Income Shifting!!!

scalesOn July 25th 2007 the House of Lords handed down its long awaited decision in the “Arctic Systems Ltd” case involving the use of a limited company structure to run their business by a husband and wife. Geoff and Diana Jones have fought a valiant and expensive three and a half year battle with the Revenue and Customs to get the courts to accept that their business set-up was a legitimate business vehicle and not a tax avoidance structure. They  won their case with the House of Lords turning in a unanimous decision in their favour!

However, whilst this was seen as a resounding victory for commonsense which was  be welcomed by many of our clients and by similarly organised small businesses up and down the country, it is not all good news.  Unfortunately the current favourable situation is not going to last. In a brief ministerial statement issued almost straight away after the judgement the government announced that it is to change the law soon. The statement included the following words:-

 “It is the Government’s view that individuals involved in these, (company), arrangements should pay tax on what is, in substance, their own income and that the legislation should clearly provide for this. The Government will therefore bring forward proposals for changes to legislation to ensure this is the case. In the meantime, HMRC will apply the law as elucidated by the House of Lords and will be providing guidance in due course. 

Subsequently the HMRC announced that Finance Bill 2008 would introduce detailed anti-avoidance provisions, known as "income Shifting Rules" which will in future require all husband and wife companies or partnerships, and possibly other family businesses as well to consider if they have "shifted" profits from one individual to another to reduce their tax bills. See the HMRC's Consultative Document for more detailed information.


However, in something of an about face on this subject on Budget Day 2008 the Chancellor announced a delay and said that these new provisions will not now be introduced before 6th April 2009 at the earliest!


 If you need advice or have any questions about the case or your business structure do not hesitate to give us a ring to discuss this in more detail.