Proposed new rules could lead to taxing times ahead
Family businesses to face higher tax bills
Thousands of family businesses could face higher tax bills under proposed new rules that overturn a famous defeat for the government in the courts. Husband and wife businesses, along with all other arrangements between family members in companies and partnerships, would be caught by the change.
The rules, drafted by HM Revenue & Customs (HMRC), aim to overturn a defeat in the House of Lords that allowed a husband- and-wife team to take an income from their business in a form that minimised their tax payments.
The new rules may also extend beyond husband-and-wife businesses to include all small businesses where the relationship was "not arm's-length". Under the proposed legislation businesses will have to provide detailed evidence of how they pay themselves or face fines. This could mean that two people living together, a brother and sister or a father and son in business together would be caught by the new rules.
Business partners caught by the rules may need to justify to HMRC how they are paid. If they are both directors of the family firm, which is common, they would need to document how much time they each spend managing the business and detail how much capital they contributed and in what form.
A spokesman for HMRC said the agency wanted to consult on the rules to make sure the legislation was workable. He added: "The government believes that income shifting, the process whereby an individual gains a tax advantage by artificially shifting part of their income to another person who is subject to a lower rate of tax, is unfair. The majority of individuals [all employees and most business-owners] cannot shift their income."
The new rules follow the case of Geoff and Diana Jones and their IT business Arctic Systems. In the summer they won a four-year court battle against HMRC that also benefited an estimated 30,000 husband-and-wife-owned companies, using dividends as income to minimise their tax bills.
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Levels and bases of, and reliefs from, taxation are subject to change.
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