Darling 'in rethink on income shifting'

Tough new rules to ban a decades-old tax advantage for 'husband and wife' businesses will be softened when the chancellor delivers his Budget next month.

Alistair Darling is tipped to ease the rigorous requirement of spouses, civil partners and other "connected" company persons to prove that they contributed to the firm.

Unnamed sources involved in talks with the Treasury also told a Sunday paper that the rethink on income shifting is likely to be seen as the showpiece of small business reform.

Experts have warned that owners face an administrative mountain as the rules dictate their jointly-owned companies must specify how many hours a spouse works in the business, and for how much.

The government says it is right for distributions from the company to reflect the contribution of a second person who gives their time for work (or capital) to the business.

But it says it is wrong for the main-income earner to deliberately forego or lower their earnings, so it can be passed to the second person, who is subject to less tax, to obtain it via dividends.

Someone in a company or partnership who passes their income, as dividends or partnership profits, to a "connected" person just because that person pays a lower rate of tax is "unfair."

As currently drafted, Mr Darling's rules would end "income-splitting" where the spouse or partner "plays either no role or only a minimal role in the business".

Therefore the legislation means that the amount of time contributed to the business by the second person, and the amount of remuneration set for their work, may need to be proved.

However, The Mail on Sunday understands that the administrative burden will be lightened, as Number 10 is reported to be displeased about the Revenue's "hard-nosed" approach to the rules.

One accountant hinted to the paper that officials will be more disappointed when they see the annual yield from the new laws.

"The government has estimated that it will get £350million from this measure," said Chas Roy Chowdhury, head of tax at the Association of Certified Chartered Accountants.

"The 'take' will be far less than the government is estimating and will create an onerous burden for businesses for very little gain."

Most business and tax bodies estimate that the legislation – being attacked for implementing a family business tax – will net the Treasury around £200million a year.

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