Monthly Newsletter

Family businesses and their representatives have breathed a sigh of relief in the wake of Chancellor of the Exchequer Alistair Darling's announcement in the 2008 budget that new 'income shifting' legislation will be delayed until 2009.

The Professional Contractors Group (PCG), which represents the UK’s freelancers, says that it is pleased the Chancellor has apparently listened to a growing chorus of criticism from business, accountancy and other professional bodies, over the plans, which are primarily designed to prevent small husband and wife-run companies from distributing income through the firm to take advantage of one partner's lower tax rates.

“We are glad that Mr Darling has taken notice of not just the experts but the thousands of people who signed the petition on the 10 Downing Street website, the MPs who signed the Early Day Motion against the proposals and others."

"There has been a clear consensus that the FBT proposals would not have worked. We hope the next phase of consultation will result in a sensible outcome," commented the PCG’s managing director John Brazier.

PCG has pledged to provide full input into the next phase of consultation, stating that: “We will hold the Chancellor to what he promised today: a ‘stable business tax regime that is responsive to business needs.'"

“We are glad that there is now an opportunity to persuade the Government to reconsider fully," Brazier added.

The government decided to change legislation on income shifting following HM Revenue & Customs's loss of a case against Arctic Systems, a husband and wife-run IT consultancy, in the House of Lords last year.

Tax experts argued that the case demonstrated the need for clarification of this area of the tax law. However, they also cautioned that clarification should not come at the cost of a greater administrative burden for small firms.

"As they stand, the income shifting proposals fail the certainty and practicality criteria that are necessary for a workable tax system. If the legislation is to work, it must take into account the type of small businesses that it is targeted at," observed Kevin Nicholson, UK head of entrepreneurs and private companies with accounting firm PricewaterhouseCoopers LLP.

However, according to Nicholson, the proposed rules will put the onus for judging tax bills firmly with the taxpayer, and in doing so, seem likely to impose an administrative burden out of proportion to the issue being targeted.

"This won’t encourage an enterprise economy," he argued.

“Legislation must be simple and easy to comply with if it is to work effectively. For small companies to succeed and grow in the UK, they need to remain focused on developing the commercial needs of their business as opposed to managing the business according to increasing regulatory requirements," Nicholson concluded.