Date: 23 September 2008
When the House of Lords ruled in favour of Mr & Mrs Jones in the long-running and much-publicised income shifting case colloquially known as Arctic Systems, the Government reacted within 24 hours by announcing that it intended to introduce legislation to "put the law back to where everyone thought it was before this case"! This announcement was followed in December last year by the issue of draft legislation and a consultation paper, both of which were roundly criticised by the Professions, with many respected commentators and business owners branding them as unworkable.
Given the Government's speed of action to protect its revenue base, one of the notable omissions from this year's Finance Bill was the enactment of the draft legislation. The Chancellor announced a further period of consultation would be necessary and deferred the start of the new regime until 6 April 2009. Hopefully, this is an indication that he listened to the concerns expressed by so many. Although there can be no certainty of this, it seems unlikely the legislation will be retrospective so many income shifting structures and remuneration strategies have survived for another year.
As far as we can tell, this promised further consultation process has yet to commence. Sources tell us that the Treasury remains firmly committed to the introduction of the legislation and it is likely to feature in this autumn's Pre-Budget Report. We will have to see what the second round of consultation brings.
However, something that must remain of great concern to all family businesses is that the original draft legislation went much further than the simple reallocation of dividends in the case of husband and wife companies (as in Mr & Mrs Jones' case). It was made clear that the legislation was to be extended to encompass partnerships and, undoubtedly, many other business arrangements, including family companies where different generations of shareholders would also be affected.
As originally drafted, the legislation would apply if the arrangements by which income was shifted from one party to another were not made on a commercial or arm’s length basis and resulted in a tax advantage. In addition, all four conditions had to be satisfied:
- An individual is party to, or has control over, the arrangements;
- that individual forgoes income and passes it to someone else;
- the first person has the power to control their income; and
- the income consists of distributions of a company or profits of a partnership.
You will see that the above conditions are very widely drawn and would not just affect companies owned by a married or civil partnership couple. They could also affect companies owned by family members and unmarried couples, as well as most family partnership structures. Given that a tax advantage is a major ingredient, the net could extend beyond family situations.
The original draft legislation and examples given in the guidance were not easy to interpret and gave rise to a number of anomalous situations. While we must all hope that, when published, the new legislation will be easier to interpret, there can be no doubt that from 2009/10 the existing "remuneration structures" of many family businesses may not remain effective in spreading the tax burden around a family, or indeed associates. It may be appropriate to consider the likelihood of these changes when reviewing the 2008/09 position.
Please contact our Corporate Tax Manager Richard Lupson-Darnell on 01727 838 255 to discuss the potential impact of these changes, compliance relating to the forthcoming legislation and planning opportunities which may be available to you.