Even allowing for this, though, the consultation document released earlier this month looks likely to affect more people than nearly all commentators and tax advisers expected.

The aim of the new rules is to make sure that all family businesses split earnings and dividends “fairly” and to prevent what happened in the case of Arctic Systems Limited (where Mr Jones diverted some of the income he earned to his wife, to make use of her personal allowance and lower rate tax bands and reduce their combined tax bill significantly).

This may seem a laudable aim – especially to those of us not in a position to do the same – but, if the draft legislation does find its way onto the statute books, it will place onerous record keeping requirements on businesses in trying to justify payments to family members (and others) working in the business and create huge uncertainty for the individuals concerned but will still be very hard for the Revenue to enforce.

In any business where one or more people can control the amount and timing of any payments to partners, employees or shareholders, it is possible that those able to control these payments will have to pay tax on income they are deemed to have forgone (as if the payments had been made to them instead). To resist a Revenue challenge, the business will need to keep detailed records, to show that the amounts paid are fair, given the contribution made by each individual.

But what is “fair” – and how is anyone’s contribution measured? The Revenue’s guidance is eerily silent on these points and it seems to leave a huge gap that only the Courts may be able to fill.
Under Self-Assessment, the onus is on taxpayers to show that their calculation of their tax bill is correct. If they cannot, the Revenue will routinely charge penalties, based on the amount of extra tax found to be due. Without any indication on how to assess contributions or fair levels of earnings and dividends, it is highly likely that people who have made genuine attempts to calculate their tax bill correctly will face these penalties.

The consultation period runs out on 28 February 2008; the precise details are likely to be announced in a Budget, the following month. The new legislation will be effective from 6 April 2008.
There is little time for businesses and their advisers to consider the impact, let alone to act. If you think you might be affected by the new rules and would like to discuss what you can do before next April – and need to do after - please get in touch with Cathy Corns or me.