The government's decision to reverse the House of Lords ruling in the so-called Arctic Systems case and push ahead with new ‘income-shifting' rules could see many entrepreneurs saddled with higher tax bills.
According to business and financial adviser Grant Thornton, the new rules - which would come into effect from 6th April 2008 if approved - will hit small business owners particularly hard.
"The government has changed the law to target what it perceives as unacceptable tax avoidance, but the difficulty is going to be separating out those it wants to catch from those it does not," said Francesca Lagerberg, head of the National Tax Office at Grant Thornton. "Many entrepreneurs will now develop a persecution complex as the tax rules change yet again for them."
The new rules are designed to stop individuals transferring income between each other in a tax-advantageous manner. The Arctic Systems case related to a husband and wife but the new proposals could extend to any individual who would not enter into such a transaction were he or she acting commercially.
"The crunch term here is what is ‘commercial'," added Lagerberg. "Taxpayers and their advisers will need to examine the examples in the consultation paper to see if they are to be caught or not.
"The likelihood is that their situation won't quite replicate anything they see in the consultation paper and they will remain confused as to whether they have a problem or not."
Small companies are already facing a rise in the basic rate of corporation tax when it increases to 21% in April and have also been hit in recent months by the introduction of a flat rate of capital gains tax, which could see an 80% increase when they come to sell.
