Income Splitting could impose "horrific burden" on family businesses

The Government has published a consultation document outlining how it intends to clamp down on so-called 'income splitting'. The consultation period ends on 28th February 2008.

'Income Splitting' occurs when a small business apportions income to family members with the overall effect of reducing the joint tax liability of the beneficiaries. For example, a limited company director may distribute half of the company's profits to his wife via dividends (as a 50% shareholder), regardless of how much work his wife may have carried out for the company.

The Treasury has tried to clamp down on 'income splitting' using existing legislation since 2002, however such attempts were dealt a blow with its defeat in the House of Lords over the Arctic Systems tax case, which revolved around a limited company director's right to distribute part of his company's profits to his wife.

The new legislation will require all small businesses that pay out dividends or partnership profits to calculate whether the recipients receive a market rate for their contributions to the success of the business.

Unsurprisingly, small business groups are less than impressed by the proposals.

The MD of the Professional Contractors Group, John Brazier said:

“This will be a nightmare for family businesses. The Government seems to think that fees paid to big businesses are fine, but fees paid to small businesses are really just 'income' that is 'shifted'."

“This measure will impose a horrific burden on hundreds of thousands of small family businesses, which will make it impossible to self-assess tax bills with any certainty."

The Chartered Institute of Taxation says that it has long been of the view that fundamental reform to the structure of small business taxation is necessary if small businesses are to be able to plan their tax affairs with any degree of certainty.

However, the CIOT believes that "it as wholly wrong for the government to deal with this one issue in isolation."

You can read the Government's income splitting consultation document here and read about income shifting in more detail on Contract Eye's income splitting section.