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Taxation: Small Businesses and Settlements Legislation

Volume 694: debated on Thursday 26 July 2007

My honourable friend the Exchequer Secretary to the Treasury (Angela Eagle) has made the following Written Statement.

The Government acknowledge the judgment given by the House of Lords in the Jones v Garnett (Arctic Systems) case.

The Government are committed to maintaining fairness in the tax system. The case has brought to light the need for the Government to ensure that there is greater clarity in the law regarding their position on the tax treatment of “income-splitting”.

Some individuals use non-commercial arrangements (arrangements that they would not reasonably enter into with an arm’s-length third party) to divert income (which would, in the absence of those arrangements have flowed to them) to others. That minimises their tax liability, and results in an unfair outcome, increasing the tax burden on other taxpayers and putting businesses that compete with these individuals at a competitive disadvantage.

It is the Government's view that individuals involved in these arrangements should pay tax on what is, in substance, their own income and that the legislation should clearly provide for this. The Government will therefore bring forward proposals for changes to legislation to ensure that this is the case. In the mean time, HMRC will apply the law as elucidated by the House of Lords and will be providing guidance in due course.

The Government would not want commercial arrangements to be caught by any change to legislation. Consultation should help to ensure this.