The Forum of Private Business (FPB) is urging the Prime Minister, Gordon Brown, to rethink his decision to clamp down on ‘income shifting', a long-standing practice carried out by many small, in particular family, firms.

The FPB is backing a petition on the 10 Downing Street website. It was drawn up by the Professional Contractors Group (PCG) and calls on Brown to back down on plans to introduce an income shifting tax. It has attracted more than 3,000 signatures so far.

The Government remains intent on changing the law despite its defeat in the Arctic Systems case last year.

The House of Lords deemed as lawful the practice of firms reducing their tax bills by dividing income, as dividends, between family members who are also employees.

By drafting new legislation and, in effect, creating a new tax burden for many smaller businesses, the Government hopes to raise an additional £200 million per year.

"Brown has ignored the UK's highest court, which sent a clear message that income shifting is an established, accepted arrangement," said the FPB's Policy Representative, Matt Goodman.

"Yet again, the Government – which in the past had approved the practice – is insisting this is a loophole and piling yet another tax burden on smaller businesses," he added.

Any tax advantage gained from income shifting will be blocked from April, unless there is a “genuinely commercial arrangement”.

The FPB believes that this contradicts the Government's aims to encourage competition and assist the growth of small businesses. It is also likely that the new rules will make completing self-assessment tax forms much more difficult.

The FPB also welcomed the PCG's support of Sir Robert Smith. The Aberdeenshire West and Kincardine MP's Early Day Motion points out that income shifting has been standard practice for married couples who jointly own businesses and was, for many years, recommended by the Government.

The Motion, which called on Mr Brown to reconsider the proposal ahead of the Budget, states that the move is inconsistent with the law on divorce and capital gains tax. Spouses would be entitled to an equal share of a firm's value, but not of its operational profits.

The PCG's managing director John Brazier, urged the owners of small businesses to write to their MPs to ensure they signed the petition.

"If it is properly supported by MPs, this motion will send a clear signal to the Government that it must re-think its proposals before they inflict disaster on family-run businesses throughout the UK," he said.

Related links 

• Forum of Private Business
• Professional Contractors Group

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