Tax & Accounting News

Draft 'income shifting' rules published

10/12/2007

HM Revenue & Customs ('HMRC') have published their proposals to prevent 'income shifting' in a consultation document.

HMRC define 'income shifting' as the shifting of company distributions or partnership profits from one individual to another, in order to gain a tax advantage. HMRC stated that new legislation would be introduced after their House of Lords defeat in the Jones v Garnett case, which concerned dividends paid to the spouse of the main fee-earner in a family company.

Under the proposed new rules, which will come into effect on 6 April 2008, the shifting of income will not be effective for tax purposes where there would have been a tax saving, and the following 4 conditions apply:

A: individual 1 is party to, or has power over the relevant arrangements;

B: individual 1 forgoes income and the forgone income is individual 2’s for the relevant tax year;

C: individual 1 has the power to control or influence the amount that is shifted; and

D: the shifted income consists of distributions of a company or profits of a partnership.


The new rules will not, however, affect arrangements made on a commercial or arm's length basis.

The typical situations under attack are the payment of dividends or partnership profits that are perceived to be disproportionate to the recipient's contribution to the business.

The consultation document contains many examples of how HMRC considers the rules will apply. These immediately illustrate the following points:

- it will be very difficult to quantify the contribution of some individuals who are not main fee-earners;

- partnership profit shares of partners who are not main fee-earners are likely to be queried more than in the past; and

- the rules only apply where there is a tax saving, so if profits or dividends fluctuate from year to year, it is quite possible that the same arrangements will fall foul of the rules in some years but not others!

Please contact us to discuss whether you will be affected by these new rules. In the first instance, it may be a good idea for some companies to pay a dividend before 6 April 2008 in order to clear out undistributed income before the new legislation comes into effect.

 

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