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Income Shifting - what it will mean for IT Contractors

Published on Feb 12, 2008 |

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As we await this year's Budget, in which the Chancellor is expected to introduce new "income shifting" legislation, leading IT Contractor accountants Danbro have provided us with the damning reality of how such legislation will impact upon the contracting community:

The new laws, due to come into force from April 6th 2008, will:

- mean a significant tax rise for jointly-owned businesses where profits are distributed equally between a husband and wife (or other family members / civil partners) and the recipients make differing contributions to the business - in some cases, even business owners who are not related to each other will be hit.

- deny married couples who are equally exposed to the risks of running a business the right to an equal share in the rewards if the business is successful.

- penalise people who followed the Government's long-standing advice to set up businesses jointly.

- make it impossible for businesses to self-assess their tax bills,and leave them perpetually looking over their shoulder in fear of an aggressive investigation by HMRC, in which they will have to prove that they have done nothing wrong.

- be totally inconsistent with divorce law, as couples will be entitled to equal shares in the value of the business in a divorce, but not to equal shares in the profits while they are married.

- be totally inconsistent with capital gains tax rules, as couples will be entitled to equal shares in the proceeds from business when it is sold, but not to equal shares in the profits when they own it.

- reverse the independent taxation of spouses in respect of couples who own businesses, even though the Treasury's consultation paper does not explain what has changed that would justify this reversal.

- impose crushing burdens on small businesses who will have to record every contribution made to the business, simply to defend themselves against an attack from the Revenue - that time could be better used generating wealth for the economy.

- fail to recognise that dividends or other profit distributions are a reward for taking risk and are not simply income comparable to a salary.

You can find out more about the income shifting legislation at www.familybusinesstax.co.uk.