Revenue goes after family businesses

As well as almost doubling their capital gains tax bills on exit, the government now wants to make sure that those nasty family-owned businesses are paying the full whack of income tax even before they think about selling up. And they're not going to let the pesky judicial process get in the way, either.

Last Updated: 31 Aug 2010

The government is proposing to change the law on 'income shifting', the practice where directors move part of their income to someone in a lower tax bracket or take it as a dividend in order to minimise their tax bills. It says the practice is unfair and artificial – though the fact that the changes could raise an extra £1bn in taxes is probably a major reason for their zeal…

It’s been forced to bring in the new legislation after famously losing a crucial test case in July, involving IT business Arctic Systems. Following a four-year legal battle, the House of Lords ruled unanimously in favour of the company’s owners, leaving the Revenue with a lot of expensive egg on its face. So now it’s time for Plan B: change the law instead.

Under the new rules, thousands of small businesses will have to provide detailed justifications for every single payment they make to directors, to prove they deserve it – which means documenting exactly how much time and money they put into the business, and working out a ‘reasonable’ income. But what counts as reasonable exactly? And what about all the other work one partner might do outside the business to ensure the other spends all their time on the business (like childcare, for instance)?

It’s not even clear where the rules will apply. They’re supposed to cover any situation which would never happen if the people concerned were acting 'commercially – but this is also incredibly vague.

As you’d expect, business groups and accountants are up in arms about the plan. ‘These proposals coming out on top of the recent capital gains tax changes mean yet another hit on small business owners,’ Grant Thornton’s Francesca Lagerberg said today.'Many entrepreneurs will now develop a persecution complex as the tax rules change yet again for them'.

Even if the final legislation miraculously solves the myriad problems, it will inevitably mean one thing: yet another mountain of red tape for small businesses, from a government that’s supposed to be reducing the complexity of the tax system...

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