Holden Associates – Accountants & Business Advisers Blog

A quick recap for those who don’t know, but Arctic Systems was a small IT business where the husband was the income earner but as his wife also had shares in the business they were able to arrange their tax affairs in a most efficient manner, they would split the profits between themselves in a manner like so many small businesses that resulted in lower personal tax bills.

This arrangement is quite legal, so much so that this case was ultimately taken to the House of Lords by HMRC, oh before I forget, this was all done by HMRC at the expense of the tax payer, anyway back to the story, ultimately the House of Lords ruled the manner in which the income was split was lawful and the income had been taxed correctly.

Now rather than being where this story ends, this is where it is now starting, Alistair Darling the current Chancellor (wasn’t he the guy who stole the Tories tax ideas recently?, anyway I digress), has made a statement that from 6 April new rules will take effect, what they are, well they have to be drafted, but I don’t think they will be in anyway good news for all those small businesses that arrange their affairs like in the Arctic Systems case.

“The Government recognises the contribution that small businesses make to the economy and that business owners should profit from the success of their business,” he said. “But we believe it is unfair for one person to arrange their affairs so that their income is diverted to a second person, subject to a lower tax rate, to obtain a tax advantage.”

The vast majority of people could not shift their incomes and the procedure “ran counter” to the principle of independent taxation, Mr Darling added.

Well, again we see this government punishing small business, yes there is a tax advantage in this method over and above that of say an employee, but unlike the employee the self employed get no paid holiday entitlement, SSP, SMP, no employer to pay for their bupa, car etc.

Yes I know the argument that tax has to be fair, and I have to agree that the above method gives a distinct advantage for a section of society, but hey, they are the ones taking the risks, after all the small business doesn’t have the luxury of the expense accounts of our politicians nor the ability to waste the tax they already collect, maybe if this government got their own house in order then Darling (and Brown) would not be looking around for small change for the meter?

And what about lateral thinking, oh then again we are talking about politicians, but as Stephen Herring a tax partner at BDO said, why not allow all tax payers to transfer their personal allowances and tax bands between themselves, now this makes sense after all we all get these allowances so if one spouse stays at home to look after children what’s wrong with the other spouse getting the allowances?