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IoD calls income shifting legislation technically defective

Published on Jan 23, 2008 |

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The Institute of Directors has become the latest organisation to cast doubt on the proposed "income shifting" legislation. The IoD's response outlines the many failings of the Government's proposals.

The IoD says that the Government is answering the wrong question. The basic issue is not who gets the income, but deep structural features of the tax system, in particular the way in which dividends are taxed. Addressing that issue would require unpacking the whole tax system, including the fact that dividends come out of profits which have already suffered corporation tax. When we take that into account, we can see that there is much less unfairness than the Government imagines.

The IoD also state that the income shifting proposal would require people running small businesses to decide whether profits were being shared out in an arm's-length way. The concept of arm's-length arrangements will simply make no sense to small businesses. Even if it did, they would have to keep lots of extra records and would still be unable to give definitive answers. Even sophisticated multinationals have huge arguments about whether goods and services are traded at arm's-length prices, and need to assemble vast collections of evidence.

Most damning of all - the business organisation says that the draft legislation is technically defective. There will be scope for avoidance, especially using partnerships, and it will not work where a partnership has fixed profit shares or a company's dividend is determined automatically. If the draft as it stands gets onto the statute book, we can expect a slew of court cases a few years down the line.

Richard Baron, Head of Taxation at the IoD said:

"The Government tried to tackle income shifting in the courts, but in the Arctic Systems case (Jones v Garnett); they went down five-nil in the House of Lords. Now they are trying legislation, but they have come up with something hopeless. It misunderstands the basic issue, it will require small businesses to answer impossible questions, and its meaning is contentious even before you start to apply it to the real world."