Family Companies: Relief for small businesses as 'income shifting' legislation stalls

A delay in the introduction of new income tax legislation for family business employees was welcomed last night as HM Revenue & Customs' plans to combat "income shifting" stalled.

A complex regulation had been drafted aimed at married couples moving income earned by their business between partners in order to minimise income tax.

Alistair Darling had originally planned to introduce the legislation as part of yesterday's Budget in an attempt to curb the practice, which the Chancellor regards as a tax loophole. The Government had anticipated that the regulation would create additional income tax revenue of as much as £350m.

The crackdown followed a court battle between Geoff and Diana Jones, the owners of Arctic Systems, and HMRC last year after the taxman alleged Mr Jones moved income from the business to Mrs Jones in order to make use of her basic income tax rate. It lost the case because there was no existing legislation regarding this arrangement.

The proposed legislation met with criticism from business owners and small business groups because it would cause considerable paperwork. It was described as an attack on small and family businesses by the Federation of Small Businesses.

Yesterday, the Government said it would defer an announcement for 12 months while further consultation and any subsequent changes were made.

"The Government has clearly recognised that the proposed legislation is unworkable and that it will have to reconsider its plans," said Nicola Roberts of PricewaterhouseCoopers.

"The administrative burden of this legislation ... would be considerable for small businesses ... But in reality it would probably only affect the incomes and tax planning of a small proportion of people," she added.

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