Family-run firms face new tax burden

Proposals by the Government to stop family-run businesses from cutting their tax bills by sharing their income as dividends were attacked yesterday as complex, uncertain and an unnecessary addition of red tape.

The Treasury's plans to curb "income splitting", whereby a person shifts part of their income to a spouse in order to gain a tax advantage, are due to take effect from 1 April. The draft law, which has been put out to consultation until February, is a response to a House of Lords decision.

Earlier this year, HM Revenue & Customs lost a test case in the Lords when it tried to challenge the tax arrangements of Geoff and Diana Jones. The couple's IT consultancy, Arctic Systems, had successfully avoided paying 50,000 in income tax.

HMRC argued that Mr Jones artificially reduced his salary in order to give his wife a slice of his earnings via dividends, thereby reducing the total tax payable on their joint income. That argument was rejected by the Lords. Yesterday, the accountants Grant Thornton said the new rules would leave many entrepreneurs with higher tax bills because they would extend beyond arrangements between married couples.

"The Government has changed the law to target what it perceives as unacceptable tax avoidance, but the difficulty is going to be separating out those it wants to catch from those it does not," said its spokeswoman Francesca Lagerberg. "These proposals, on top of the recent capital gains tax changes, mean yet another hit on small business owners."

The Chartered Institute of Taxation also had grave concerns about the implications of the law. Its vice-president, Andrew Hubbard, said: "The legislation imposes an arm's-length test. In theory this might seem fair but family businesses do not and cannot possible operate on a fully arm's-length basis.

"One spouse might be the main income generator but he or she may well be totally unable to run the business without the full support of the other."

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