Income shifting

In follow up to Arctic, the government has this week issued the threatened consultation paper on [earned] income shifting.

In our view, the paper serves only to re-emphasise the nailing jelly to a wall nature of the whole issue. Stripping away all of the gloss, the perceived mischief is not difficult to grasp, and involves any situation where related parties use a business structure as a conduit for directing income generated by the efforts of one party to another party, and in circumstances where an overall tax advantage is sought and secured by the parties as whole.

In the context of the small business, we all know the mischief when we see it but, like the much touted elephant, it is impossible to define. If it was anything but, then the government would have long since amended the primary legislation. Now, all we have is this somewhat pathetic attempt by the government, dressed up with all the same old clichés about fairness etc., to save face having now bet, and lost, everything on the judiciary solving the government's dilemma.

One also has to wonder over how far removed from reality the government has become, and whether this exercise, and others like it, now represent nothing more than a disgraceful waste of public money. (And all the more so when the paper's own justification for the issue being pursued is that there are an increasing number of small businesses, whilst the paper does, of course, snidely neglect to mention that this is because of the government's own past policies.)

Firstly, the majority of the target family businesses will, as acknowledged by the paper, be advised by agents, but the majority of these agents will only be small firms of accountants and bookkeepers, who will not be resourced to apply the legislation in the way proposed. Indeed, many of these agents, to this day, seem to us to have no real grasp over what Arctic involved, nor that there was ever anything other than certain legitimacy in the way their clients had been arranging their business affairs since the early 1990s.

Secondly, the vast majority of small businesses are not going to be prepared to pay for the benefit of the considerable advice which will necessary in order that the businesses are compliant.

Thirdly, the task of policing the new legislation is going to fall on the least capable, and least resourced, end of the Revenue staff spectrum. Anyone involved with even the most basic of Revenue enquiry work into small businesses will be only too painfully aware of the agony that comes from a poorly trained civil servant trying to understand how a business operates when that civil servant is armed with nothing more than sincerity and a three week bookkeeping course. To ask the same people to attempt subjective exercises in quantifying shifted income in the way the government seems to think is possible is nothing short of laughable (although, according to the paper, the cost of training staff will be so small as to not even merit being monetised in the impact assessment !).

All told, it is difficult not to envisage that all which will come out of this latest round in the long running saga is yet more legislation, pointlessly directed at people who will not appreciate its existence, not understand it or simply ignore it, and that, as a body of taxpayers, micro businesses will carry on as before with, at best, a bit of tweaking to the way in which they organise their affairs.

When, in reality, there seems so little potential for upping the tax take in the way that the government seems to think will happen, if the government still feels it had to legislate, then would not a short purposive TAAR be more appropriate ? Once in a while, the Revenue could invoke the TAAR to pick off some poor unfortunate who had strayed too far from the huge grey area in which micro businesses exist and, for everyone else, the existence of a TAAR would serve as a restraint to keep them within tolerable bounds.

Or, hey, failing that, why not tell all small businesses to shut down and to re-direct their resources into building up a BTL portfolio on which they have to pay only 18% tax on capital profits and where, because it will not involve anything as squalid as doing a day's work, it's perfectly OK to shift the income !