CUK’s contractor guide to s660, income shifting - Part 3

(Continued from Part 2 and Part 1)

Q: What would reform to S660/s625 (the Settlements Legislation), or reform to the income-shifting proposals/ the Family Business Tax, need to address in order to be workable?

A: The most important issue is that any changes would need to deliver certainty to taxpayers.  Hard-working businessmen and women should be able to run their businesses without the fear of facing an uncertain position, perhaps for many years.  If there are to be changes in this area they need to be based upon simple objective criteria that do not depend on complex legal interpretation of the more abstruse points of the law relating to settlements.

I am not convinced that there is a compelling case for reform here at all.  But if there is to be reform, perhaps recommended by the OTS, the key decision is whether the tax system for small businesses should be based on individuals or on the family unit as a whole.  There are arguments in both directions.  But there should be one rule for all forms of income and tax credits.  One of the major problems with the shelved income shifting proposals was that they attacked sharing of business income while leaving the treatment of investment income unchanged.  On analysis this did not make sense.

Q: How might improvements to the income shifting proposals be achieved, in terms of providing a practical framework that businesses could understand?

A: Many of us have spent years looking at this issue and a simple solution has eluded us all.  I am very nervous of yet another sticking plaster solution.  It seems to be that the only rational way of proceeding is the creation of an environment for small business taxation where the structure of the business and the form in which profits are extracted make no difference to the overall tax liability.  If we were able to achieve this then many of the problems which currently blight small business taxation would largely disappear. That is the long-term aim and we should not be distracted by looking at income shifting as a separate and distinct issue.

Q: Does the Chartered Institute of Taxation, of which you are the small business tax chairman, expect changes to s660/s625 or the income shifting regulations/the FBT, to be announced in today’s Budget?

A: We would be both surprised and disappointed if changes to s660 or the FBT/income shifting were announced in the 2011 Budget.  I would hope that the OTS will set out a clear direction of travel but, even if there were complete consensus on the way forward, it will take several years of careful consultation and many iterations of draft legislation before a workable system could be achieved.  

There have been too many changes which seemed to be a good idea at the time but which have created more problems than they have solved.  The last thing we need is yet another quick fix.

Answers, as told to CUK, by Andrew Hubbard, former president  and owner managed business sub-committee member of the Chartered Institute of Taxation, and tax policy director at RMS Tenon.

Editor’s Note: This is the final part of a three-part guide, designed to provide contractors with expert answers to their most frequently asked questions about s660 and income shifting – the Family Business Tax. Part 1 is on the current and draft rules for ‘husband and wife’ businesses and Part 2 is on how the taxman calculates their liability.