The threatened changes to income-sharing (now being called “income-shifting” to make it sound shifty) where individuals divide up the income from their Company have been postponed to April 2009. Hoorah!

The revenue lost the Arctic Systems case and so have brought forward some harsher and deliberately vague rules to attack where they see income has been shifted from one connected person to another purely for tax purposes, and not reflecting their respective contributions to earning the income. The classic case (the Arctic Systems case) is where a husband was said to earn all the money for the company, but the shares were split between him and his wife, so she had big dividend income though she did no work in the business. This utilised the wife’s allowances and lower rate bands resulting in a smaller tax take on the family income.

Many of our clients have arrangements that may at first glance seem similar, and under the regime of self-assessment we have to consider whether the new rules affect how you report your income.

The rules will cover four areas:

1. The purpose of the income being split as it is; is it just for tax purposes? ACTION: Can you explain why it is split that way?
2. Does one partner forego income? Or does it reflect the work/ other contribution? ACTION: Is it clear what everyone does? Does it reflect the way you share all your assets? ACTION: can you be consistent or at least logical in the way they are shared / co-owned?
3. One partner has the power to control the way it is shared.
4. Applies only to company distributions and partnership profits. ACTION: watch this space as we await the results of the extended consultation period.