Income shifting: why accountants are protesting too much

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I have been reading the reaction on AccountingWEB to the HM Revenue & Customs' paper on income shifting.

As far as I can tell I am the only accountant who thinks income shifting is a problem. That of course probably means I have the support of the vast majority of the population, since accountants are usually out of step with public opinion on most issues so this does not unduly concern me.

Let me also be clear: I do not think this document has got the arrangements for income shifting right. My own paper on this shows that HM Revenue & Customs should be much more comprehensive in its approach and it is the application of this approach to self employed income alone that is in this case the mistake HM Revenue & Customs have made.

But let me come to my main point, which is that the Revenue should dismiss much of the comment that has been written on AccountingWEB.

First of all, it is easy to do so. I'm sure the Revenue must wonder, as I do , what advice accountants who only seem capable of moaning actually offer their clients.

Second, even from some more able commentators much of what has been said is wholly unrealistic. A husband who comes to rescue a self employed wife whose car has broken down is not offering a business service. I did the same for my wife when she was in employment - and never expected reward from her employer. You do this because you are married. It is quite absurd to suggest that this is a business supply.

Third, it is also absurd to suggest that in this day and age people need a wife (and it seems almost exclusively to be wives who do this) sitting at home by the phone to get business. You don't, and anyway, I'll guarantee they don't stay there all day. This is an excuse, not a justification. Mobile communications have completely destroyed this argument and those who will not use them need to get a life, not a servile wife.

But worse, and fourthly, there seems implicit in the comments a level of surrealness that is hard to credit. An attack by HM Revenue & Customs on income shifting is not an attack on marriage, it is an attack on tax abuse. A requirement to prove that an expense is properly incurred by a business is no more than suggesting that proper books and records be kept. Can anyone, let alone an accountant, object to that? And the same is true of the allocation of reward to capital if the dividend route is adopted and the payment is out of proportion to the risk that the capital bears - and this will not be an issue if it is not. Again, what is unreasonable about that? We have always known that records need be kept for business purposes.

Which makes the suggestion from the accountancy profession that it will not be possible to prove the proper allocation of reward a simple cry of incompetence. I wonder, are those who claim this really accountants at all? Is it beyond their wit to come up with some key performance indicators that might suggest degrees of involvement in a business? Some such indicators might be:

1) Time spent business planning, which is an hours measurement;
2) Dealing with correspondence (count the emails - it's an easy test);
3) Time on the accounts - not hard to prove - sign the vouchers as they're processed and keep copies of signed cheques as evidence of involvement and the case is proven, I suggest;
4) Log the business phone calls received - doesn't that make sense anyway, and won't a simple book by the phone do for the job?
5) Estimate the work contribution to productive output if there is one - but be realistic as to what it is and what it's worth. My wife, for example, reads some of my stuff before it is published to offer a second opinion, style comment and so on even though she has no tax knowledge. That has a value. Is it beyond anyone's wit to attribute reasonable value to that, and to keep a record? No one will be seeking precision to the last 10p, after all.

My answer is that this is entirely feasible, perfectly possible to do, and necessary if you want the tax advantage. I just don't see the issue.

Or rather, I think I do. You see over very many years during which I have been responsible for thousands of sets of accounts I can't recall more than a handful where a salary was paid to a spouse. But once I worked for a firm where it was routine to income split - indeed the client was never asked for their consent. It was routine.

My approach required me to justify why I income split, although it was never a problem - the most basic questions could establish if there was a real partnership or not. And if it existed then a note was made as to the reasoning, because I believed that the settlement legislation applied in the 1980s, not just now. And the reasoning would not have been extensive but would have covered key issues on which evidence could be secured of the type noted above so that if enquiry arose the matter could be dealt with. I just thought that common sense.

But the reality is, I suspect that this was an unusual approach to accountancy and that the routine claiming of deductions for which there is no support and the reallocation of income without economic justification has been the norm and that as a result many accountants have been assisting an unjustifiable exploitation of the tax system which they know has now been rumbled.

That's what the protests are about. And that's why they should be ignored.