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This is the executive summary from the PCG's response to the consultation document issues on 'Income Shifting': PCG opposes the proposed Family Business Tax (FBT), referred to by the Government as legislation on “income shifting”. It is not fair, not workable and not justified by any evidence or argument in the consultation paper. The proposals are not fair - PCG believes that when two or more people are equally exposed to the risk of running a business, they should be equally entitled to share in the rewards: this proposal denies this basic principle. - Nothing has changed since the introduction of the independent taxation of spouses to justify its reversal as proposed here; independent taxation is fair, workable and well-understood, and should be preserved unless and until a compelling reason for its replacement emerges. - The proposals seek to tax business profits as if they were personal income akin to a salary: they seek to deny the legitimacy of hundreds of thousands of businesses. This is an insult to businesspeople throughout the UK. The proposals are not workable - The proposals show a total lack of understanding of how family businesses operate: applying “commercial” tests to them is a nonsense, because they only exist, and only operate, by virtue of family relationships, not “commercial” ones. - The FBT will create a disproportionate burden on small businesses, who will face an enormous amount of red tape in recording and valuing all work done for the business; this will destroy the progress made by HMRC towards its target of cutting administrative burdens on businesses by 15%, and is in contravention of the Hampton principles of Better Regulation. - Applying the rules, particularly with regard to applying “market rate” values to work done within a family business, will be impossible to do with any certainty; accordingly, businesses will be unable to meet their obligations under self-assessment. - Tax inspectors will take an increasingly aggressive attitude towards small businesses: as so many taxpayers will inevitably make mistakes when self-assessing under this legislation, tax inspectors will come to presume, even more than they already do, that all small businesses have got it wrong; the relationship between HMRC and business will sink even lower. The consultation document does not offer a justification for the measure - The introduction of this measure is politically-driven: there seems no other explanation for the Government’s apparent determination not to listen to reasoned argument. - The Government has committed to the policy without having established any evidential basis for it, as demonstrated by the incompleteness of the draft Impact Assessment; PCG will be raising the inadequacy of the consultation process with the Better Regulation Executive. - The FBT is being driven by the Government’s need to increase tax revenues, and is essentially a tax grab; PCG calls on the Government to raise taxes fairly and transparently if it needs to, rather than targeting particular groups. The draft Impact Assessment does not identify the likely impacts - The proposals will create a disincentive to enterprise: there will be fewer start-ups and many existing businesses may close down and their owners decide to abandon their business careers and seek to return to permanent employment; this will also reduce labour market flexibility. - The consultation document and draft Impact Assessment suggest that the FBT will produce a higher tax yield for minimal extra costs to business and HMRC: in fact, the costs to HMRC and the taxpayer will be not only high, but disproportionate, and the predicted tax yield is unlikely to emerge. Full response document available here Commentary on the consultation document available here
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