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Revenue's law changes 'unfair to family firms'

A consultation paper from HM Revenue & Customs (HMRC) proposes sweeping changes to the tax treatment of family businesses.

The document comes after the taxman’s failure in the House of Lords in the Arctic Systems case, according to Spofforths Chartered Accountants.

This long-running battle featured the husband-and-wife business of Mr and Mrs Jones and their off-the-shelf company called Arctic Systems Ltd.

The majority of the work was done by Mr Jones but in order to avoid higher rates of tax he shifted some of his income to his wife.

HMRC lost its appeal and has now said it will change the law.

The Government says that income shifting, through which one individual can shift their income to another in order to gain a tax advantage, is unfair.

The changes, which would apply from April 6, 2008, were designed to affect those who split dividends or profits to move income to a lower-rate taxpayer.

Many commercial arrangements may also be caught because the proposals are very widely drafted.

They will catch many owner-managed businesses involving husbands and wives and other family members.

The difficulty will be in working out whether they are caught by the definition or not.

Tax professional bodies have attacked the proposals as being drawn far too broadly.

And they have encouraged owner-managers to write to the Treasury and HMRC to explain how the measures will target some businesses unfairly.

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