Taxation

Income Shifting Plans Could Damage Family Businesses

The Government’s consultation on the proposed introduction of income shifting legislation introduces unnecessary complexity and uncertainty for businesses, according to The Institute of Chartered Accountants of Scotland. In particular, the effect on family operated businesses could be damaging. Income shifting refers to situations where money received by a person, such as a profit share or dividend, is deemed for the purposes of taxation to belong to someone else who pays tax at a higher rate.

Derek Allen, Director of Taxation at ICAS commented, “In taxation there should be certainty and clarity. The proposals within this paper go against these two principles.”

Derek Allen continued, “Take, for example, a family run shop where Dad runs the business but Mum and the two children help out. Under the current government plans, the tasks carried out by the family members would be compared to similar jobs in the retail sector. So Mum might operate the till which attracts a market rate for a till operator of £7 an hour. These plans would mean that she would be granted a tax allowance for the £7 an hour, but anything that she is paid over and above that is now shifted onto Dad’s liability. It completely ignores the wider contribution that people make to a family business, beyond looking at an isolated function that they carry out. Many a family will keep the business open despite huge difficulties and their contribution and commitment can be very different from that of ordinary employees.”

Bob Crawford, Convener of the ICAS Taxation Committee said, “The impact of these proposals will run counter to the Government’s commitment to reducing existing burdens on business and will devalue initiatives undertaken by bodies such as the Administrative Burdens Advisory Board and the Better Regulation Committee. We recommend the withdrawal of these proposals and urge the Government to think again as to how the issue might be better addressed.”

ICAS notes support for Early Day Motion 714, which was laid before the House of Commons on 16 January and recommends that Parliament reconsiders the income shifting proposals.