Income shifting - May 2008
Following the well publicised case of Arctic Systems regarding dividends in a husband and wife company, in particular the split of income between them, HMR&C are currently considering what can be done to undo what they believe is an unfair tax advantage by partners (yes, this will apply to partnerships as well as family companies) or directors 'shifting' income according to tax benefits rather than practical work considerations.
For example, a husband and wife partnership earning profits of £70,000 per year, the husband works full time in the business, the wife does no, or little, work for the partnership, and the profits are split equally. In this situation, tax will be paid at no higher than basic rate on all the profits.
However, the commercial reality is that the husband should receive the vast majority of the profits as he has provided the majority of the input. This will mean some of the profits probably being taxed at 40%.
The legislation is still being considered, so no clear guidance can yet be given, however, there is certainly a potential problem when the change of rules is finalised.
For more information regarding this, please contact Rosy or Gary at the office.
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