Husband-and-wife firms get a reprieve

Income-splitting legislation for small business taxation plans delayed

The Treasury has signalled that it was willing to amend the current draft legislation for tax rules that govern the way family businesses distribute their profits. Husband-and-wife firms that split the income generated from their businesses in order to reduce their joint tax bills will now have a reprieve until 2009.

The Treasury announced that the government had considered the responses received to the consultation and believed that a further period of consultation would ensure that the legislation in this area provides clarity and certainty for businesses and their advisers.

It said it "firmly believed" that allowing individuals to shift part of their income to another person on a lower rate of tax was "unfair", but conceded that it needed to rethink how it would tackle the problem.

‘The government now intends to introduce legislation through Finance Bill 2009 and will not enact legislation effective from 6 April 2008,’ it said.

The chancellor Mr Darling chose not to mention this reprieve in his Budget speech, even though he announced the legislation in his Pre-Budget report.

The decision to delay the income-splitting legislation was the most significant new change to the government's small business taxation plans.

The Treasury also announced other tax measures that included an increase in the rate of small company corporation tax from April from 20p to 21p.

The VAT registration threshold was raised in line with inflation from £64,000 to £67,000.

The new £50,000 annual investment allowance for all businesses, announced by Gordon Brown in his last Budget, goes ahead as planned.

In addition, small firms will now be able to write off historical capital expenditure for instance on computers or office equipment worth less than £1,000 against their taxable profits in one year instead of doing so over decades.

But a planned increase in the small firm’s research and development tax credit from April has been delayed and new EU state aid rules applied to restrict access. Firms applying for the credit, worth up to 175 per cent of expenditures, will now have to prove they are a going concern by presenting accounts signed off by an accountant. A new expenditure cap of €7.5m (£5.7m) per project has also been applied.

Levels and bases of, and reliefs from, taxation are subject to change.