Despite several high profile cases going against HM Revenue & Customs, the tax authority is continuing to pursue shareholders in family companies where there is perceived tax avoidance by income shifting.
Income shifting is the process of diverting income from one tax payer to another where the second taxpayer is subject to a lower rate of tax. This is most commonly found in small family businesses where two spouses may each own 50% of the company’ shares (as so each receive 50% of any distributed profit) but the income of the business is actually only generated by one spouse. In this scenario HMRC argue that 50% of the income has been artificially shifted to the non-working spouse and will attempt to assess the working spouse to up to 100% of the distributed profit.
In reality, for most small businesses it is highly unusual for only one spouse to have an active involvement in the business. As if often the case, while one spouse may be the income generator, the other is usually involved in administration or other non-fee earning activity and should be entitled to participate in the profits of the business as a reward.
The key question, and the one which must be defended to HM Revenue & Customs, is how much should this reward be?
If you are a family business and you want to know more about shareholdings between family members we will be happy to discuss your options and work to ensure you are getting the most from your business.