We have previously reported the case of Mr and Mrs Jones who finally won their case in the House of Lords in July this year. You may remember that the profits of Arctic Systems (their company) were paid equally to them by means of dividends. HMRC had tried to have the income assessed solely on Mr Jones rather than between them but failed in their attempt.

The government had stated that it believes it is unfair for one person to arrange their affairs so that their income is diverted to a second person, and therefore is subject to a lower tax rate, obtaining a tax advantage.

The government has announced that they propose to draft legislation which will take effect from 2008/09 to address income shifting. This legislation will be issued for consultation before being implemented. The government propose that the legislation will remove the tax advantage obtained from income shifting. The rules will only apply when the income is in the form of distributions from a company (dividends) or partnership profits.

HMRC have announced that they will provide ‘practical guidance’ on the legislation which will outline those circumstances which may not be caught by the legislation. The proposals are expected to consider that when establishing whether or not income shifting has taken place that:

• work done by the individuals in the business,
• investments made and
• risks to which the individuals are subject to through the business

may be taken into account as pertinent factors.

Income from employment, interest on savings and any other source will not be affected.

We will of course keep you informed of developments.

Internet Link:

HMRC press notice