Small Businesses Welcome UK Income-Shifting Reprieve

by Robin Pilgrim, LawAndTax-News.com, London

02 December 2008

The Professional Contractors Group (PCG), which represents the UK’s freelancers, has today expressed its great relief at Chancellor Alistair Darling’s decision not to introduce the planned family business tax on so-called “income-shifting” in 2009.

Income-shifting, whereby small family businesses shift income to those members subject to a lower tax rate, was set to be legislated against as part of new revenue protection measures. But the government announced in the pre-budget report on Monday that new laws would not be brought forward in the 2009 finance bill as planned given the current economic climate.

While the delay has been welcomed by small business groups, the PCG warned however, that the government’s understanding of small business remains "fundamentally flawed."

The PCG’s managing director John Brazier said: “The UK’s freelancers and other small businesses are pleased that the government has reached the right decision, but concerned they have done so for the wrong reasons. We needed to see a firm commitment from the government to drop the proposals and an acknowledgement that they were wrong; instead, we have a commitment to defer them and keep them under review owing to the economic circumstances.”

Andrew Hubbard, Deputy President of the Chartered Institute of Taxation (CIOT), is of the view that this area of tax law is in need of "a radical overhaul."

"The current system for taxing small businesses is riddled with anomalies and inconsistencies. But the income-shifting regime would have made matters worse," he argued.

"It would have created a huge administration burden on all small businesses, would probably not have brought in significant additional taxation revenues and would have been a massive distraction at a time when businesses need to devote all of their energies to managing through the economic crisis," Hubbard added.

The government first announced that it would bring forward new legislation to change the tax laws with regards to income-shifting in July 2007 after the House of Lords ruled against HM Revenue and Customs in the long-running Arctic Systems case. In response to the verdict, the Treasury said that "individuals involved in these arrangements should pay tax on what is, in substance, their own income and that the legislation should clearly provide for this."

There was good news, however, for freelancers concerned at the prospect of aggressive legislation on umbrella companies’ and agencies’ expenses. Brazier said: “PCG advised the government not to pursue either of the courses of action it proposed – we are pleased that it is focusing on making the existing rules work properly as we recommended.”

PCG has also given a lukewarm response to the Chancellor’s approach to corporation tax for small firms. “The decision to delay the third of the successive rate increases instituted by Gordon Brown’s last Budget is barely a concession at all,” Brazier remarked.

“Small business owners will not be fooled – the government should have completely reversed this policy, which was a mistake to begin with," he added.

The PCG has also called into question the government's much vaunted temporary cut in value-added tax: “This does not address the deep iniquities found elsewhere in the tax system and it is going to cause confusion for the freelancers and other small businesses using the flat-rate scheme, who will have to assess whether they will be better off moving back to standard VAT accounting under the new 15% rate," Brazier observed.

The government’s failure to address "unfair and unworkable" IR35 legislation has also been condemned by the group. Introduced in 1999 as an anti-avoidance measure, IR35 seeks to deny that freelance contractors are genuinely in business and to tax them as employees without establishing a proper employment relationship.

“IR35 continues to place vital freelance workers in appalling difficulties: it imposes significant costs, makes it impossible to self-assess with any certainty, and allows HMRC to mount unjustified attacks on law-abiding taxpayers. The government’s refusal to admit that it was wrong and remove this burden on small businesses is unforgivable," Brazier said.

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