'Income Shifting' – The New Rules

Following HMRC’s defeat in the Arctic Systems case, the government has published a consultative document which includes draft legislation to prevent a tax advantage being gained through what has become known as ‘income shifting’.

The proposed legislation will potentially apply from 6 April 2008 to an individual who shifts company dividends and partnership profits to another individual.

It will not affect dividends from a quoted company or investment income from savings accounts or generally from rental.

It is broadly designed to address the Arctic Systems sort of situation, where one spouse or civil partner generates most of the business profits but the other gets a proportion of the profit and, overall, the couple save tax into the bargain.

However, the proposed rules are very widely drafted and may catch many owner-managed businesses involving husbands, wives and other family members, as well as businesses run by people who are living together but are not married.

A Pdf of HMRC’s consultation document can be downloaded here

Please note that this is not yet legislation and is subject to a consultation process. If you have any questions or concerns, please do not hesitate to contact us.

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