Income shifting. By Simon Sweetman

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We now have the long awaited (well, not that long) draft legislation and guidance on the subject of income shifting. (Income shifting: a consultation on draft legislation) . What was done in the Arctic Systems case can probably be done no longer. There is a 12 week consultation period but I think we can assume that nothing significant will change, since these changes are politically driven.

Since the intention to legislate is clear, there is no point in arguing about whether it's right or wrong it will not be overturned by Parliament. After all it has been part of the argument for the practice that the shifting of income was not a breach of tax law and so it was acceptable planning rather than avoidance. That argument can no longer apply.

Most attention in recent years has of course been di...

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10th Dec 2007 12:43

Property Partnerships
Is a property partnership not a "real" partnership? None of the examples in the draft guidance refer to property partnerships, yet (although the dividing line between partnership and mere joint ownership is very ill-defined) HMRC are plainly of the view that joint ownership can involve partnership (see PIM1030). And I see nothing to exclude such partnerships from the new legislation, though it would plainly be absurd that joint ownership is OK but partnership isn't. On the other hand, why on earth should a business of exploiting property be treated more favourably under the law than a manfacturing or service business? And what if a property investment business is conducted via a company? That seems to be within the new rules - so how can a property partnership not be?

HMRC give the impression that they want to attack transfers of "individual earnings" without ensnaring investors who want to transfer capital. Apart from the problem that it's extraordinarily difficult to define the sort of income which they want to catch (as the draft legislation shows) you also have to ask - why is it OK for an investor to save tax by gifting capital to his or her spouse or friend but not OK for a worker to save tax by transferring income to his or spouse or friend?

This legislation is terribly difficult to draft mainly because the thinking behind it is terribly wooly.

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By NeilW
10th Dec 2007 13:45

Time for an anti-avoidance mechanism
What this all shows is that if politicians want to pull more strings we are going to have to have clearance to get any certainty.

Rather than this complex rules system used at present to bloat the tax legillsation, what we need is the simple legilsation, guidance and a mechanism to ask the Revenue which side of the fence a particular case falls. And HMRC should charge for clearance to cover their increased costs.

Beyond that HMRC could deny uncleared transactions the tax effect they are seeking if they felt it went against the will of parliament.

It would be no different than applying for a patent or a trademark.

So why not? It's got to be cheaper than the current system.

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By NeilW
11th Dec 2007 09:57

Will of parliament
It's not a matter of trusting HMRC. It's a matter of being able to obtain certainty for a fixed cost.

If you don't like what HMRC dictate then you lobby their political masters and ultimately use the political process to elect a government that will change the rules.

However it would be much better than the 'reinterpret post-hoc as we feel like it' approach that we have at the moment.

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By NeilW
11th Dec 2007 09:58

End of NI

If only...

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10th Dec 2007 19:50

the fix
y oh y do these teeedious civil servants keep wasting forests of paper trying to fix something that is soooooooo easy to fix with minimal legislation ?

i.e. just abolish nic, as that is the real driver for Arctic etc...., just make basic rate tax 33% etc, and we can all get on, AND better still bin loads of tax advisers! NIC is an appalling distortion of taxes at any level and it is high time it was thrown down the toilet (avec le Darling and Northern Rock directors)

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11th Dec 2007 10:59

Income Splitting
A single man earning £100,000 pays the same tax as a married man with children earning £100,000 if he doesnt apportion some income to his wife. Is that fair? I would say it is only right that a married man with children should pay less tax than a single man. Not allowing income splitting is wrong.

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11th Dec 2007 14:32

Disclosure rather than clearance

Clearance would be needed for every tax year not just the business structure.

What I can see is lots of white space notes, as we were using after the High Court decision in Arctic Systems --> if we have not spellt out the structure & thus our reasons for failure to reallocate "split" income to the "earner" then we will be at risk from discovery for 6 years.

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11th Dec 2007 19:14

The contributor below...
... is surely wrong to claim that the married man on £100,000 with two children should pay less tax than the single man on the same salary.

The single man's necessary living expenses are likely to far exceed those of his married counterpart when account is taken of the cost of keeping even one petite amie content and accommodating. Just think of the cost of all those champagne dinners and five-star hotel weekends, no to mention the diamonds and sapphires and golden tiaras - sine qua: Non!

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By Anonymous
12th Dec 2007 15:02

Income splitting for the non-accountant
Tried to discuss these proposals with a husband and wife partnership. She said "Its OK, income shifting doesn't apply to us you see, we split everything down the middle, always have..."

I turn to him in the hope that he at least has got a drift of what I am trying to say. He replied "Don't ask me, she wears the trousers round here!"

So if individual 1...thinks that he is not the main source of income and individual 2 doesn't either...

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By Anonymous
13th Dec 2007 12:14

Off the wall suggestion
How about allowing income splitting if you have children?:

1. Encourages having children - we're running out of them here in Scotland apparently - no-one will be working to support me when I'm old!

2. Encourages one partner to stay home to look after children - if both parents work they get 2 sets of allowances, rate bands etc. so the system actually encourages people to leave children in care daily - i.e. a couple with both earning 30k each pay much less tax than one earning £60k and the other nothing. Should it not at least be a choice based on equal taxation?

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14th Dec 2007 01:26

Solidarity Comrades
"Tired Practitioner" BRILLIANT you have highlighted what will make this legislation inoperative. The reality of most small family businesses that they are rarely run on a commercial or arms-length basis and therefore attempting to apply such text book concepts will tie up the Revenue, tax payers and their advisors in discussions over what is & isn’t a fair commercial return to individual 2 for his/her input into the business.

Despite Simon’s apparent resignation to the legislation being inevitable, surely it’s worth responding to the consultation. With memories of something called IR35 (are they "bovvered"?) and a partial U turn on CGT, who knows, the more the merrier (R Hood) Never stop fighting till the fight is done (on 28 February) (E Ness).

One small technical point that puzzles me. Simon hasn’t quoted exactly from the key conditions. These make reference to individual 1 being able to “control or influence” income & arrangements. I would suggest that mixing these two words will cause all sorts of trouble, ie shouldn't it be either “control” or “influence” and if the latter is it any influence or only significant?

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