New legislation that will hit joint-business owners who split their incomes to ease the tax burden will come into force next April - as announced in the Pre-Budget Report.

Contractor accountants, Danbro, have provided the following overview for Contract Eye readers.

What is Income Splitting?

The legislation is aimed squarely at 'husband and wife' firms, which, like tens of thousands of other businesses, draw payment by income shifting between spouses. This is being introduced following the Arctic Systems case.

HM Revenue & Customs spent four years, in vain, trying to persuade judges that Geoff and Diana Jones, the company’s owners, avoided tax in this way and so broke the law.

The government has announced that draft legislation to take effect from 2008/09 to address income shifting will shortly be issued for consultation.

The legislation will work alongside the existing rules on businesses deductions and settlements, and will seek to remove the tax advantage obtained from income shifting.

It would only apply when the income is in the form of distributions from a company (dividends) or partnership profits.

HMRC will provide 'practical guidance' on the legislation as to the circumstances which may not be caught by the legislation.

Relevant factors to consider when establishing whether or not income shifting has taken place could include the work done by the individuals in the business, the investments made and the risks to which they are subject through the business.

Income from employment, interest on savings and any other source will not be affected.