New tax laws to hit the likes of Arctic

Just 24 hours after the Lords approved a tax reduction scheme used by thousands of 'husband and wife' businesses the government announced plans to call it in.

Legislation to head off income-splitting used by Arctic Systems, and thousands of other businesses run by married couples, will be brought forward to nullify the tax advantage.

In a statement on Thursday, the exchequer secretary to the Treasury added that individuals involved in such arrangements should pay tax on what is, in substance, their own income.

It said: "This case [Jones V Garnett] has brought to light the need for the government to ensure that there is greater clarity in the law regarding the tax treatment of 'income-splitting' arrangements, which are used by some taxpayers to achieve an unfair advantage over others."

On the night of the Lords' verdict, CUK reported it was "very unlikely" that the government would accept the judgement from Britain's highest court, which found in favour of the taxpayer.

Anne Redston, spokesperson for the CIOT, who has advised Arctic Systems, warned any new rules for husband and wife companies would be difficult to frame.

The legislation would have to specify how many hours a spouse works in the business, and state whether working in IT would have different tax implications to working in administration.

She added: "If HMRC bring in new rules, they will have to look at the question of which husband and wife businesses are they really going to attack, and on what grounds, and what evidence are they going to need?

"They may wish to change the law but it would be very difficult. Secondly, if they do wish to do it [legislate], it is absolutely imperative that they consult."

Besides the technical difficulties of legislating against income-splitting, or against the exemption that allows husband and wives to make each other an outright gift, the move has been attacked for political reasons.

David Ramsden, chairman of the PCG, which supported Arctic Systems in its four-year battle, said: "When husbands and wives began to be taxed independently in the 1980s, it was always intended that they should be encouraged to go into business together in this way.

"We question why the government suddenly wishes to jeopardise the UK's vibrant small business sector by reversing this well-established policy."

Mr Ramsden also expressed dismay at the prospect of new legislation, particularly since the taxman had consistently denied that the Arctic Systems case was a 'test case.'

He asked: "If it did not test any significant new point of law, why does the law suddenly need changing?

"And if the law needs changing, why did the government not just do that to begin with, instead of chasing Geoff and Diana Jones to the House of Lords?

Ms Redston echoed his view, saying the fair way to change the rules governing the tax practice of 'husband and wife' businesses would be to openly legislate.

Chartered accountant PKF cautioned that any attempt to legislate the tax affairs of family-run firms would undermine the government's pledge that it is a champion of enterprise.

The taxman's "next move is likely to be a push for changes to legislation to prevent all small company owners using what is a long-standing practice to their advantage," said Peter Penneycard, PKF's national director of tax.

He added: "Unfortunately, while HMRC may increase their tax take, this is likely to make starting a new business less attractive and damage entrepreneurial spirit within the UK

"There is clearly a justification for reviewing this area of tax but it is impossible to look at it in isolation; it is time for a complete overhaul of the small business tax regime so that there are sufficient incentives for people to take what can be a major gamble while ensuring the state receives a fair level of tax. Shut down all the incentives and there's no point taking the risk of starting a new business."

Francesca Lagerberg, of the ICAEW's Tax Faculty, said: "The government is looking to review situations where family members are involved together in a business.

"It appears that the tax authorities will seek to separate out 'commercial' situations from those where it believes dividends are being passed to lower rate taxpayers primarily to keep down the tax bill.

"The reality is that most businesses do not fall into such neat categories. There is a danger that rushed legislation will result in unworkable legislation, plunging thousands of taxpayers into yet more uncertainty about their tax position.

"There is no 'quick fix' formula that we think could work. There is now an urgent need for full and detailed consideration of the small business tax regime, which should include a detailed understanding of the businesses and the issues involved and full consultation, which should be completed before any measures are announced."

The move to legislate fuels suspicion that Gordon Brown, who has populated the Business Council of Britain with big-business owners, unveiled anti-avoidance laws for MSCs and increased the SCR, is keen on firms only if they grow and create jobs.

 

Jul 29, 2007