Income shifting is a term used for a person/s using another’s tax allowance to claim tax benefit. This is usually a family member, such as a spouse or civil partner. Commonly in the past, one partner of a marriage could produce all or most of the income but split the income across the marriage. For example, if a doctor was to earn the majority of the income through locum company, he could, in theory, distribute the money as dividend 50:50 split to take advantage of the tax allowance. Income shifting was a common concept, which was well known among qualified accountants.

Personal service companies are formed by contractors, who do not want the hassle of being a full time employee, . They tend to use recruitment agencies to employ skills quickly.  Contractors are able to also split the shareholding and dividend payments with a spouse or partner. Qualified accountants for contractors would be able to help contractors and personal service companies. An accountant is able to provide ongoing tax advice and further help regarding tax returns. Specialist help can help with personal or business taxation needs to ensure you are contracting in a legally tax efficient way. Section 660A of the taxes act applies to arrangements where a spouse retains interest in a settlement. This legislation was introduced in the 1990s but not brought up until nearly 70 years later, which many deemed unfair.  It stated that all transfers between spouses are potentially settlements, unless the assets passed are an outright gift.

In 2004, the HMRC began to challenge income shifting between spouses.  The HMRC began to suddenly enforce the settlements legislation in a different way, almost suddenly, which left many feeling that the HMRC had been unfair. Artic systems went through the courts, which led to early victories to the HMRC. The final appeals led to two victories to the taxpayer. The law currently states that you may use spouses to reduce tax bills. At the Accountancy Solutions, qualified accountants are able to provide advice on these specialist tax issues. The law on income shifting means that if you have a non-working partner or a partner who earns lower than the higher tax rate threshold, which stands at £43,000, you could include your spouse as a shareholder and let them have a share of dividends, which would reduce the tax bill. The protection of the Arctic systems case only applies to civil partnerships or marriages. For unmarried couples and other relations, income shifting is unclear so the advice of specialist consultants is recommended, as income shifting strategies can be risky.

GAAR, also known as the general anti abuse rule is a rule that has been setup to strike tax avoidance. It is rumoured that this rule may be used to assault income shifting in the future. As for now, the HMRC has stated that giving assets to reduce your income is not an abuse of taxing rules.

There are many uncertainties revolving around income shifting. A budget report issued in 2009 by the HMRC confirmed that they would defer introducing legislation on income shifting and therefore keep this issue under review. The legislation draft was created by the HMRC, as they believe there was an unfair tax advantage for companies where dividends were split between close family members. Many argued that introducing a new legislation could create uncertainty among small businesses and that it was unfair and could not work. The government listened to the feedback of specialist consultants and decided that any new legislation regarding the issue should not be rushed without considering further complications.

Remember, paying a salary to a spouse will only save tax if the pay is reasonable and they work in the business. If the salary is deemed excessive, the HMRC may challenge this and refuse CT, also known as corporation tax. This uses long standing rules therefore GAAR does not apply to this type of income shifting. A specialist consultant may argue that overpaying your spouse is not tax effective.

If your civil partner / spouse pays a lower rate of tax then giving them shares can be a tax effective method as you can pay them dividends, which saves on national insurance and tax. A qualified accountant would be able to tell you that this is not considered an abuse of the tax system, as the HMRC stated this previously.

For more information on income shifting, get in contact with a qualified accountant that will be able to provide you with expert help. The Accountancy Solutions is a specialist firm and deals with HMRC investigations and specialist tax advice.