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Income shifting ban could cost small companies £1billion

15 December 2007

The common practice in small companies run by married couples (or those in civil partnerships) of transferring income from one to the other to make the most of tax allowances could be brought to an end in April.

In the pre-Budget Statement this autumn the government promised consultation on the matter. On 6 December it published the consultation document "Income shifting: a consultation on draft legislation".

The government wants to change the law following a four-year tax case involving husband and wife business owners Geoff and Diana Jones. They owned a company called Arctic Systems. Mrs Jones was the second shareholder in the business and received dividends from her shares. This - legally as it turned out, although it went all the way through the courts to the Lords to determine it - lowered both her and her husband\'s tax bill.

The government says the legislation would apply only where a tax advantage is gained through non-commercial arrangements and where the shifted income is in the form of a company distribution or share of partnership profits. The legislation aims to ensure that genuine commercial transactions are not affected and that administrative burdens are minimised.

But the Association of Chartered Certified Accountants (ACCA) says the new legislation could affect some 30,000 small companies and the Association for Consultancy & Engineering (ACE) says the change could cost small and medium sized companies (SMEs) £1billion.

PDFs of the document can be downloaded from the website: www.hm-treasury.gov.uk.

The consultation period will close on 28 February 2008.

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