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Hundreds of thousands of small businesses will face a combined tax bill of half a billion pounds and have to reconsider their tax planning under new proposals unveiled by chancellor Alistair Darling yesterday.
The measures will ban "income-shifting" arrangements favoured by family businesses and partnerships and raise £485 million in revenue by 2011, according to the governments pre-budget report announced yesterday.
The Treasury said that it would crack down on married couples who set up companies based around one spouses work after HM Revenue & Customs lost a landmark House of Lords decision in July.
The decision, known as the Arctic Systems case, centres on husband-and-wife businesses where the couple split ownership between them and receive equal share of the profits as dividends. However, the wife, who only undertakes administrative duties, is paid a lower salary thus paying less income tax.
Chas Roy-Chowdhury, head of taxation at ACCA Global, told the Times that small businesses had been hit by a "double whammy . . . with the near-doubling of the capital gains tax rate when they sell an interest in a business and the confirmation by the Chancellor that he will be looking at the income-splitting".
Mr Darling said that draft legislation would come into force in 2008-09. HMRC will apply a test to companies and partnerships to ensure that shareholders and partners are receiving a share of the profits that reflects their input into the company.
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