Outlining the scope of the proposals, the UK Treasury announced that:

"The Pre-Budget Report set out the Government's view that income shifting - through which one individual can 'artificially' shift part of their income to another person who is subject to a lower rate of tax - leads to unfair outcomes."

"Comments are invited until February 28, 2008 on draft legislation, and accompanying guidance."

"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."

The Association of Chartered Certified Accountants (ACCA) was amongst those quick to respond, claiming that husbands and wives - or relatives or friends - who set-up in business together stand to lose out if new rules from the Government are implemented.

According to the ACCA, the Government is looking to change the tax rules regarding “income splitting” because it lost a House of Lords case earlier this year regarding tax paid by a husband and wife company called Arctic Systems.

The ACCA is concerned that this proposed legislation could damage the dynamic SME (small and medium enterprise) business.

Chas Roy-Chowdhury, head of taxation at ACCA, announced that:

“This draft legislation from the Government comes in response to a now infamous four-year tax legal case involving husband and wife business owners Geoff and Diana Jones. They owned a company called Arctic Systems and Mrs Jones, as second shareholder in the business, received dividends from her shares, legally lowering both her and husband’s tax bill as income from shares is taxed less than income from salaries.”

He continued: “Now the Government is looking to change these income splitting rulings. If the new arrangements come into place, then it could deter people from setting up a business together – husbands and wives, friends and relatives. It is thought some 30,000 small companies would be affected, and SMEs represent over 99% of UK businesses. Legislation could stifle dynamic entrepreneurship.”

Another firm quick to issue warnings about the proposals made in the consultation documents was accounting firm, PKF.

In light of the proposals, accountants & business advisers at the firm have warned family businesses to take immediate action to review the way they take money out of their businesses.

Peter Harrup, a tax partner at the firm observed that: "If this draft legislation is enacted as it stands, many family businesses will have to keep much better records to prove that they are not shifting business income between family members to save tax."

The new rules will allow HMRC to challenge income shifting for all payments made after 5 April 2008.

However, Peter Harrup pointed out that:

"Many businesses have accounting years that will end after 5 April 2008 so they need to start keeping good records now to be able to defend salary and dividend payments made later in their accounting year."

"The key problem is, that so far, HMRC has not set out just what records it considers sufficient to prove that the main earner in a family business is getting a market rate return for his work and cash investment."