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.
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It’s impossible to dismiss the reasons why the Revenue should dismiss many of the comments made by the accounting profession. But the real world, as well as the intellectually correct argument, has to come into the equation somewhere.
Those who see only higher tax bills as a result of these proposals ask why they are being targetted when private equity partners and non-doms are given special deals to keep their taxes down. I’m not sure that a correct intellectual position on income shifting is enough to convince these people when such guiding principle is so notably absent elsewhere in the tax system. And, in a democracy, small business, a large constituency, does need to be convinced.
I can’t avoid the conclusion that our lords and masters are so blinded and cowed by wealth – as well as oblivious to the obvious consequences of ill-considered legislation, eg the Corporation Tax 0% band – that they are prepared only to select the easiest targets, even if they are intellectually justifiable. If they were guided by clearly stated principles that they had the balls to observe, it would be far easier, politically and practically, to gain some sort of acceptance for specific proposals.
Nick
I 100% agree – the income shifting paper is far too narrow in its approach and should be much more broadly and ethically based
But for accountants to argue that self interest or claimed (but not actual) difficulty in justifying a salary is reason for rejecting the proposal is as absurd.
That was my point.
In essence – we accountants have to be on a higher plain. And the debate has been uneifying on AccountingWEB if this is the criteria for its likely contribution is used.
Richard
Some rather weak and circular arguments here. Not least:
“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?”
Which phone is that? The home phone that no one answers, or the mobile one in someone’s pocket. Together with the log book…
Get real Richard…
Rob
Sorry – I think you have hit the wrong target with your comment.
I have suggested here that if people want to claim their wives sit at home waiting for the business line to ring that they should prove it with a record.
In practice I know – and I suspect you know – that this does not really happen in 99% of cases where it is claimed. Of course cals go to mobile phones.
But the reason why people won’t keep a log is that they don’t want to prove that no real value is added.
So I am real – very real. I have been a practitioner for a long time remember.
Richard
I have issue with this legislation, my issue is it is yet again more poorly drafted legislation, and I have no doubt it will come out as poorly drafted, I also imagine the HMRC do not have the bodies/capacity to enforce it anyway, and how do you enforce something that is not fixed, i.e. wife’s involvement, a clever accountant can easily advise a client around this, as they can advise around paying tax through the use of ‘engineered’ schemes.
I act for small business, and I can see where many on AWeb are coming from, and many are arguing from a passionate standpoint, but rather than argue ‘oh my client will pay more tax’ my worry is the legislation is not clear, adequate nor do I feel it is fit for the purpose.
What we need in the UK is robust and clear tax legislation, something we will not get under this government.
The British businessman/woman deserves better than they are getting, we are seeing time and again legislation that is rushed out and its effect is one of harming UK enterprise, and on top of this, there is the not knowing what they will do next.
I only hope we see a change of government soon before it is too late for the entrepreneurial talent the UK has, and with a change of government I hope we will one day see clear and robust tax legislation, legislation that allows advisers to advise with certainty and entrepreneurs to be entrepreneurial.
I agree with Jason – what the UK needs is simple, robust, strong tax legislation. And this government seems capable only of tying the small business community up in ever tighter and more complicated tax knots.
But – and I’m going to put my cynical hat on here – how many accountants will argue for tax simplification? Simple tax = less work for accountants.
That said, tax is now getting so complicated that perhaps I’ll be proved wrong. I hope so.
M
Richard, I do agree, and suspect that many accountants do, that there is a real problem with income shifting (I prefer this to splitting) and I agree that the Government are right to do something about it. What I have a problem with is trying to draw the line in a true partnership between business and marriage (or other relationships) and decide which bits to value and which bits to ignore. My example of my husband rescuing me at night was actually due to the need for me to be 150 miles away by nine the next morning to present to 70 accountants – a business requirement if ever there was one. If I had not been working I would have happily waited for the AA. I’m not incapable of so doing. My husband is more highly qualified than I and gave up his career so that we could work together. I have a real problem in now sitting down and calculating what each of us contributes to the business – it does not sit easy with me. To be honest removing the spouse exemption from the settlement provisions would have been preferable to this muddle.
Rebecca
I entirely agree on the language issue.
I’m not sure I see the probelm with relationships and determining income. I should add in saying so that I was in partnership as a chartered accountant with my first wife and co-own businesses with my current wife. I have some experience in this area.
My point is relatively simple: when there is a real partnership and people are really working together I am going to be very surprised indeed if the Revenue could raise any realistic challenge to any sensible split in the income arising IF there are appropriate indicators in place that each really contributed value. In your case there clearly are. And I do not think preparation of those indicators would be difficult. Time sheets would be one the weakest, by the way. They can be fabricated and mere hours are no indication of value. Anyone who intends to rely on them would be poorly advised.
The purpose of this legislation is to attack arrangements where there is no real partnership and no record if involvement.
If youir concern is it will not be used that way – I share that concern. But this requires another issue to be tackled – which is that of purposove legisalation. See our Code of Conduct on that. http://www.taxresearch.org.uk/Blog/2007/10/18/the-tax-justice-network-code-of-conduct-for-taxation/ I am convinced of the need for this – and that it would solve this problem by giving clear direction to Inspectors of what they are meant to do with the legislation they are given.
But that is constructive criticism of the legislation. My disappointment with the comments on AccountingWEB was their inability to take the debate forward. I hope we can agree that there is a difference.
Richard
Have you seen this? “Costing the wife”
http://www.accountingweb.co.uk/cgi-bin/item.cgi?id=177071&d=1032&h=1019&f=1026&dateformat=%25o%20%25B%20%25Y
Key performance indicators, costings and brings humour (which is sadly lacking) to the issues you mention.
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.