Uncertainty reigns over profit shares

Feb 19 2008 by jez Davison, Evening Gazette

OWNERS and partners of Tees family businesses are set to lose out under government proposals that will outlaw the sharing of profits and dividends.

Uncertainty surrounding the proposals is affecting small family firms attempting to make provisions to avoid paying extra tax.

Under current legislation, the owners can decide how profits and dividends are distributed between partners or company directors.

But from April 6, husbands and wives in particular could be asked to justify the underlying commercial reasons for the way in which income is allocated to family members.

The rules are less likely to affect business partners who co-habit, although the full implications will not be made clear until consultation on draft legislation ends on February 28.

Elizabeth Wilson, tax accountant at Anderson Barrowcliff in Thornaby, said: “Currently, even if one of the spouses is more active in the business than the other, it is for the business to decide how its profits are allocated.

“However, from April 6 husbands and wives in particular could be asked to justify the underlying commercial reasons for the way in which income is allocated to family members and a greater tax liability may be generated on the family income.”

If a business generated profits of £70,000 which it allocated between the husband and wife equally, basic rate tax may be payable on the profits. However, from April 6 this may not be possible and additional tax will be payable.

Guy Woodall, director of family-run firm, Thorncroft Drinks in Yarm, said: “I am not aware of these proposals but they would be very difficult to enforce and to make sense of. I can’t see how an official could come into my business and apportion responsibility for bringing in different amounts of income”.

Lea and Robert Darling, partners of Darlington-based Burtree House Farm, currently split the company’s profits equally.

Lea said: “Small businesses are often penalised when it comes to taxation but I leave all dealings with the Inland Revenue to my accountant.”

Other taxation changes will be introduced from April. The basic rate of income tax is dropping from 22% to 20% and the existing starting rate of 10% is to be abolished, meaning that individuals on low incomes will pay more tax.

In addition, basic rate tax relief on pensions will decrease from 22% to 20% in line with the reduction in income tax rates, while taper relief on capital gains tax is to be scrapped and replaced with a single tax rate of 18%.