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Income shifting: an example
Page 27
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To understand income shifting, take the case of a small company equally owned by husband and wife, where the husband does all the client work (such as managing the transport and delivering the loads) and the wife looks after the back office, This was the situation in the Arctic Systems case.
HMRC 's contention is that it is the husband's business, so condition A (someone individual 1 is party to, or has power over the arrangements') is met. If both just take a small salary, which means significant dividends flow to each party, condition B (individual 1 forgoes income which goes to individual 2') is met as some dividend income has been 'forgone' by the husband.
HMRC assumes that condition C (individual 1 can control the amount shifted') is met as the husband could insiston a bigger salary; condition D(the income shifted is the distributions of a company or profits of a partnership') is clearly met.
Assuming some of the income would otherwise be taxed on the husband at 40% this means there is a tax saving and HMRC argues that the husband wouldn't set up this arrangement with a stranger, so this can't be excluded under the 'commercial' get-out.
The result is that this is an income shiftand the money that flowed to the wife over and above reasonable pay for her adm in duties will be taxed on the husband, not on her.