Treasury Consultation on Income Shifting - the successor to s660

19 December 2007

Having lost its battle in the House of Lords with Mr & Mrs Jones of Arctic Systems over s660, the Government immediately announced that it would introduce legislation to rectify what it considers to be a defect in the tax law. It has therefore published a consultation paper on draft legislation it proposes to introduce to prevent a tax advantage being gained through 'income shifting'. The consultation period will close on 28 February 2008.

Having lost its battle in the House of Lords with Mr & Mrs Jones of Arctic Systemsover s660, the Governmentimmediately announced that it would introduce legislation to rectify what itconsiders to be a defect in the tax law. It has thereforepublished a consultation paper on draft legislation it proposes to introduce to prevent a tax advantage being gained through 'income shifting'. The consultation period will close on 28 February 2008.

The consultation document "Income shifting: a consultation on draft legislation" sets out the Government's view that income shifting, through which one individual can shift their income to another in order to gain a tax advantage, leads to unfair outcomes. It asks whether the draft legislation, which applies only where a tax advantage is gained through non-commercial arrangements and where the shifted income is in the form of a company distribution or share of partnership profits, meets the Government's aims. It also seeks comments on the draft guidance published alongside the legislation, to ensure that the legislation is clear to businesses and their advisers, and that administrative burdens are minimised.

The regulatory impact assessment (RIA) in the consultation paper suggests that there will be no long term administrative burden on the family-owned companies affected, and yet it is difficult to see how this will be the case given that the rules as drafted will require taxpayers to know, and to be able to prove, what each family member has done in making their contribution to the business. Equally, the RIA suggests that HMRC is relying on voluntary compliance by taxpayers to minimise its own administrative burden, and yet the tests to be applied to assess whether there has been income shifting appear subjective, which can only give rise to time-consuming investigation and dispute.

Interim managers who thought their personal services companies might be affected by the outcome of the Arctic Systems case need to get to grips with these proposals as soon as possible and to make their views know to the Treasury.

A copy of the consultation paper can be downloaded by clicking on the link below.

The IIM intends to send a coordinated response to the Treasury and all comments should be sent to tom.brass@ioim.org.uk. Alternatively, for those wanting to make their views known to the Treasury personally, details of how to respond direct to the Treasury are given in the paper; if responses are sent direct,the IIM would nevertheless appreciate a copy of these so that it can reinforce the points made in its collective submission.

Associated File: HM Treasury consultation on income shifting.pdf