should be celebrating the chancellor's change of heart, it follows a massive number of responses to the Treasury's income shifting consultation document issued in December. An Early Day Motion requesting postponement was given support by both the conservative and liberal democrat parties, and over 170 MPs had signed it online. Business groups also petitioned No.10 and overall, the efforts to stall the new tax seem to have had the desired effect.
Richard Mannion, of Smith Williamson responded to the announcement, "This is really good news as long as we don't end up back where we started in a year's time".
AccountingWEB's Tax Editor, Nichola Ross Martin commented, "This is great for many small companies, many of whom were unaware of what was planned in any case. It makes much more sense to revisit the review of small company taxation and the chancellor is spared any allegations of "u-turns" by now apparently backing simplification to boot."
Background
The anti-avoidance legislation was to have applied to two forms of income:
- profits from a partnership; and
- company dividends
As broad as HMRC's guidance notes on the topic are long these measures are designed to catch married couples/civil partnerships/cohabitees/family members who seek to share business profits that have been generated substantially by the efforts of only one individual in the relationship.
Three other conditions must apply:
- the individual who is doing "the shifting" is a party to relevant arrangements, or has the power to control or influence relevant arrangements,
- that individual forgoes income (directly or indirectly), as this is shifted to another individual.
- the individual doing the shifting has the power to control or influence the amount of the shifted income.
The individual who has shifted his or her income to another individual will then pay tax and NI (as applicable to partnership profits) on the income shifted.
The legislation is not intended to apply to genuine commercial arrangements, or arrangements that are the same as those that would have been entered into in dealing with an unconnected party on an arm’s length basis. "The power to control or influence..." ensures that income from most PLC shares will not be caught by the proposals.
In addition, the legislation would not apply where:
- gaining a tax advantage is not the main or one of the main purposes of the arrangements;
- the individual whose income is shifted has no power to control or influence the amount of the income; or
- notwithstanding that income shifting has taken place, there is no overall tax
advantage.
The consultation period for 
Income shifting: a consultation on draft legislation closed on 28 February 2008
The Treasury and HMRC also announced a parallel consultation process over the summer to explore options for simplifying how companies with fewer than 10 employees (or £750,000 in annual turnover) calculate their Corporation Tax liabilities. The departments will put their findings forward in the autumn pre-budget report.
The areas identified as the most likely areas to produce benefits for small companies were:
aligned by looking at the range of adjustments that smaller companies are
required to make in arriving at their taxable profit
comparable unincorporated businesses to see if there are any areas where
their obligations could be aligned more closely to deliver simplification.
Budget 2008 coverage sponsored by
AccountingWEB.co.uk 12-Mar-2008
Categories: Budget News, Tax News, Tax - Nicki Ross Martin
Times read: 7313
Yet again as they did with IR35 the government have created tax law that requires a subjective judgement as to it's application. Although in the US under IRS Rule 1706 all one need do is compare the relationship with 20 questions - if so many apply then you are caught. In the UK you look at over 100 years of case law, much of it contridictory and then make a subject judgement. Hence investigations lasting in some cases 4 years or more.
Here we need to make some kind of subjective judgement as to the contribution of the non-working spouse and it's value.
Yet why? To ensure that employment income is not re-classified as business income? However if they were employees then surely tax would be deducted at source - and alongside that the worker gets a number of other rights and obligations.
The fact that these rights and obligations are absent surely demonstrates that the relationship is not one of employment. To use a version of the Elephant test - It may sound the same, it make look superficially the same, but that does not make an Indian Elephant an African one.
The targets of Income Shifting were and will be legitimate businesses, and the work they do is not employment - if it was then Ir35 would apply, there would be no tax benefit and the income shifting rules would not apply.
Freelancers who work through agencies are denied the ability to use the lower tax of a self-employed by S44-7 ITEPA 2003, and by the risk averse nature of many potential clients who have no desire for the work to be reclassified as employment - even defending such a claim is costly.
Sixty years ago the US opted to repeal it's Income Shifting regulations as unworkable and allow joint returns, as do France and Germany. So why is the government so ready to ignore this and introduce it's own unworkable alternative. Rather the government should look at the relationship between those who commision work and those that do it so that each can be sure of the relationship's substance. Our divorce laws recognise the valuable contribution made by a spouse to one's career - is it so difficult for HMRC.
Equally the recently concluded consultation shows a lamentably lack of knowledge of basic business rules. It showed itself in the Artic case when they argued that Ordinary shares carried a right to income when that is manifestly untrue and then to compound that it missed out the CT due on it's first example in the consultation itself.
Create a seperate entity and you also create the ability to seperate, to tax one group differently - there can be no justification for taxing smaller businesses more than larger ones.
The reality in the case of married couples is that if a “non-working” wife was divorcing her husband, she would be entitled to 50% of everything on the basis that she had contributed to their accumulation of wealth by running the household for him. There have been many high profile settlements made in the past few years on that basis. So why doesn’t this apply to income shifting within husband and wife small businesses?
I appreciate it is tricky to precisely evaluate the spousal contribution, but you can still say to the person earning the money: ”well if you didn’t have your wife helping with the kids, house, socialising and networking etc, what impact would it have on your earning potential?” It’s impossible to value that and I think trying to place a specific value or percentage on the contribution isn’t the right way to go. The Revenue has to use the announced further consultation period to put proper legislation in place with clear guidelines on how to deal with it.
Perhaps the way forward is a compromise and they say that only 25% of the unused basic rate band can be utilised? Or perhaps they introduce some kind of transferable allowance? In my view this would be the fairest approach. And let’s face it, all we as tax professionals were doing when we recommended paying dividends to a non working spouse was finding a way to use their basic rate band and their unused allowance…so why not legitimise it in a structured way?
For instance, in the Isle of Man they have transferable allowances between jointly assessed couples. Now maybe for the UK they legislate that you cannot transfer it all, maybe you are restricted to say 50% of the basic rate band. Or maybe they should introduce a family threshold which can be graduated. For example, if you have 2 kids or more you can transfer it all whereas couples without children can only transfer 50%. Of course it is not going to be popular universally but ultimately that’s the best way to address it. In my view this is much better than introducing some grey, wishy washy legislation which says ”depending on what they do they may be eligible, but doesn’t spell out what is covered.”
In the end the fact is that this has been postponed for further consultation and therefore is unlikely to finally take the form of the draft legislation. The consultation process needs to be reflective and the ensuing legislation must be easy to understand and form a fair system, perhaps including a proportion of allowances.
Can anyone indicate whether another 'consultation' started at the same time as the income shifting one was concluded or deferred or quietly forgotten, namely:
PAYE including benefits in kind and expense payments in the payroll
Consultation will take place later in the year on how to tax all benefits and expenses through the payroll, including removing the £8500 threshold. We will publish details when available. (http://www.hmrc.gov.uk/agents/update2/pbr.htm
Thanks
but Mr. Darling did not even mention income shifting in his speech. There is the paragraph in the press releases and Budget note, but he obviously did not wish to be further embarrassed.
I suppose the easiest way to have achieved this would have been to re-introduce the Investment Income Surcharge on family company dividends. Forget about a deminimus limit and charge a flat rate of 30% additional tax on such dividends. (charge calculated as tax plus NIC).
This was such a pig's ear, I was sort of hoping that the income shifting legislation would be enacted as originally proposed. I would then have ignored it and taken out tax enquiry insurance. In the unlikely event of being investigated, I'm sure we could have justified the dividend distributions as reasonable. This approach would have been ten times cheaper than attempting to comply with it.
the elephant stays in the room for another year. Probably just as well, but will another year make it any easier to describe in legislation?
Looks like he has delayed it to 06/04/09
From PN3
Income shifting
The Government firmly believes it is unfair that some individuals can arrange
their affairs to gain a tax advantage by shifting part of their income to another
person who is subject to a lower rate of tax.
The Government has considered the responses received to the recent
consultation and believes that a further period of consultation will ensure that
legislation in this area provides clarity and certainty for businesses and their
advisers.
The Government now intends to introduce legislation through Finance Bill
2009 and will not enact legislation effective from 6 April 2008.
