Sunday, 29 July 2007

A taxing time for couples

When I was legal director of PCG (Professional Contractors Group) back in the early days of the new millennium, a strange case crossed my desk. Apparently somebody in the Inland Revenue was trying to apply the settlements legislation to a couple of contractors, which meant that the higher earner would pay tax at over 45% on the lower earner's share of the business.

I didn't spend much time on it because I was tied up with the judicial review against IR35, and I figured it would be sorted quite quickly once PCG's investigation team got involved. As every contractor knew at the time - a company run by a married couple is probably a settlement, but there is an 'outright gift' exception for married couples. That then puts them on a par with unmarried couples and normal partnerships.

After some seven years the House of Lords finally agreed with the contractors. And then as soon as they won, the government decides it is going to change the law to stop what it calls 'income splitting'. Why they couldn't have done that in the first place rather than leading everybody a merry dance for seven years is something people ought to ponder the next time they are asked to put an X on a piece of paper.

That the government is going to introduce one of their wonderfully effective 'targeted' pieces of legislation is not new of course. Taxation experts and lawyers are already rubbing their hands with glee at the extra fees this thing will generate. What worries me is that the government is conveniently avoiding a couple of other issues.

If 'income splitting' is wrong and individuals should be taxed according to their contribution, then why is income based upon physical assets to be taxed differently.

For example if a couple have a Buy-to-Let business then income (and capital gain!) from that business can be split 50/50 and nobody seems to get upset - regardless of where the money came from to purchase the houses and regardless of the effort put into running the business.

Similarly if an individual pays into a spouse's ISA or a pension, or simply puts assets in the name of their spouse then the income from those assets is taxed as the spouse's income.

Why is income from physical assets so different from that from intellectual assets? It makes no sense.

And of course if you introduce the notion of 'income splitting' so that the exchequer can transfer money to the highest taxed individual on a whim, then surely it is only 'fair' (to use that appalling PR phrase the government is so fond of) to consider the opposite issue of 'income aggregation'.

Is it 'fair' that when an individual sacrifices their earning potential so that their spouse can earn a higher wage, that the spouse is taxed on *all* the income generated? Often at a punitive marginal rate of up to 45%.

Isn't it about time that unpaid carers and housekeepers and personal assistants received a wage for their efforts, and were taxed accordingly?

If 'income splitting' isn't fair, then 'income aggregation' is an outright scandal.