Income shifting as defined by the Government is where one individual can shift their income to another in order to gain a tax advantage – and they don’t like it. They are therefore proposing to introduce new legislation effective from 6 April 2008 which could potentially affect hundreds of dentists.
This all started when East Sussex based IT consultant Geoff Jones was accused of income shifting when he gave a large part of the income from his company Arctic Systems in the form of dividends to his wife Diana. The Revenue cited Section 6 of the Code and told Jones he was ”bounteously” distributing money to his spouse in order to cut his own taxes. HMRC then presented Jones with a bill for £42,000.
The Revenue lost the case last year, but the Government wants to make sure there is sufficient legislation in place to stop this happening again.
The reason dentists might be affected is that there are many practices where spouses participate either as a partner, an associate, dental nurse, receptionist or practice manager. It’s therefore logical to share income from the practice with spouses, and giving shares to them is a natural way to go about it.
Dentists have also been allowed to incorporate their business since 31 July 2007 and there are several advantages of doing this including greater opportunities to shift income.
But there are limits to the ways in which you can divide up your company’s income. You can’t give half your company’s income in dividends to your spouse if they don’t work in the practice or take any financial risk. The Revenue would argue you are cutting your own income in half yet still reaping the benefits of that income.
If you’re worried, consider the following questions:
- Can one individual decide or secure how the profits from the business are distributed?
- Has that individual forgone income that formed part of the second individual’s income within an arrangement that would not be entered into at arm’s length?
- Does the shifted income consist of distributions from a company (for example, dividends) or a share of partnership profits?
- Has a tax advantage occurred as a result of shifting the income from the first individual to the second individual?
If you’re in doubt about what to do, contact HM Revenue & Customs directly, your accountant or your Independent Financial Adviser.