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Income shifting attack on contracting sector unlikely under coalition

Married contractors could benefit from tax breaks within the life of the next parliament. Prime Minister David Cameron reportedly told BBC political editor Nick Robinson: “I have always supported the idea of supporting marriage through the tax system, specifically supporting the idea of a transferable tax allowance.

“The idea of a transferable tax allowance is in the coalition agreement,” continued the Prime Minister. “It’s something we would like to do this parliament, but I hope you will bear with me as I try to announce one policy at a time.”

Any moves by the Conservative-Liberal Democrat government to introduce married couple’s allowances could signal a softening of the Treasury’s approach to income shifting and resulting investigations under Section 660. This has been a major source of concern to contracting businesses run or owned by married couples.

In a recent analysis of the ‘tax gap’ by The Guardian, income shifting between spouses and companies is calculated to cost the exchequer £3.2bn each year in lost revenue. With the stakes so high, it is not surprising that HMRC still actively pursues investigations into income shifting between spouses, as shown by the Patmore case in August.

The Prime Minister’s announcement has been made against the backdrop of planned cuts to child benefits, which would reduce the incomes of many contractor families with children where one spouse is a higher rate taxpayer.

But married couples who pay low salaries and split dividends and remain below the higher rate threshold are likely to continue to receive child benefit, because families will be assessed on a single parent’s earnings and not household income. The flip side to this is that single-parent contractors who are higher-rate taxpayers will also have their Child Benefit removed, despite their household income potentially being considerably lower than married couples who will continue to receive the benefit.

However, any initiatives to allow tax breaks for married couples may be opposed by Liberal Democrat members of the coalition government, who secured the right to abstain in debates to introduce such measures.

Published: 06 October 2010

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