'Income shifting' - how it might effect you
Date of Issue: 7th February 2008
HMRC has proposed legislation that seeks to prevent a tax advantage being gained through “Income Shifting”. “Income Shifting” as defined in the Arctic Systems case, occurs when one spouse or civil partner generates most of the business profits but the other gets a proportion of the profit and, overall, the couple saves tax as a result.
The new legislation broadens the definition to include husbands, wives, other family members and couples who live together but are not married.
The incomes concerned are company dividends and partnership profits, where the following conditions apply:
- The individual “shifting income” is party to or can control the arrangement or understanding and can control or influence the amount shifted
- That individual forgoes income (directly or indirectly) as it has been shifted to another individual
In these circumstances, the individual who has shifted the income will be liable for tax and and national insurance due on the income shifted.
The legislation will not apply to:
- genuine commercial arrangements
- 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; and
- situations where, even though income has been shifted, there is no tax advantage gained
This proposed legislation will come into effect on the 6th April 2008, unless calls to defer it by 12 months are heeded by HMRC, so there is very little time to consider what action might be needed and implement this for the next tax year. Bates Weston recommends you contact your business advisor to discuss your own circumstances in more detail.
For further details, please contact:
Bridget Charlton, Marketing Manager
Email: bridgetc@batesweston.co.uk
or telephone 01332 365855
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