Income shifting: The debate begins as Treasury publishes consultation

As this thead has been revived can I point out to all, if they are not et aware of it, of the thread on EDM 714 - a parliamentary attempt to persuade Darling to think again on this topic - so far the efforts of AccountingWeb members has increased the total of MPs signed up from 59 to 157 - if you haven't yet written or e-mailed to your MP please go to this link

http://www.accountingweb.co.uk/cgi-bin/item.cgi?id=179268

and find out how - 100 was the first target, 200 makes it very hard for Darling to ignore it.

If you have already done so check if your MP has actually signed it - mine said she would (on 18 February) but so far hasn't done so - I've just sent a reminder!

David,

It seems to me you probably fail the "arms length" test,, even though it is more likely your shares that were acquired 'uncommercially' (would you have acquired any shares in the company if you were not your father's son?)

An HMRC apologist would probably say that your father's dividend could be justified as a return on his previous investment in the company. It does not have to be work currrently done. Further, you can argue you have not 'foregone' income, and that you do not have the legal power to take away your fathers shares, or deny him his dividends, and that there is no purpose of avoiding tax.

The problem is there is no guarantee any individual Hector will accept this. Why don't you leave your father's company and set up your own, with just you as shareholder? Ha! To avoid Tax! etc.

Finally, the Family Business Tax does not actually prevent your father receiving his rightful dividend, but it means you risk being challenged to pay higher rate tax on it, and having to defend what is a perfectly normal and straightforward situation.

I think you should write to your MP with this example.

Mm. The thing that I am not happy about is this: dividends are paid for investment (owning shares). The payment of dividends are for owning the shares. The amount of work done is not relevant. If I own shares in say BT or British Gas, I don't have to do ANY work for them. I sit back and receive a dividend. I can own these with my wife if i want.
So, if the revenue are now saying that the amount of dividend is related to the work done, they are only one step away from Ah - so its wages... kerching!! all that extra tax and NIC.
My dad started a company (which i now run) and it did very well. He has retired but keeps his shares and receives dividends as an income to supplement his pension. He has every right to do so. He owns those shares. But now he does not do any work for the company. So, the revenue are saying he is no longer allowed to have this income?!? So will they make up his pension then? Not likely. So he has to go onto state benefits instead.... Hey; great idea.
If I am showing a childish misunderstanding of the situation, please forgive me.
Thanks

if its me you are referring to i am humbled, if not it was nice thinking it. i just wish i had some sort of answer here

As so often Nicholas has the essence of the problem.

The whole process has been dreamt up by civil servants who operate in a world of exact quantification of worth via salaries based on staff gradings.

The fact of logical inconsistencies between IHT & Revenue taxes and between family law and tax law will worry the chancellor not one iota.

fair point, i am no sure they they have got there yet - Parlour v Parlour? etc.

the point i was making was that the spouses right to a share of the income seems to exist ( as does a right to a share of the assets) and in my view that is irrrespective of whether the joint income is £50k or £500k. This is of course particularly relevant wher the assets have been dissipated.

i am trying to get my head around how we can determine what is a fair or commercial salary in these situations first. You cant pay the 'right' amount of tax until you know what the 'right' amount of income is

OK, the legislation only applies to company distribution. But do explore the principle:

(i) If there is an investment company and one party does more on the investment decisions etc, the Income Shifting would no doubt apply.

However, if a husband manages his wife investment and saving porfolio, then the legislation does not apply albeit beyond the corporate veil, what are done are exactly the same.

How about this?
(i) Dividend decared 10th of April 2008. Share holder husband,wife and a minority partner.
(ii) Both husband and wife go on holiday for 1 year and the minority partner draw £20k per year.
So..husband wife contribution is close to zero for the year. So..has income been shifted ?
-----
Does this means that the tax payer cannot know if income has been shifted at time the distribution is made (e.g. 10th of April) as whether income is shifted will then largely depend on what contribution each of the parties make during the rest of the tax year ?
--
And I am wondering if this applies to a hyphothetical scenario, say Mr G who is a CEO of a big company with a wife who is non residence ( say resides in IOM) who received then £300 million of dividend.

Does the CEO has control /influence over the distrubution (through informal influences? yes).
Income shifted - yes ?
Has the CEO received commercial compensation? Fortunes and FTSE companies compensation packages are pretty complex, so who is to determine what package would qualify as a comemrcial package for the purpose of income shifting legislation ?

Pre, or post tax income, Nicholas?

It is key to your argument and since alimony is not paid gross to what are you referring?

Richard Murphy

there are a myriad number of interesting points here, but the most fundamental of them is what is the right amount of income rather than the subsequent question about the right amount of tax.

the lords of appeal have made clear (well almost) that a spouses right to income exists so i want to know what HMRC are going to do about this basic dichotomy where they donot agree

There seems to be a trend developing of the revenue hiding certain consultation on the treasury web site - how many business owners will have seen the leak in the press this morning (I assume it was a leak as neither HMRC nor Treasury issued a press release to this effect). They may have then looked, as I did, at the HMRC site - nothing - even though there is notification of a completely different consultation, and, at that time nothing on the Treasury site either. Then the document is released on the Treasury site but still with no reference on the HMRC site. Are they hoping the thousands and thousands of taxpayers affected by this won't notice?

The new legislation is supposed to apply from 6 April 2008 and yet the consultation period expires on 28 February - do they seriously expect us to believe that due consideration will be given to the thousands of replies that they should receive - I would suggest that every firm enters a reply and so does every client adversely affected by it - and that this will shape the resultant legislation?

When dealing with local councils and consultation I point out to fellow activists the distinction between consultation and participation - consultation means 'I will listen to what you say but take not a blind bit of notice' - only participation enables you to play an active part in the decision making process. Consultation is to make you feel better.

I suppose it may be too early to speculate as to ways round the new legislation but the examples on partnership are particularly worrying as where there has been joint and several liability the revenue have not previously pressed the settlement provisions but it is clear that they would be caught by this idea of income splitting - and effectively with retrospective effect is catching partnership arrangements established and running without challenge for many years. This is much more than countering Arctic Systems.

The legislation is misleading. In fact the Treasury fully support and approve of Income-shifting.

What they want to do is shift income from family-run businesses into the treasury. From there they can donate it to worthy causes such as Northern Rock.

Have just looked on the HMRC site - under what's new. Absolutely nothing. These proposals potentially affect the tax position of tens of thousands of individuals and yet there is no mention of the proposals. Perhaps the consultation document is in the same place as the numerous missing disks (even as a mathematician I've lost count of the number)

The news of the proposals was in the Guardian this morning, the Treasury had it by twelve - it is the last item on today's What's New section on the HMRC website - so we have shamed them into admitting it's existence, but where is the news story concerning the consultation on domicile and residence which was also released today on the Treasury website, or the North Sea Oil taxation regime consultation, also released today?

And search all you might the consultation document on capital allowances is still the best information we have on the most significant reform of the CAs system since 1974 due to start in less than 4 months time - and it's now too out of date to be mentioned in current consultation on the Treasury website!

This approach to consultation - let's hide it on the Trasury site and hope no-one notices - is nothing short of scandalous!

I explain how here:

http://www.taxresearch.org.uk/Blog/2007/08/09/arctic-systems-moving-small-business-taxation-on-in-the-uk/

Reliable sources suggest HMRC have read it

And I agree with those who say that to consider this issue in isolation is wrong.

We also need an investment income surcharge to tackle the incentive to do this as well

Richard Murphy

I mean it is isn' it, complete and utter b*ll*x. You wonder if there is an inkling of intelligence in the Treasury. It's not even worth responding because they won't listen to a word accountants say or even the general public come to that. Try and solve a problem with another piece of ill-thought out legislation that will only result of inumerable confrontations between HMRC and taxpayers. Great public relations! Anyway what do I care I'm not married, merely have lived with my partner and three children for the last 15 years and share all my company's income with them.

Doug Scott wrote - "Anyway what do I care I'm not married, merely have lived with my partner and three children for the last 15 years and share all my company's income with them."

You obviously haven't looked at the document yet - it makes no distinction between husbands and wives, sons, daughters, uncles, aunts, friends, relatives, civil partners or uncivil partners - it is framed as Individual 1 and Individual 2 - if individula control has control over the disposition of income as a result of which Individual 2 benefits and there is a lower overall liability you are stuffed. It is not even clear who is individual 1 and who is Individual 2! A delegate at a conference tonight said he had a client where a father had provided capital into a family business in which the son now works and is the only worker - so is Dad Individual number 1 providing tyhe son with the income derived from his capital, or is the son individual 1 providing dad with the fruits of his efforts?

The remedy was to exclude shares in close companies and limited partnerships from s625, so that where there was a settlement the technicality of the outright gift would not protect it. This goes far beyond that and means that people who entered into what they believed and the revenue accepted to be perfectly commercial relationships are now exposed to the danger of self assessment liability which could lead to assessment of more income than that which arises.

The Professional Bodies MUST protest, and every - EVERY - practitioner, client must indicate just how damaging this idea is to the concept of the 'ma and pa' business where the future of the family is entrusted to the parlous risks of a corporate or partnership venture. Unless we galvanise the population as a whole to tell HMRC - who have been given a completely free hand to devise this nonsense - there is no political thought behind this - to back off - or lead to a catastrophic rejection of any political party that allows this nonsense to be perpetrated in their name then as a profession we will have failed in our duty, Good God - even Mr Murphy disagrees!

The real issue is, and I'm sure all of us which do small firm accounts, is that, in most cases, the non-primary partner/shareholder, does actually do a certain level of work, in which they should be renumerated in some way by. The real issue, and it's one of pure judgement, is what the 'value' of that work is, and as stated in husband/wife teams, its very difficult to assign a clear value to that. Commerical terms won't work, as its not a commerical arrangement (the old 'talking and planning over breakfast' issue).

This is incredibly unfair. In a divorce, its recognised in law, that the non-primary earner has a claim to the household income and assets (which would be including the business) in respect of support given to the primary earner.

Why not in tax?

Am I alone is noticing that in HMRC's admittedly very simplistic examples they have forgotten to deduct corporation tax in their comparisons.

The example at Box 1.1a shows a company making £60K of profits being distributed in full to shareholders - no mention of the £12K CT liability but notes that if Nina had taken the entire dividends she would have a personal liabilty of £6,039.

This is then compared to a sole trader whose total liability would be £15,414.

Quite apart from the fact that the company could not pay out a dividend of £60K out of current profits - the maximum dividend is likely ot be only £48K giving a personal liability of £3039 and a total tax take of £15,039.

They have also failed to mention that if Nina took all the profits out of the company as salary the total amount taken in tax and national insurance would be £22,618

Surely if HMRC want to have a full discussion on this issue they should at least get their sums right in the first place.

With regard to RIchard Murphy's call for investment surcharge to be reinstated, he is old enough to remember the last time this was introduced and the amount of tax evasion which resulted.

I've also just read the consultation document on "Principles-based approach to financial products avoidance"

The following paragraph caught my eye:
1.7 "We have therefore considered whether what we are calling a “principles-based” approach has a role to play in legislation that seeks to prevent taxpayers exploiting distinctions in tax law in order to pay less tax than the tax principles require. "

If HMRC can't correctly determine what amount of tax the "tax principles require" then how can they produce accurate anti-avoidance legislation

I am still unable to get my head around the fact that Mr Darling has accepted that couples should be able to save tax with his inheritance tax provisions announced in October, but that it is unfair when they split income.

"I want to ensure that husbands and wives can benefit from each others unused inheritance tax exemptions" is what he said.

Why does this not extend to income tax? Please can someone explain the difference. Perhaps David Cameron may have some ideas.

Paragraph B.36 in the guidance covers that scenario. Apparently 'control' isn't limited to the usual definition involving shareholdings. 'Informal relationships', shadow directorships etc are supposed to be taken into consideration.

Utterly unworkable obviously!

It is quite normal to start a business working full time and when it is up and running to leave or come back part-time after having children. Your family business tends to keep going under these circumstances, and prudent families will tend to build up reserves so that shareholders do not suffer any substantial changes in income when one is absent for parental leave. This is fine, from what I can see in the guidance, maternity leave is justified as being commercial!

Presumably then, there will be no problems for parents if having come back from maternity or paternity leave one then works shorter days to pick up the kids after nursery/school too? Will the commercial opt out continue I wonder, and for how long?

We all think the consultation deadline is 28 February - it's what both the Treasury and HMRC think and what the document says - but I just got acknowledgement of my response which say - "Thank you for your email. We are accepting comments until 21 February 2008". I know its only a minor point but if they can't get the deadline for consultation right...

I have now received an e-mail in reply to the one I sent pointing out the disparity and they now confirm receipt until 28 February.

How about if the company makes less money than the "market value" of labour supplied as is often the case in the first 1-3 years.

Ie As time is 'worth' £50k, Bs is worth £25k, and the company makes £20k, then what do you do?

Charge B with £25k of income, and A with er, a loss of £5k??? Or A with £20k and B with zero? Or something else?

It makes no sense to me.

Also the examples seem to assume all income is distributed at the time it is earned. This clearly doesn't happen in practice - how on earth do you cope where the participation rates have changed, but the distributions are current?

Let me get this right - the plan is for which of the following?

(a) Consultation until the end of Feb, reviewed during March, legislated in the Budget and imposed w.e.f April 2008? or

(b) Consultation until end-Feb, reviewed with a little more care, legislated within FA 2008 and then imposed retrospectively on businesses w.e.f April 2008.

(a) seems madness because they simply won't have time to get the legislation right and (b) is unreasonable because it will require people to trade, not knowing the nature of the regime under which they're working.

What HMRC fail to understand is that owning equity in something alters the market rate at which you will work in that entity.

If I take on a professional individual at full salary I might have to pay him £60k salary with all the associated costs.

However if I use the Enterprise Management Incentive and give him a small chunk of equity I can probably get him to work for £40K salary. If I give a slightly bigger bit I might get half price.

If I gave half I'd expect them to work for dividends and not salary at all, and they would get it regardless of how hard they work.

So you could have the situation where you have an EMI individual working for your company all quite happily, and then you decide to marry them because you get on really well and suddenly end up with a big tax bill even though nothing has changed other than, perhaps, a surname.

Equity changes salary expectations. Otherwise share schemes wouldn't work and there wouldn't be tax breaks on them.

Looking at the third part re power of the income-shifter - I read that as assuming that the "worker" earning the money has the balance of power in the company.

How would it work if wife had say 51% of the shares and was the sole director, with husband (the worker) owning 49% shares and being the company secretary. Whilst husband was actually doing the work, he wasn't the power behind the company. The wife is the power and she isn't income shifting.

Is there any way of making this kind of arrangement continue to work - assuming of course that husband is happy to be a mere low-paid employee and would need to be paid at least minimum wage seeing as he is not a director?

Para 1.2: "The Government believes that the fairness of the income tax system is undermined if some individuals are able to dissociate themselves from income that they would have received in order that the income is taxed in the hands of another individual at a lower rate. This is known as income shifting (or income splitting)."

...so might MPs who employ their spouses and other sundry family members be 'income shifters' as defined?

Oh, of course not. Silly me.

I have a 20% stake in a trading company and my partner has a 5% stake. That's been the set up since the shares were subscribed for about 8 years ago. Company is growing - more than one office and several PAYE staff, and an overseas branch about to open. The majority of shares are held by one non-related shareholder (I'm the "junior" partner as it were). We pay salaries - not market rate admittedly but a great deal more than minmum levels usually paid in salary / divdend splits. Dividends are paid based on profit and vary year on year, therefore my partner gets their share of these. She does a little work for the company (not salaried as she has another employment) involving company secretarial work (of which because of the company's nature, there is more than the usual nominal amount, but obviously its not a huge amount).

I therefore do not have control of the company. I have some influence but ultimately I don't have any control.

So if this situation is caught which it would appear to be on the "influence" basis, I have one question for our dear Chancellor.

If you really intend to have a go at us entrepreneurial types, and if you have any other disincentives planned to further demoralise us, would you let us know now so that we can all disappear to our new overseas branch, and take our six figure tax payments to the UK Exchequer with us?

I went through the document fairly thoroughly earlier today and penned a response which I sent off - however it seems fairly clear that the impression I get is that the author of the document doesn't understand what a partnership is.

Perhaps when joint and several liability came to an end for tax liability of a partnership they didn't realise that it still aplies to all other commercial indebtedness. So they have examples where a partner not wishing to risk capital withdraws it from a partnership - eh?

Then there's the issue of profit division - now I know some accountants get a bit cavalier here and allow partners to take whatever share of profit they choose but in strict law - the Partnership Act 1890 (s24) - unless the partners have a profit sharing agreement that provides to the contrary, profit and loss MUST be shared equally and the act also forbids partnership salaries and interest on capital (unless the amount contributed is beyond an agreed share) outside of an agreement as devices to ensure a 'fairer' allocation of profit.

In no part of this lengthy document does it mention either aspect of a partnership but seems to imagine it is some sort of flexible company.

I suggested that this evident lack of understanding is such that the revenue ought to go back to the drawing board and start again - how can they consult when the author or authors of the proposals clearly do not understand what they are legislating for.

... why has this issue only become "important" following the loss of the Arctic case.
Surely if it had any merit it should have been done at the time of that other bit of 'small-business-friendly' legislation - IR35.

And surely one possible option could be joint tax returns, at least for marital/civil partners, to make available to Mr and Mrs PAYE Class1 - which seems to have been part of the 'fairness' angle.

I look forward to legislation to mandate that all people are remunerated strictly according to the proportion of hours they work and the fees they themselves charge. ;-) mutters More micromanagement ...

@James Smith:
How about sending in a copy of your points by letter post as well - hopefully they'll have to respond to each letter.

If partner A works away from home all week, must (s)he now look at the commercial rate for having a live-in nanny / housekeeper to enable this to occur, and attribute that business contribution to partner B ? Plus office rent, laundry, cleaning and bookkeeping ... PA ?

From Guardian March 2000:

"Last week Labour MP Ruth Kelly pointed out that single parents are penalised by the tax credit system if they declare they are living with partners or their children's fathers. Kelly wants 'income splitting', which would add both the mother's and her partner's incomes, divide by two and calculate benefits for each half. This would introduce truer equality throughout the family, Kelly says."

Also http://www.guardian.co.uk/business/2000/mar/13/6

When George Osborn, declaired their plan for a £1 million exemption limit from IHT, this got Brown/Darling to quickly change their views within a week!

I suggest we get Cameron/Osborn on the case again and you will soon see big U turn.

The only sure thing is Labour has already lost the next election and I find it shocking that Brown does not know what is going on at the grass root level. Either he has got it all wrong or Tony left at the right time.

Having always voted labour I will not next time.
Osborn as far as I am aware is still promising £1 million IHT exemption EACH!

I do income shift to my wife who works part time with me. If she did not look after our 3 children I would not be able to work and income would fall. So the question is does she contriburte to my business? HMRC would say x hrs @£5.52 . Are they right?

I may as well stop working, and therefore pay no taxes and start claiming benfits which millions in the shadow economy do with no action being taken to stop this happening. Why is it that, we the hard working tax payers who WORK for a living always get clobbered, whilst individuals in the shadow economy and corrupt MP's ( 99% of them) get way with it?

Received just before recent proposals were published:

Thank you for your letter of 13th November, This was a detailed letter which raised several important points.
You mentioned the tax case of Jones v Garnett. Although Geoff and Diana Jones, the directors of Arctic Systems, won their legal battle with HMRC, the Government announced in the Pre Budget Report that they will change the tax legislation used by Arctic Systems so that, in future, 'income shifting' will no longer be possible. We will need to look at the Government's specific proposals but we are concerned that this will mean, in effect, a further tax increase for small businesses. The Government is seeking to end the type of tax beneficial arrangement which has been in place for many years. The consequence is that many small businesses will be paying more in tax than they previously have done. In conjunction with the rise in capital gains tax and corporation tax, entrepreneurs and small businesses face a worrying increase in their tax burden. I am very concerned that this will damage the UK's competitiveness.
Regarding marriage, most European countries recognise marriage in their tax system yet Britain doesn't. David Cameron has made it clear that we will recognise and support marriage in the tax system, and seek to reduce taxes on families. We will produce detailed proposals before the next election.
Thank you again for your useful comments.
Yours sincerely,

The Rt Hon Theresa May MP
Shadow Leader of the House of Commons

We moved my husbands sole trader business to a new site in 2003. For various reasons, including land ownership and vehicle operators licences, I became a partner in the business at that time. I had previously worked for him both with the bookkeeping and with driving, all unpaid. As I continued to work elsewhere for a salary, the profit has continued to be allocated 100% to him on the partnership return, which obviously does not in any way reflect the division of work, but does keep us out of higher rate tax. I have now had a second child so have given up my other work, and so the income will probably now be split 50:50 to better reflect the work that we do.. If however if I chose to go back to work and decided to continue to allocate all the partnership income to my husband, would that be classed as income shifting too as it would make a difference to total tax payable??

3.
A qualified accountant working for a large multinational company has felt for some time that she should set up in private practise. She decides that incorporation is the most suitable vehicle for the way in which she envisages that she would work. She hands in her notice, explaining her reasons for doing so to her employer.

The accountant sets up the new company in the way advised by the DTI and again follows accepted practice. The company issues 2 shares and appoints two directors. The accountant is appointed managing director whilst her live in partner, who also becomes a director, is made company secretary.

The shares are allocated equally, thus ensuring that neither director has a controlling share. The accountant is made an employee of the company. The accountant naturally has already made a substantial investment in a home computer setup and naturally utilises the computer and space at her home as the company's registered office.

The company's customers are invoiced and VAT is charged on the services as the turnover of the company is above the VAT threshold.

The accountant's live in partner undertakes no duties for the company, other than being a director with legal responsibility for the company's conduct and debts.

The two directors decide to pay the sole employee a salary commensurate with an employed accountant and pays the remainder of the company income, after deductions for expenses, in dividends, pro rata in relation to the director's share holdings.

Are these arrangements covered by the regulations?

How do you value the person who answers the phone, when you are out, to speak to that vital new contact you have just made?

How do you value the emotional / common sense business support that you sometimes receive "out of hours". Spouses / partners often (!) have all sorts of conversations about how to make their business work better. They do not fit these in to the 9.00 - 5.30 business framework that operates for many (larger) business.
What about when the partner / spouse is travelling, or in meetings and is unavailable. Maintaining contact with customers can be valueless, but they can sometimes be invaluable!
What is the value of having that important conversation at 8 or 9 o'clock at night, when all other employees are 'unavailable'? I should think double or triple-time rates should apply!

"... before the next election" !!!?

What b****y good would that be ? You've got until March !

1.
An established self employed plumber finds the CIS regulations onerous and decides to incorporate his business in order to gain more control over the flexibility of his work. This approach is further strengthened by the local plumbing supplies company offering extra discounts to incorporated businesses.

He sets his company up in the way recommended by the DTI and follows the established approach. The company issues 100 shares and appoints two directors. The plumber is appointed managing director whilst his wife, who also becomes a director, is made company secretary. The shares are allocated equally, thus ensuring that neither director has a controlling share. The plumber and his wife are also made employees of the company.

The plumber utilises a small room at his home as the registered office of the company and uses his home computer to produce any necessary legal documentation. The plumber contracts his services in the main to a large local builder, whilst providing some services to local householders.

All customers of the company are invoiced, but no VAT is charged as the turnover of the company does not exceed the VAT threshold. After deductions for expenses, the company pays half of its income in salaries to the plumber and his wife in a ratio of 5:3, the remainder of the income is paid in dividends to the two directors, the plumber and his wife, pro rata in relation to their share holding.

The plumber's wife attends to phone calls received regarding further work, the company's details having been added by the local phone directory producers in the business section of the directory. She also opens letters addressed to the company and ensures that the plumber is contacted in the event of any pressing important communications.

Are these arrangements covered by the regulations?

2.
An LRIBA qualified architect feels that his employer, the local council, does not value his contribution appropriately. He is aware that freelance architects command higher salaries and is also aware that expenses are claimable, whilst he feels that he would improve his experience with an increased variety of assignments. He decides to hand in his notice and incorporates in order to take advantage of the extra benefits of free-lancing.

The architect sets up the new company in the way advised by the DTI and again follows accepted practice. The company issues 2 shares and appoints two directors. The architect is appointed managing director whilst his wife, who also becomes a director, is made company secretary.

The shares are allocated equally, thus ensuring that neither director has a controlling share. The architect and his wife are also made employees of the company. The architect has already made a substantial investment in a home computer setup and naturally utilises the computer and space at his home as the company's registered office.

Before leaving his employment, his employer, the local council, indicates that they would wish to use his services for about three days a week, and would accept that he would offer architectural services to other clients as necessary. The architect agrees and his company enters into a contract with the local council to provide for his services on this basis.

The company's customers are invoiced and VAT is charged on the services as the turnover of the company is above the VAT threshold.

Again, the architect's wife stays at home, answering the phone and opening the company's mail. Naturally, as the architect works in a professional environment, she has to take care with his laundry to ensure he presents a smart appearance to the company's customers. He also feels that he needs to dress appropriately and invests in high quality clothes.

The directors of the company, the architect and his wife, decide to minimise their tax liability and decide to pay themselves a market rate for their services, whilst paying the remainder of the company's income after allowances in dividends pro rata in relation to their share holding.

Are these arrangements covered by the regulations?

Following Ken Howard's example - which asked what would happen if the wife held 51% of shares and husband 49%. Let us go further. The wife owns 100% of shares. Regardless of whether the husband (who is the main direct fee earner) is a director or not - is it actually possible for HMRC to deem that he receives or is taxable on any dividends at all from a company in which he is not even a shareholder ?

Our architect finds that no-one wants to design any buildings. Times are tough.

He cannot claim unemployment benefit because he cannot be unemployed.

There is no income coming into the business and so any wages must be paid out of reserves.

Unfortunately those reserves do not exist since they were deemed as income in a previous year.

How can you define that income is foregone? By assuming that no reserves are ever held?

What if they get to the end of the year, smell the end of "no more boom and bust" and pay no dividend but instead increase reserves? Has income been forgone? Has tax been avoided?

Do they even UNDERSTAND the concept of business?

Here's a scenerio for you:

Co-habiting couple run Limited Company with shareholding 60/40 in favour of the man. She undertakes some work but they are caught under new legislation.

They agree that he can re-acquire the shares from her leaving him as sole shareholder.

From April 2008 he draws a salary of £6000 from the company. She is paid a salary of £10,000 from the company and he draws all remaining profits via dividends.

As this is no longer an income splitting company is there an issue e.g. is every one man company suddenly faced with having to show a "market rate" salary because if this is so then the repercussions go far far beyond a husband and wife company set up.

If this set up is not caught then is it not a half way house solution?

Condition B - one of the four which must be met for the legislation to apply: "Individual 1 forgoes income and the forgone income is individual 2's for the relevant tax year". So what if the "forgone income" is left in the company as reserves, and not paid out as dividend until the next tax year ? And the company does the same every year so that year 1 profit is paid out as dividends in year 2, year 2 profit in year 3, etc?

Does this mean that by both individuals accepting reduced income in year 1, it is possible to escape the applicability of this legislation for evermore (or until it is repealed by the next government)?

Company set up with 3 husbands and wives - husbands do majority of work but one of the wives is a full time secretary on a market rate salary.

99 shares issued - 25 to each husband and 8 to each wife.

Husbands all have salary of £6000 and wives have no salary except the full-time secretary.

Strikes me that under the proposals that they will be caught? Or will they be ok as each couple is in no way related to the other!?

Once again if the wives shares revert to the husbands are they safe?

Or on further thought as no one party controls the company eg there are 3 shareholders with approx 25% and 3 with approx 8% then they should be safe as they do not meet all 4 of the Revenue's conditions............. when you think about it how fair is that then!?

Guess it goes back to my other post below about enforcing a market rate salary in which case every single company can be caught.

@Richard Murphy
I can assure you that in some sectors it is seen as unprofessional to take work calls for other clients while you are engaged in current work at a client's site.

In those circumstances it is usual to have an 'office' number ...

William Dick is absolutely right (and the others who make the same point).

These proposals are perilously close to interference by government in the decisions that businesses make about how they are run.

And only one step away from this is for example a tax inspector saying he wants to disallow x expense because it doesn’t seem (in his opinion) to be sound business practice to incur such an expense.

Business decisions are for the people running the businesses to make and Government should be kept as far away as possible. This destroys the last lingering vestiges of the myth that New Labour is any friend of enterprise. They should admit they are Marxists and simply nationalise everything and pay everyone the minimum wage.

How many people contributing to this debate have heard of mobile phones?

Do you really all have wives sitting at home waiting for someone to call?

I doubt it.

The Revenue may not have got their logic right - but debating an age gone by won't persuade them otherwise.

Richard Murphy