UK: Budget 2008: Income shifting

Many people have formed companies in order to reduce the tax that would otherwise have been paid if another business structure were used. In Jones v Garnett [2007] UKHL 35, the House of Lords considered whether the tax anti-avoidance provisions within Part XV of the Income and Corporation Taxes Act 1988 applied to the arrangements made by two taxpayers, Mr and Mrs Jones, with regard to the distribution of income from a company (Arctic Systems Ltd.) in which they were equal shareholders. The company had been formed as the vehicle through which Mr Jones' services as a computer consultant would be provided; his wife, Mrs Jones, provided administrative support. Mr and Mrs Jones received modest salaries and received the majority of their income from the company in the form of dividends. This minimised their total tax liability. The House of Lords held that these arrangements did not breach the anti-avoidance provisions.

The Government subsequently announced that legislation would be introduced to remove the tax benefits of "income shifting" (sometimes called "income splitting") and a consultation paper was published at the end of last year. It was expected that legislation would be introduced later this year in the Finance Act 2008. In this week's budget the Government has, however, announced that legislation will now be brought forward in the Finance Act 2009 (see paragraph 4.69 of the budget report).

The Government's proposals have been widely criticised. In its response to the Government's consultation, the UK's Chartered Institute of Taxation described the draft legislation as "unworkable, impractical and lacking certainty". In its response, the Institute of Chartered Accountants in England and Wales described the legislation as "too widely drafted to be workable" and stated:

"We deplore the growing practice of relatively brief legislation that then has to be supplemented by lengthy HMRC guidance because the primary legislation is not adequately drafted. This guidance will have no legal authority, but is merely an indication of HMRC’s view of particular arrangements. It can also be changed in the future without Parliamentary approval".