Treasury officials are said to have joined the chorus of voices from
enterprise, tax and legal groups calling for higher taxes on ‘husband
and wife’ businesses to be scrapped.
Since December, draft laws to strip away the “tax advantage” these
firms gain by diverting income to the spouse on a lower tax rate have
been widely attacked as unworkable.
Now the government’s own employees have added their own condemnation to
ministers, reportedly saying the new rules appear so difficult to
follow that people will just “not bother.”
Speaking to The Sunday Telegraph, an anonymous source close to the
matter also said legislating against family firms would ‘setback’ the
state’s relationship with enterprise.
The PCG, the trade group for freelancers, has echoed the warning,
saying many of the new requirements for jointly-owned businesses will
put them on a collision course with the taxman.
“Tax inspectors will take an increasingly aggressive attitude towards
small businesses as so many taxpayers will inevitably make mistakes
when self-assessing under this legislation.
“Inspectors will come to presume, even more then they already do, that
small businesses have got it wrong,” the group said, “the relationship
between HMRC and business will sink even lower.”
Under the legislation, owners of jointly-owned companies will have to
keep records of how much work they do, and at what rate, so they can
prove the salary and dividends they receive are justified.
It also requires anyone who is aware that they are sharing their income
– known as ‘income shifting’ – generated by their trade to another
person to declare this and pay tax accordingly.
The legislation would not apply if there was a “genuine commercial
arrangement” and HMRC believes tax reduction was “not the main or one
of the main purposes” of the arrangement.
In other words, this latter requirement dictates small businesses would
have to somehow prove that they had no intention of avoiding tax by
choosing their structure.
The PCG reflected: “The proposals show a total lack of understanding of
how family businesses operate: applying ‘commercial’ tests to them is a
nonsense, because they only exist, and only operate, by virtue of
family relationships, not ‘commercial ones.’
“Applying the new rules, particularly with regard to applying ‘market
rate’ values to work done within a family business, will be impossible
to do with any certainty. Accordingly, businesses will be unable to
meet their obligations under self-assessment.”
The Federation of Small Businesses has pointed out that the legislation
intends that people will self-assess and will be able to self-assess.
But Simon Sweetman, its tax chairman, warned it is “clear” that there
is in most cases going to be no ‘right answer’, when the legislation
takes effect next month.
“There may be a range of acceptable answers,” he said, “This looks like fertile ground for disputes to me.”
The Chartered Institute of Accountants think disputes won’t only be between taxpayer and tax authority.
“Business owners caught by the legislation would need access to
confidential tax information about their fellow business owners to be
able to self assess properly yet without, it seems, the right to such
information.”
As a result, accountants fear it may be impossible for some businesses
to calculate the impact of their ‘income shifting’, without breaking
confidentiality and data sharing laws.
In its analysis of the new rules, the CIOT has told the Treasury: “The
legislation would be unworkable and have no semblance of practicality
or certainty.
It will not be easy for taxpayers or advisers to comply with nor for HM Revenue and Customs (HMRC) to administer.
“The income shifting provisions are effectively imposing transfer
pricing tests on the internal working of small or family businesses to
a standard comparable to that required from the largest PLCs.”
And although officials now apparently agree the rules are worrisome, in
addition to whispers of a rethink on the most onerous requirements, the
consensus among experts is that the government is determined not to
concede, evidenced in part by its dogged pursuit of IT contractor
company Arctic Systems Ltd.
Most experts estimate that the legislation – being attacked for
imposing a family business tax on up to 30,000 small businesses – will
net the Treasury around £200million a year.
Mar 10, 2008
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