HMRC’s new consultative document includes two pages of new legislation with 18 pages of explanation and lays down four conditions to identify when an unacceptable income shift has taken place: A - someone (‘individual 1’) is party to, or has power over the arrangements, ie how the business has been set up; B - individual 1 forgoes income which goes to individual 2; C - individual 1 can control the amount shifted and D - the income shifted is the distributions of a company or profits of a partnership.

All four conditions must apply; in addition, a tax saving must result from the arrangements.

Arrangements involving children, wider family and friends could also be caught and the asset-backed business that was accepted as outside the HMRC target zone for the Arctic attack is firmly in the sights of these new rules.

The HMRC’s paper suggests it has ‘identified 65,000 companies where income shifting is likely to be taking place’ and talks in terms of tax losses of £500m a year, half of which will be clawed back by the new rules. It goes go on to say: ‘the government is looking to individuals to comply voluntarily without the need for interventions.’ So small businesses are going to have to self assess whether caught or not.

Although the consultative document says HMRC would not expect further documentation to be needed to prove a situation is outside income shifting, it seems inevitable that businesses will have to get better at documenting how they have valued individuals’ contributions.