Following the release of draft legislation today which outlines the Governments plans on 'income splitting', the Chartered Institute of Taxation (CIOT) says it has "grave concerns" about the implications of the proposed legislation.

The CIOT says that it has long been of the view that fundamental reform to the structure of small business taxation is necessary if small businesses are to be able to plan their tax affairs with any degree of certainty.

However, the CIOT believes that "it as wholly wrong for the government to deal with this one issue in isolation."

The Government wants to prevent business owners from sharing their income with other family members in order to reduce shared tax bills. The new legislation is aimed at ensuring that family members receive a realistic 'market rate' for any income they receive from small businesses.

Andrew Hubbard, CIOT Vice-President said:

"The legislation imposes an arm's length test and requires taxpayers to work out how much income they have 'foregone' by making a comparison with how the business would have operated had everything been done by independent third parties operating on a fully commercial basis. In theory this might seem fair, but the reality is that family businesses do not and cannot possibly operate on a fully arm's length basis. One spouse might be the main income generator but he/she may well be totally unable to run the business without the full support of their spouse. Measured purely in hours that spouse's input may not appear to be significant, but that is not the reality of the situation. The support of the spouse may well be the difference between the business succeeding and failing."