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June 2008

ACUMEN WARNS CONTROVERSIAL LAWS COULD SPELL END FOR FAMILY BUSINESSES

Acumen, one of the leading independent financial firms is warning that family businesses in Aberdeen are facing a major financial and administrative headache with new regulations, due to be introduced in April, set to crackdown on husband and wife businesses.

HM Revenue and Customs (HMRC) is preparing to introduce controversial new rules aimed at uncovering couples who claim to be working together in a bid to avoid paying a higher level of tax. The regulations have been dubbed income shifting legislation after attempts by some couples to make tax savings by splitting shares in their company and subsequent dividends and taking full advantage of the tax allowances of both shareholders. The new rules will also apply to spouses involved in business partnerships. From April 6, everyone involved in such businesses will need to prove the extent to which they've been contributing to the business and justify their cut in the profits.

Andy Bain, Senior Tax Manager at Acumen said: "The prospect of these new rules is causing a significant amount of concern throughout both the business community and financial sector. Everyone who's in business is worried about this and some people may decide that the main person in the business should become a sole trader or only shareholder.

"From an advisors point of view the rules are so ambiguous it's incredibly difficult to know what steps businesses should take to ensure they are complying. It might be that we will have to wait until a case is taken to court to know how such cases will be viewed by HMRC. We would advise all businesses who could be affected by these regulations to speak to their accountant about the structure of their business and what records they should be keeping."

The legislation was put forward by HMRC after it lost a test case in the House of Lords last summer involving Geoff and Diana Jones who own Arctic Systems. The couple had been fighting HMRC after receiving a back-dated bill for £42,000 in tax which, according to the then Inland Revenue, was owed under the settlements legislation. However, the new rules are wider than the husband and wife scenario in Arctic and could apply to civil partnerships and other connected persons.

While the legislation is very complicated, at its hub is a drive to ensure that shared dividends are based on the proportion of dividends a spouse gets on the ‘market value' of the service the spouse provides. Market valuation is based on:

  • How much work is done
  • The type of work carried out
  • The amount of capital invested
  • The responsibility for making key decisions
  • The risk taken on

Andy added, "There's no doubt that this legislation is going to be a huge burden on small companies who are already struggling with a significant amount of red-tape and there is mounting pressure on the Treasury to backtrack on these controversial plans. We will have to wait until the budget next month to find out what the final decision will be".

 
Companies in the Acumen Group include Acumen Accountants and Advisors Limited, Acumen Financial Planning Limited and Acumen IT Consultancy Limited. Acumen Financial Planning Limited are authorised and regulated by the Financial Services Authority. Acumen Accountants and Advisors Limited are registered to carry out audit work and are regulated for a range of investment business activities by the Association of Chartered Certified Accountants but are not authorised and regulated by the Financial Services Authority. Acumen Financial Planning Limited, Registered in Scotland number 215343, VAT Number 894 6221 94. Acumen Accountants and Advisors Limited, Registered in Scotland number 153885, VAT Number 894 6221 94. Acumen IT Consultancy Limited, Registered in Scotland number 284749, VAT Number 859 474862. Acumen Holdings (Aberdeen) Limited, Registered in Scotland number 215503, VAT Number 894 6221 94. Registered office, Commercial House, 2 Rubislaw Terrace, Aberdeen, AB10 1XE.