If you are one of the income shifters the Government could be on your tail.
The Government produced draft legislation yesterday, which they propose to implement next April, which will stop IT Contractors and others from paying their spouse’s money in order to cut their overall tax bills and enable them to receive dividend income if their spouse is basically a ‘sleeping partner’, in the business.
Husband and Wife businesses have been doing this for a long time.
However, previously it was tax avoidance.
Now it will become tax evasion – and you know what that means.
Income Shifting a Difficult Area
It’s a difficult area here as regards Income Shifters.
For some, it’s not too difficult.
If you have a wife or husband who takes no part in your business but gets income from it then that’s cut and dry.
This legislation will stop you doing this.
However, in many businesses, spouses do a variable amount of work.
Post Business Letters
Let’s have a look at some of the things they do, or could do:-
- Post Business Letters and CVs
2. Keep ‘the office’ clean
3. Buy stationery
4. Answer calls from agencies and potential clients (acting as a receptionist)
5. Opening business letters
6. Keeping bank statements and receipts
7. Filling in the Vat form
Fulfilling Two Roles
You could argue that your spouse there was fulfilling two roles here both as Secretary and as Book Keeper (you could add Office Cleaner).
But would HMRC consider this person to be a genuine part of the business?
Would both spouses have to be out IT Contracting before HMRC would be convinced that both people are genuinely part of the business?
There is a very much sliding scale here.
You could recognise someone who is a genuine Income Shifter if the spouse does nothing at and gets income for it.
You could also recognise that if two people are out IT Contracting and putting their money into the business then that is a genuine business with two people in it.
However, spouses often do a variable amount of work for the business.
Where do you draw the line?
How would HMRC decide where the threshold is where there are two people who do some work for the company and one does slightly less and one slightly more?
One feels that it is going to be very difficult to decide and that there are a further round of long investigations and court cases in store for IT Contractors.
We had this with IR35 – and are still having it.
That’s the problem with this type of legislation.
It is not clearly defined who is inside and who is outside of it.
It’s not clear cut.
HMRC Want Tax Money
Basically the Government and HMRC want more tax money without doing anything so rash and politically costly as putting up the basic rate of income tax.
So, they’re looking for soft targets.
However, IT Contractors, with the help of the Professional Contractors Group, have not proved such soft targets in the past and it looks as if battle lines will be drawn.
One side issue here.
If, for taxation purposes, one person in a marriage is considered as not being truly part of the business, will this affect divorce legislation.
After all, in most settlements in divorce cases, it is said that one of the partners helped build up the family business.
Can that still be said if they do so little that HMRC will not allow them to be paid or receive dividend income?
For Taxation Purposes Only
One guesses that, as with the IR35 legislation’s ‘disguised employees’, this only applies for taxation purposes.
We’ll wait to see what the courts make of it in a never ending sea of investigations and court cases.
It looks like deja vu all over again as Yogi Berra once said.