UK: Pre-budget report - no action on income shifting

Many people have formed companies in order to reduce the tax that would otherwise have been paid if another business structure were used. In Jones v Garnett [2007] UKHL 35, the House of Lords considered whether the tax anti-avoidance provisions within Part XV of the Income and Corporation Taxes Act 1988 applied to the arrangements made by two taxpayers, Mr and Mrs Jones, with regard to the distribution of income from a company (Arctic Systems Ltd.) in which they were equal shareholders. The company had been formed as the vehicle through which Mr Jones' services as a computer consultant would be provided; his wife, Mrs Jones, provided administrative support. Mr and Mrs Jones received modest salaries and received the majority of their income from the company in the form of dividends. This minimised their total tax liability. The House of Lords held that these arrangements did not breach the anti-avoidance provisions.

The Government subsequently announced that legislation would be introduced to remove the tax benefits of "income shifting" (sometimes called "income splitting") and a consultation paper was published at the end of last year. In the March 2008 budget, the Government announced that legislation would be brought forward in the Finance Act 2009 (see paragraph 4.69 of the budget report). However, in today's Pre-Budget Report, the Government has announced (para 5.103):

...it is unfair to allow a minority of individuals to benefit financially from shifting part of their income to someone else who is subject to a lower rate of tax, known as income shifting. The Government has consulted on this issue but, given the current economic challenges, the Government is deferring action and will not bring forward legislation at Finance Bill 2009. The Government will instead keep this issue under review".