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Family business tax imposes intolerable burden, says CIOT

The London-based Chartered Institute for Taxation, an independent agency, has sent a scathing letter to the Financial Secretary to the Treasury Jane Kennedy pointing out that the proposed Family Business Tax on income shifting, which penalises spouses and partners for sharing dividend income, wipes out any gains that have been made in reducing the administrative burden on small companies.

Enormous Administrative Burdens

CIOT president Rob Ellerby wrote to register his ''extreme disappointment with the the quality of the consultation paper and the general proposal to deal with this perceived problem in isolation, rather than through a wholesale review of the taxation of small businesses promised on a number of previous occasions.''

Says Ellerby: ''Yet the result of this consultation on Family Business Tax seems to be a proposal that, far from solving problems, will unleash enormous administrative burdens for thousands of family businesses that Government has previously sought to encourage.''

Lack of Any Coordination

The background here is important. The Government has been promising to reduce the administrative burden on all businesses, and has even created an Administrative Burdens Advisory Board. There is even a target set: reducing the burden on businesses of dealing with HMRC's forms and returns by at least 10% over five years; and reducing the burden of dealing with HMRC's audits and inspections by 10% over three years and at least 15% over five years;

The proposals seem to us to fail the tests of workability and practicality and certainty

Ron Ellerby-CIOT

But now the Treasury is proposing this new Family Business Tax which will force businesses to document income shifting. Ellerby points out that this increased administrative burden ''is likely to wipe out the gains made in other ways by the Administrative Burdens Advisory Board. These proposals fly in the face of that vision,'' Ellerby insists.

Don't people in different departments at the Treasury ever talk to each other?

Loads of Red Tape With No Extra Income for the State

Ellerby continues: ''The proposals will impose substantial administrative burdens on ordinary businesses to enable them to justify with any degree of certainty the stance they have taken regarding income allocation. Those burdens seem to be completely out of proportion to the tax benefits from the proposed initiative, estimated in the document to produce additional tax of around £3,000 for each business targeted by HMRC in the first year.''

But Ellerby explains that the Government won't even make any money out of the new tax, while succeeding in driving small business owners crazy.

''However, on a more realistic estimate of the number of businesses affected by the proposals, and given the total expected tax take, we think the income is likely to average under £300 per business - an amount likely to be exceeded by the professional fees incurred in navigating the new rules. In this connection, we note that HMRC have admitted in the document that they will not be able to provide any assistance to business proprietors in making the judgemental decisions required.''

Impossible To Apply

Finally, Ellerby demonstrates that the Family Business Tax with its income shifting proposals is just plain unworkable.

''The proposals seem to us to fail the tests of workability, practicality and certainty.''

''They display little understanding of the businesses that Government seeks to tax. The examples are simplistic, in contrast to the real case studies that the CIOT has submitted in the past. The examples seem to ignore everyday facts about the way family businesses are run and, in particular, the fundamental point that such businesses simply would not be conducted with non-family people, so that an arm's length test is all but impossible to apply.''

These proposals fly in the face of the vision of reducing the administrative burden on business

Ron Ellerby-CIOT

One would think that the Government might take this kind of expert advice into account, along with the avalanche of protest from every expert tax body throughout the UK. But it isn't going to. A political decision has been made to impose this unworkable tax on small business, and the Government is going to pass it with the Budget in March unless we all continue to write our MPs and make it clear that we can't accept this kind of arbitrary and contemptuous treatment that this so-called Family Business Tax imposes.

Published: 14 February 2008

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