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By | Kelly Fiveash 9th January 2008 15:15

IT contractors cry foul over HMRC income splitting law

'Stop crippling us, we're not tax dodgers'

IT contractors are up in arms about government legalisation that will overhaul income splitting arrangements among individuals following a landmark case that Her Majesty's Revenue and Customs (HMRC) lost.

In July last year, Arctic Systems beat the taxman which had pursued the small, family-run IT services firm for what it claimed was unpaid taxes.

However, the long-running legal dispute came to an end when the House of Lords threw out an appeal from HMRC in favour of Arctic bosses and married couple Geoff and Diana Jones.

At the time the HMRC responded by accepting that it had lost the battle, but reckoned it would win the war by introducing a new law that would close what it considered a loophole in the system.

HM Treasury said it wants to prevent individuals from divvying up income earned from businesses with other individuals solely to reduce their joint tax bills. It has also estimated that some 85,000 companies throughout the UK were currently working the system to their advantage.

The government plans to introduce legislation from 6 April this year. HMRC laid out draft consultation guidelines (pdf) last month in which it said:

"The intended outcome of the proposed legislation is to undo the tax advantage gained by income shifting arrangements. The legislation does not consider any situations where an arrangement has been made on a commercial or arm's length basis."

HMRC proposes four conditions that would need to be set to determine whether income splitting is taking place:

• individual one is party to, or has power over the relevant arrangements;
• individual one forgoes income and the foregone income is individual two's for the relevant tax year;
• individual one has the power to control the amount that is shifted; and
• the shifted income consists of distributions of a company or profits of a partnership.

But many have voiced concern about the government's stance, arguing that the new law could affect small businesses throughout the UK.

The Professional Contractors Group, which supported the Joneses throughout their fight against the taxman, has set up an e-petition in the hope of convincing the government to "abandon" its plans on income splitting.

Elsewhere, a lone IT contractor has decided to take on the HMRC by setting up a Facebook group, dubbed "Stop the government from crippling contractors!", in the hope of provoking a stampede of Web 2.0 opposition to the legislation.

So far the e-petition has garnered more than 2,500 names, while the Facebook group has just 15 members who agree that the government's plans will hurt IT contractors' pockets. ®

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