Limited Company - Income Splitting yes or no?

[Wanderer]

Hello fellow contractors,

I've got a limited company and I find myself in a position to consider income splitting with my wife who no longer works.

I have a scenario whereby she does some work for the company, much like the "work" an MP's wife gets paid to do - secretarial stuff but nothing that I would invoice clients for or create an auditable paper trail to prove.

Can I make her a shareholder, pay salary and split dividends with her to avoid paying tax (or should I have said "structure our tax affairs more efficiently")?

There are some obvious answers that I have considered. They include "ask the Inland Revenue" , "ask your accountant" (advises me not to), and google "Arctic Systems" (sounds like it's perfectly legitimate).

I've read the Artic systems case (what the papers wrote about it, not the full judgement) and this seems to indicate that it's perfectly legitimate but the government were going to change the law. As far as I can see, they never did so does that mean we can go ahead and income split with impunity, or at least demonstrating "reasonable care" thus avoiding penalties if the Inland Revenge do a retrospective crack down on the practice?

The accountant recommending that I don't income/dividend split bothers me. Should I get a different accountant?

I'm sure there are a lot of facts surrounding all this. What I'm hoping to get is some opinions from forum members as to what happens in the real world.

[BolshieBastard]

S660 was intended to be brought in to end income shifting. S660 never made it to the statute book. Therefore income shifting is perfectly legal exploitation of a loophole in tax law at this time.

Any accountant who is discouraging you from this must be mad.

Bear in mind there are a number of trolls around who will criticise you for exploiting an existing tax loophole in such a way.

If your wife isnt already a shareholder of your ltd co, you wouldnt be able to pay her a dividend and therefore 'shift your income' to her. I think your wife would have to buy a share or shares in your ltd co and this cost may not be a token few quid.

[ASB]

1) you dirty filthy income shifter you

2) By "wife" I assume you mean "wife" in actuality. This is because if you are not formally married the the transfer of shares is a disposal for CGT and there is the question of value

3) Make sure you fill in the stock transfer form correctly. Stamp duty should not be careful

4) Make sure the transfer is recorded in the company books properly (the shareholders register)

5) Make sure a share certificate is produced

6) There are 2 views as to whether it is better to gift or sell. A search will yield loads of information (and probably leave you none the wiser). At least you'll know the differing opinions of practioners

7) Try and avoid dividend waivers if you are trying to get exceptionally creative. It's a red rag in an investigation should there ever be one

8) Make sure you may your wife a salary of around 6k to use her personal allowances. Obviously she ought to do some work. HMRC would not normally query this, again search.

9) Remember there is still the potential for an S660 attack. Even if that fails (and it should) then HMRC could potentially look through the transaction, it is therefore essentially that all the paperwork is absoultely correct.

10) Find out from your accountant EXACTLY why he advises you not to, "S660" is no a good enough answer. There are a number of sections to this, exactly which one is he afraid of why? This may help you decide the most appropriate way of dealing with 6. Note if you are selling there is a case to suggest the valuation per share is retained funds/shares in issue.

[malvolio]

I asked the guy in the Arctic case (and so a reasonable authority...) this question a while back. There is no reason not to do it beween husband and wife. Even if some chancellor is stupid enough to try and outlaw it, you will have the budget plus a year to change any such arrangements.

And I should change your accoutnant. You want expert advice, not lazy suppostion.

[kaiser78]

You will find the husband / wife income shifting scenario the most suitable setup for the standard ltd co. Any accountant who advises otherwise would need to put up a pretty good argument against.

[Olly]

A lot of accountants recommend a minimum wage salary of 12K (or was it 10, I forget). I can't fathom a single argument that it makes sense and they can provide no evidence it lessens chance of investigation.

If investigated then 12K is no more a valid salary than 6K when in reality a permy rate for the same work would be 30K plus.

Bottom line...although every man and his dog says "ask your accountant" on this board, I'm a firm believer in guide your accountant to the answer you want to hear. Bit of a waste of money paying an accountant but proof one can not "trust the experts".

If yours is "well" off the mark, rather than seeing things from a warped angle, then give him the flick.

[Maslins]

Different accountants get uncomfortable about different things. There's a few things clients often try to do that make me squirm, but I for one see nothing wrong with giving your wife half the shares, and both of you taking a salary of £5,715 (based on current year). Sure, it is clearly choosing numbers specifically to reduce your tax bill, but that's perfectly legal.

At the end of the day, as long as you're not being audited, your accountant should essentially do what you ask them to (though if they're uncomfortable with it they'll no doubt put that in writing to cover their ass). If you're otherwise happy with your accountant, then just say you understand the risks, but want to do it anyway. If there's a few other things you're unhappy about from your accountant, then consider making a change.

[Wanderer]

Hi Folks,

Thanks for the replies they have pretty much backed up what I have been thinking. To clarify a few points slightly for ASB.

Yes, my wife and I are indeed joined in good old fashioned holy matrimony.

There won't actually be a stock transfer because we were given a share each in the company when it was formed. I've recently transferred from Umbrella working - yes, that was a mistake to go brolly but my last stint at contracting ended up with a load of company related grief and I thought this contract would be brief (but it's not).

Find out from your accountant EXACTLY why he advises you not to, "S660" is no a good enough answer. There are a number of sections to this, exactly which one is he afraid of why?

I'm still waiting for a proper reply from the accountant. They are a well known one (recommended by the PCG etc) and I'm wondering if I should just ask for someone else at the company to do my accounts for me or push them to tell me what their company policy is.

I really don't want the Inland Revenge to come along and charge me penalties for taking the income splitting route and saying I should have known better because as the director, I rejected the accountant's advice. I want the accountant to advise me that income splitting is OK so I can demonstrate reasonable care. So the accountant puts their but on the line rather than me? Hell yes, the are big enough and ugly enough to take the heat.

"Under the new system if you take reasonable care to get your tax right, HMRC will not penalise you, even if you make a mistake."

[Fred Bloggs]

Don't mess about, change the accountant right now to one who really understands the up to date situation with "income splitting" (I hate that term). Right now, IMO, there's little risk of an HMRC enquiry similar to Arctic Systems.

[Flopsy]

I don't understand your accountants problem. Most of my male colleagues (with children) operate exactly the same arrangement. My neighbours (female contractor and male at home with the kids) do exactly that.

You both have a share in the company. Your wife will provide some "input" and will be paid.

In my years of contracting I know of no actual couple who have had hassle over this. You looked at the Artic one and know the possible problem.

It does seem strange that your accountant is not supporting this given that it is so very common indeed. Apart from advising against, it has your accountant said actually why not?