The tax general anti-abuse rule (GAAR) is now law, and there have been rumblings that HMRC will use this to attack income shifting between spouses. Should you be concerned about this?
There are a few ways in which company income can be shifted to a spouse that may come under scrutiny by HMRC. Where you:
- Pay them a salary
- Appoint them a director and pay them fees
- Transfer shares to them and pay them dividends
To save tax the receiving spouse must pay at a lower rate than the transferring spouse, and not fall foul of specific HMRC anti-avoidance rules – and now also the GAAR.
Paying your spouse a salary from the company will only save tax if they work in the company and their pay is reasonable for what they do. However if HMRC believe that the salary being paid is excessive then it may challenge the arrangement and refuse a corporation tax deduction for some or all of it. This is a well established line of attack using long-standing rules. Therefore GAAR isn’t applicable to this type of income shifting arrangement. The key element in this case to make it a success is not overpaying your spouse.
Directors fees option
Director fees are treated the same as salary for tax purposes and so, by appointing your spouse a director, you can pay them. But fees don’t need to be justified like a salary. A non-working director is entitled to be paid because they have legal responsibilities for the company and this is enough to justify paying them fees. HMRC can’t refuse a corporation tax deduction unless the fees are disproportionate to the level of the company’s activity.
When directors fees are paid they should all be of a similar amount to avoid HMRC attacking the arrangement. Once again this is a long-standing rule, so the use of GAAR isn’t appropriate.
Transfer of shares option
According to Tips & Advice-Tax magazine, assuming your spouse pays tax at a lower rate than you, then giving them shares in your company so you can pay them dividends is the most tax-efficient route to save tax and NI. The good news is that HMRC confirmed earlier this year that, as far as it was concerned, giving assets to your spouse to reduce your income or capital gains tax bill is not abuse of the tax rules.
The information from this article is taken from Tips & Advice-Tax magazine, issue 22.