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UK Tax Experts Urge Legislative Caution After Arctic Verdict

by Jason Gorringe,, London

31 July 2007

The Chartered Institute of Taxation (CIOT) and Institute of Chartered Accountants in England and Wales (ICAEW) Tax Faculty are asking the Government to take its time and reflect on the House of Lords decision in the Arctic Systems case before rushing to legislate.

Both professional bodies are hoping that HM Treasury and HM Revenue & Customs will fully consult and listen to all interested parties before creating tax law that increases uncertainty further and puts yet more obstacles in the way of small businesses.

The Government announced a review of small business taxation in 2004 and the bodies believe that it would be much better to await the outcome of this review rather than rush through legislation. The professional bodies believe that there have been too many cases in the recent past where legislation introduced without proper consideration and consultation has ended up creating more problems than it solves.

"It is entirely right and proper for Government to decide who pays tax and how it is paid," says Andrew Hubbard, CIOT Vice-President. However, the Ministerial statement published today will almost certainly lead to yet more complex tax legislation to deal with the situation that Mr and Mrs Jones faced. Given the new Chancellor's stated commitment to making the tax system simpler, this would be a backward step and one which we would like to avoid."

Francesca Lagerberg, Chairman of the Technical Committee of the ICAEW Tax Faculty, says: "The Government is looking to review situations where family members are involved together in a business. It appears that the tax authorities will seek to separate out 'commercial' situations from those where it believes dividends are being passed to lower rate taxpayers primarily to keep down the tax bill. The reality is that most businesses do not fall into such neat categories. There is a danger that rushed legislation will result in unworkable legislation, plunging thousands of taxpayers into yet more uncertainty about their tax position. There is no ‘quick fix’ formula that we think could work. There is now an urgent need for full and detailed consideration of the small business tax regime, which should include a detailed understanding of the businesses and the issues involved and full consultation, which should be completed before any measures are announced.”

Andrew Hubbard adds: "We can understand why the Government would want to review the structural basis of small business taxation. There are anomalies in the current system and we would support reforms that more closely linked taxation with the underlying economic activity rather than with the legal form of that activity. But it is difficult to see how there can be a proper and open debate and consultation if the outcome has been pre-determined.”

Francesca Lagerberg concludes: "A clear signal should be sent to owner managed businesses that they are a valued part of the economy and that the tax goalposts will not shift every time a tax case goes against the tax authority. A full and open debate is required about how small businesses should be taxed and we would welcome a review that covered all aspects of this area without leaving hardworking individuals like Mr and Mrs Jones with years of concern about their future tax liabilities."

In the Arctic case, the tax authorities challenged the way in which the owner distributed income through the firm to take advantage of his wife's lower tax rates, but was eventually defeated in the House of Lords last week.

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