January 2008

INCOME SHIFTING

Income shifting is the process by which an individual transfers part of their income to another person who is subject to a lower rate of tax.

As the result of the defeat of H M Revenue & Customs by Mr & Mrs Jones in the Arctic Systems Case the Government has issued a consultation on draft legislation to prevent income shifting.

It is proposed that a new rule will be introduced from 6 April 2008 to prevent income being transferred from one individual taxpayer to another.

The rules will apply where under 'relevant arrangements' dividends or partnerships are shifted from one individual to another individual. It affects those who move income from a higher to a lower rate taxpayer.

The rules apply where all of the following conditions are met:

 Individual 1 is party to or has power over the relevant arrangements

 Individual 1 forgoes income to individual 2

 Individual 1 has the power to control the amount that is shifted

 The shifted income consists of distributions of a company profits or of a partnership