Revenue attack on family businesses
| Author: Mary Clark | Published: 2nd June 2008 11:37 |
Income Shifting Proposals
Typically many small businesses are structured so that maximum use is made of tax breaks available to couples; often this involves a sharing of income to prevent tax being paid at higher rates. BUT in the Inland Revenue have their way, all this may be about to change!
Following the House of Lords decision last year in favour of Mr and Mrs Jones against the Inland Revenue, new rules are proposed from 6 April 2008 to attack the sharing of income. In particular, married couples (and civil partners) often run businesses together and share the profits in a "tax efficient" way and this will be, in the future, capable of being overturned by the Inland Revenue where certain conditions are met:
- Ø Firstly non-commercial arrangements must be in place, the main purpose of which is to reduce income tax e.g. profits to lower taxed spouse.
- Ø Secondly, that one party to the arrangement foregoes income that they might otherwise expect to receive e.g. only one spouse works full time in the business.
- Ø Thirdly that one party can control the amount of income shifted.
- Ø Fourthly that the income consists of company dividends or, partnership profits.
Many small family businesses operate such that the profits are shared between husband and wife (civil partners) in proportions other than that in which they "contribute" to the business. How is that contribution to be measured? How is the ‘'income foregone''' to be measured?
The new rules are very widely drafted and may catch many long standing arrangements. What can you do?
If you have undistributed company profits consider the benefit of distributing them before 6 April 2008 under the current rules.
Consider keeping records of meeting whether at home or in the office and of the time spent dealing with the business in both office hours and outside office hours. This information may be helpful if challenged as to the ‘'contribution'' each spouse makes to the business.
With thanks to Burgis & Bullock - http://www.burgisbullock.com/ for providing this article
