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Income splitting under review again

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The question of family firms that split income between husbands and wives in order to reduce tax liabilities may come under the scrutiny of the Office of Tax Simplification (OTS).

For HM Revenue and Customs (HMRC), the issue has long been a challenging one.

In the past, the tax authority has used laws passed in 1930s to stop family businesses shifting income between spouses through dividend payments as a means of limiting tax liabilities.

The Treasury had promised to legislate in 2007 to make the law clearer, but a subsequent consultation yielded no new laws.

Now the OTS, set up by the Government to streamline the tax system, may be re-examining the matter.

In a newspaper interview, John Whiting, the tax director at the OTS, said that income splitting could be under review once more, along with other vexed tax issues such as IR35 and national insurance.

Mr Whiting said: “Income splitting is in the pretty-difficult-to-do box because it has been looked at a heck of a lot. We have to come up with some ways forward. I hope we can come up with some quick tweaks that can make a difference, but I am no under illusions that some of the things we could come up with will require some serious study.”

Mr Whiting also addressed the IR35 rules which are aimed at preventing firms from treating employees as contractors as a way of reducing national insurance charges.

He said: “One of the issues is around IR35, and there are others around the employed-self-employed boundary and family business taxation. These are difficulties both from the businesses’ point of view and from the Revenue’s point of view in terms of policing it.

“Clearly we have to come up with some ways forward. We have some ideas. I think a lot of people will be quite happy if we say, ‘This really is a problem, it has to be solved. Here are some of the ways we can do it: now choose.'”

On national insurance, Mr Whiting added: “To give no secrets away, when you talk about small business taxation people point to national insurance. Different rules at one level, so administratively difficult. And it’s a driver behind people having companies and paying dividends. What do you do? Abolish national insurance? Whoa there. We might want to raise these issues but we are hardly going to solve them.”