We’re not shifting

Apr 22 2008 by jez Davison, Evening Gazette

FAMILY businesses are digging their heels in over the Government’s controversial income shifting proposals.

One Sedgefield firm this week branded the scheme as “totally unworkable” and “another example of control from an over-controlling government”.

Peter Troy, of husband and wife PR firm Peter Troy The Publicist, blasted the plan to clamp down on the sharing of profits and dividends between members of a family firm.

He said: “The authorities tend not to like small business people because they are difficult to control; this is an attempt to control them.

“Entrepreneurialism survives the less interference it has. The best government can do to make small business flourish is to leave them alone.”

The Government’s proposals met a wall of opposition from business leaders when it first mooted last year.

Income shifting is legitimately used by thousands of family run firms to reduce individual partners’ and directors’ personal tax liabilities.

For example, if a firm generated profits of £70,000, it could be allocated equally between the husband and wife, reducing the tax liability of each to below the high rate band, irrespective of how much time and support each contributed to the firm.

The Government lost a court case last year against Geoff Jones and his wife Diana, of IT consultancy firm Arctic Systems who successfully fought a Revenue ruling, which said they had avoided tax by paying Diana through dividends from their firm.

The Revenue argued that Mr Jones had reduced his own salary to an artificially low level to give his wife a bigger slice of his earnings.

Proving how much time a partner devotes to the firm is at the heart of the proposals. John Wright, Middlesbrough-based chairman of the Federation of Small Businesses said it would be like “asking a couple how much sex they had”.

Women are likely to bear the brunt of any legislation. Many, like Peter’s wife, Diane, had made a lifestyle choice to work from home.

Diane keeps a daily log of her daily activities, but many would struggle to provide the information tax inspectors needed, she said.

Diane believes it is “impossible” to put a value on a partner’s contribution to the business. And she is angry that the new rules would force her to justify her financial worth to Peter. She believes it could lead to discrimination claims from irate partners.

Tim Smith, partner in Ward Hadaway’s employment team, agreed that it could result in an increased number of equal pay claims, if, as feared, the proposals are extended to include spouses who are legally employed by the business.

“Employees may have justifiable grounds for a claim if they can demonstrate that they bring more value to a business than another employee on a higher salary,” he said.

The Treasury, which has given no indication that it will back down, but has extended the consultation period on the plan, says it is the current system that is unfair. If introduced in the 2009 Budget, it is unlikely it will be retrospective.