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.

However that view was not supported by the House of Lords in the recent defeat by HMRC in the long running saga of the Arctic Systems Case. The crackdown followed a court battle between Geoff and Diana Jones, the owners of Arctic Systems, and HMRC last year after the taxman alleged Mr Jones moved income from the business to Mrs Jones in order to make use of her basic income tax rate.

They lost the case because there was no existing legislation regarding this arrangement. Alistair Darling had originally planned to introduce the legislation as part of the recent Budget in an attempt to curb the practice, which the Chancellor regards as a tax loophole. The Government had anticipated that the regulation would create additional income tax revenue of as much as £350m.

The proposed and complex legislation had been aimed at parties moving income earned by their business between partners in order to minimise income tax. However, it was met with withering criticism from business owners and small business groups because it would cause considerable additional paperwork.

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.

After intense lobbying the Government backed down this year, however, they have said it would defer an announcement for 12 months while further consultation and any subsequent changes were made. The Government now intends to introduce legislation through the Finance Bill 2009.

We will keep you up to date on the revised proposed legislation as it becomes available. If you would like to discuss this or any other matter please contact Mark Michie or Stephen Clark.

For the full transcript of the last Consultation Document go to:
http://www.hm-treasury.gov.uk/consultations_and_legislation/income_shifting/consult_income_shifting.cfm