6 December 2007 - Income shifting: a consultation on draft legislation

The Government has announced a consultation on draft legislation to prevent a tax advantage being gained through income shifting.

They describe the situation where an individual establishes a business using a company structure and decides introduce a second shareholder. If the second individual contributes in some way to the business the Government believes that it is right for the distributions from the company to reflect the contribution that both individuals have made.

However, they describe another scenario where the second individual plays either no role or only a minimal role in the business with the first individual is solely or mainly responsible for the activity of the business and the generation of the income that is then distributed.

If the first individual forgoes income it can then be distributed to the second individual and taxed at a lower rate as a result. This had been expecting it ever since the defeat of HMRC in the House of Lords by Mr and Mrs Jones in the Arctic Systems case.

This is only a consultation at present, but it is the Government's view that income shifting in order to gain a tax advantage should not be allowed and they are determined to introduce legislation in this area.