The Government today published a consultation document on 'income splitting' which "sets out the Government's view that income shifting, through which one individual can shift their income to another in order to gain a tax advantage, leads to unfair outcomes."

The threat of moves against income splitting in family owned business was first announced in this year's Pre-Budget Report. It follows on from the Arctic Systems court case - which HMRC lost.

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.

The consultation period ends on 28th February 2008. The Government wants the new income splitting legislation to take effect from April 2008.

The UK's leading contractor organisation, the PCG, reacted angrily to the news.

The PCG's MD, John Brazier said:

"This will be a nightmare for family businesses. The Government seems to think that fees paid to big businesses are fine, but fees paid to small businesses are really just 'income' that is 'shifted'."

"This measure will impose a horrific burden on hundreds of thousands of small family businesses, which will make it impossible to self-assess tax bills with any certainty."

Andrew Hubbard, CIOT Vice-President, said:

"The CIOT accepts that what it prefers to regard as 'income sharing' within members of the family unit is an issue which would need to be considered as part of that reform, but regards it as wholly wrong for the government to deal with this one issue in isolation."

You can read more about the CIOT's reaction here.

You can read the income splitting consultation document here.