Income shifting: Tax Research LLP submission to HMRC

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I have submitted comment to HM Revenue & Customs' consultation on Income Shifting by smaller businesses in the UK. I have called for the current proposals to be put on hold so that a longer consultation on change in the taxation of this vital sector of the UK economy can take place so that any changes to tax law affecting it encourages both business efficiency and tax compliance.

In addition my submission says:

1. That the government must justify why the proposals are only being applied to the small business community when income shifting is common throughout the tax system;

2. That the income shifting review should consider changes in company and limited liability partnership law that would make it easier for these legal structures to promote both enterprise and tax compliance;

3. The government should state how it thinks profits should be taxed. At present they are treated as earned income for income tax purposes and unearned income when generated through a company. Tax Research LLP suggests that this is the core of the income shifting problem, and that it cannot be resolved until this issue is addressed;

4. That the government should justify why different sources of income are taxed at such widely varying rates, especially when national insurance is taken into account. If the widely differing rates of tax applied to different sources of income of similar amount where removed from the UK tax system much of the incentive to avoid tax would be eliminated and overall rates of tax could be reduced;

5. That any legislation on income shifting should be constructed purposively so that its intention is clearly stated in Plain English. In addition it should be supported by regulations that have the force of statute so that taxpayers can rely upon them;

6. That HM Revenue & Customs publish clear and binding guidance on acceptable arrangements for making payment to persons subject to income splitting legislation so that the small business community can know in advance that if they rely on that guidance that their tax affairs will be tax compliant.

I think income shifting is a problem - but it really has to be dealt with more comprehensively if the government is to prove that its proposals have a logical coherence. Right now they haven't.