Tax laws: Save your sympathy for the Doms
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The run-up to Chancellor Alistair Darling’s Budget next week has been dominated by the yelps from non-doms who have lived here for decades, objecting to having to pay a bit of extra tax to maintain their status.
The way that the press have supported all freeloaders has been stunningly irritating. But the worst thing about the coverage is that it has meant that one Budget change which will seriously hurt genuine entrepreneurs – and which we should really be protesting about - has been all but ignored.
At the moment, many family businesses use a tax planning method known as ‘income shifting’, whereby they pay out salaries to family members in such a way as to take advantage of their family’s tax allowances. But HM Revenue and Customs doesn’t approve.
Back in 2004, it demanded a huge sum in back taxes from Geoff and Diana Jones, owners of a small IT firm in Sussex, arguing that Diana’s salary did not reflect her contribution to the business, and therefore should have been taxed as Mr Jones’s income, at a higher rate. The case went to the House of Lords, and eventually ended in victory for the Joneses last year. So the Treasury – which hates to be thwarted - has changed the law to explicitly forbid income shifting.
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The rules affect all businesses, but will disproportionately affect small companies, which will have to start keeping detailed records to prove the contribution everyone makes to the business. This is wrong. If the Treasury is happy to indulge the non-doms, why so eager to strip such a minor tax advantage from small business people? These people take genuine risks to set up their businesses, often securing start-up loans against their own homes. They are building local businesses, which can’t relocate at the drop of a hat if changes to the tax laws upset them.
This of course is why the Treasury considers them a prime target – but with recession looming, the Government should surely be looking to nurture local employers, not crush them.
First published in The Evening Standard 4/3/08
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