Keep your eyes on family finance plan

Mar 18 2008 by jez Davison, Evening Gazette

A TEES legal expert warned that family firms should not abort plans to restructure their finances following a partial climbdown by the government in last week’s Budget over controversial “income shifting”.

Small companies breathed a sigh of relief on Wednesday when the Government, widely criticised for its failure to consult over Capital Gains Tax, announced that it would put off taking action on the sharing of profits and dividends in family businesses for year in order to canvass opinion.

But it did not say it had stepped back from plans to outlaw so-called income shifting, used to reduce family partners’ and directors’ personal tax liabilities.

Martin Barber, a tax partner in the Middlesbrough office of Vantis plc, believed the government was forced to extend the consultation period because it was uncertain how the proposals would be applied in practice.

When news of its intentions broke earlier this year there was a rush of small family firms attempting to make provisions to avoid paying extra tax, he said.

Mr Barber said: “The chancellor has taken a backward step in his drive to introduce legislation to tackle perceived tax avoidance.

“The consultation document published last December has been widely criticised by the tax profession as being draconian, and examples given in the document were unrepresentative of real-life business situations.

“My advice to businesses that were already making provisions is to carry on doing so, even though the legislation due to be published in the Finance Bill 2009 is unlikely to be retrospectively applied from April 2008.”

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

But from next year, husbands and wives in particular could be asked to justify the way in which income is allocated to family members.

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

In future, they may have to justify their share.

Guy Woodall, director of family-run drinks company, Thorncroft in Yarm, was one of many who said the law would be unworkable and unfair.

“I can’t see how an official could come into my business and apportion responsibility for bringing in different amounts of income,” he said.