The Chartered Institute of Taxation (CIOT) has grave concerns about the implications of the draft legislation on income splitting which was published today. The CIOT has long been of the view that fundamental reform to the structure of small business taxation is necessary if small businesses are to be able to plan their tax affairs with any degree of certainty.
Andrew Hubbard, CIOT Vice-President, says: “The CIOT accepts that what it prefers to regard as 'income sharing' within members of the family unit is an issue which would need to be considered as part of that reform, but regards it as wholly wrong for the Government to deal with this one issue in isolation."
Given, however, that the Government has chosen to introduce these measures it is clearly in the interests of all taxpayers that they operate effectively.
Andrew Hubbard adds: “The legislation imposes an arm's length test and requires taxpayers to work out how much income they have 'foregone' by making a comparison with how the business would have operated had everything been done by independent third parties operating on a fully commercial basis. In theory this might seem fair, but the reality is that family businesses do not and cannot possibly operate on a fully arm's length basis. One spouse might be the main income generator but he/she may well be totally unable to run the business without the full support of the other. Measured purely in hours that spouse’s input may not appear to be significant, but that is not the reality of the situation. The support of the spouse may well be the difference between the business succeeding and failing.”
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Notes to Editors
The Chartered Institute of Taxation has produced a series of case studies to illustrate the problems that arise with income splitting (attached).