Recently the media and the general public have shown a quite unprecedented level of interest in the moralities and technicalities of tax avoidance. The newspapers have given front-page coverage to stories on multinational companies diverting profits from their UK activities to lower-tax jurisdictions as well as on exotically-named tax avoidance schemes used by celebrities, including the comedian Jimmy Carr. The media has also turned the spotlight on the tax affairs of senior civil servantsFootnote 1 and BBC presentersFootnote 2 for allegedly channelling their earnings through private companies to save on tax. One such investigation by BBC2's Newsnight programme and the website Exaro revealed that a senior civil servant—the CEO of the Student Loans Company, Ed Lester—had negotiated an arrangement whereby he was paid gross through his company rather than having tax deducted at source as an employee.Footnote 3 The arrangement was said to reduce the cost of Mr. Lester's pay package for the Student Loans Company and also save him personally £40,000 in tax p.a. This story led to a Treasury review of such arrangements in the public sector, which revealed that out of approximately 16,000 senior civil servants, at least 2400 were engaged “off payroll”, i.e. paid through agencies, personal services companies or as self-employed contractors rather than as employees.Footnote 4
In Part I of this article I briefly outline the tax and National Insurance contributions (NIC) savings that can be had from deriving earnings through a private company. The primary benefit is that it enables highly-taxed earned income to be converted into more lightly taxed unearned income, particularly dividends. Two recent major studies on small business taxation by the Office of Tax Simplification (OTS)Footnote 5 and the Institute for Fiscal Studies-led Mirrlees ReviewFootnote 6 have questioned the favourable tax treatment of companies as compared to unincorporated workers and employees engaged in similar economic activity, and have called for structural reform of the tax system to address it.
The tax and NIC savings can be increased even further by engaging in family income-splitting arrangements through a private company. This issue was the focus of a 2006 article by Professor John Tiley in this Journal.Footnote 7 Since that article was written, a number of important developments have occurred in this area, most notably the 2007 decision of the House of Lords in the leading case of Jones v Garnett (also known as Arctic Systems).Footnote 8 The House agreed with the Court of AppealFootnote 9 in the result, finding in favour of the taxpayer Mr. Jones, but for reasons completely opposite to those of the Court of Appeal. In Part II I examine the key elements of the House of Lords decision, and the Government's reaction (and ultimate inaction) following that decision.
In Part III I consider what, if anything, should be done to reduce the fiscal incentives to carry on economic activity though a company. Several possible reforms are outlined and evaluated. One option is more rigorous anti-avoidance rules. This could include strengthening the famous IR35 rules meant to combat “disguised employment” or applying the new statutory general anti-avoidance rule, which the Government intends to introduce in Finance Act 2013. A second approach, and the one this writer advocates, is to follow the recommendations of the Mirrlees Review and the OTS and pursue closer alignment of tax and NIC rates on economic activity carried out in a variety of legal forms. This option has the advantage of addressing the root of the problem by limiting the tax incentives to become self-employed or incorporate in the first place, but at the cost of increasing the tax burden on those who presently benefit from the inequity of the current regime.
I. Tax (and nic) Benefits From Off-Payroll Arrangements
The temptation to use off-payroll arrangements for tax reasons—as has apparently been surprisingly common in the civil service and the BBC—is certainly not a recent phenomena. For many years self-employed workers and those offering their services through a company have enjoyed lower rates of tax and greater flexibility in terms of timing of tax payments and claiming expenses in comparison with employees.Footnote 10 As a result, a substantial body of case law has developed to police the border between employment (contract of service) and self-employment (contract for service) for tax purposes. The courts consider a number of factors including control, integration, ownership of tools, economic reality and mutuality of obligations.Footnote 11 The cases are heavily fact-dependent, but the tests are fairly well-understood and have been flexible enough to adapt over time.
Taking into account tax considerations when choosing whether to carry on economic activity through a company also is not a new phenomena. Over forty years ago the 1971 Bolton Report highlighted the then inequality of tax treatment as between different forms of business organisation, with some unincorporated businesses taxed more lightly than companies and others taxed more heavily.Footnote 12 The Report called it “unfortunate” that tax consequences were a consideration in choice of legal status in carrying on a business, and especially that an individual or partnership could not retain profits in a business or profession without paying (at that time) surtax whereas an incorporated business could.Footnote 13 This general concern is still valid today, with undistributed profits of a small company taxed at rates well below the higher rate of personal income tax. Even off-payroll arrangements at the BBC are hardly new. In 1993 the BBC caused a media stir when it was disclosed that then director general John Birt was actually engaged on a freelance basis through his own company.Footnote 14
The present tax and especially NIC rules unquestionably provide strong incentives for a taxpayer to choose either self-employment or a small company as a legal form for carrying on economic activity instead of employment where possible.Footnote 15 Very briefly, employment earnings and self-employment earnings are subject to income tax at either 20%, 40% or 50%, with the top rate dropping to 45% for 2013–14. Companies, on the other hand, pay a standard rate of corporation tax of 24%, falling to 20% on profits below £300,000. Payments to owner-managers can take a variety of forms, some of which are tax-deductible in computing the profits of the company (e.g. salary/bonus and benefits-in-kind). Dividends, on the other hand, are paid out of after-tax profits. Dividends come with a tax credit of 10%, which means if the recipient of the dividends is a no- or basic-rate taxpayer there is no further tax charge; a higher-rate taxpayer pays an additional 25% tax on the amount of the dividend. Alternatively, once corporation tax has been paid, the after-tax profits may be left in the company to be reinvested in the business, in which case no further tax is charged.
While tax differences are important factors in choosing the corporate form, the difference in NIC treatment is probably even more significant. Although labelled a “contribution”, NICs are generally viewed by economists as simply another tax on earnings.Footnote 16 This is because the link between contributions made and benefits received has been substantially eroded over time, to the point that the contributory principle upon which the NIC regime was originally based has been described recently as “largely illusionary”.Footnote 17 The NIC charges on both employees and employers, however, are very real. The rate of employee NICs is 12%, dropping to 2% on earnings over £42,484 p.a.; employers also pay NICs of 13.8% on employee earnings, with no upper limit.Footnote 18 The self-employed, on the other hand, pay lower Class 4 charges on their profits of 9%, dropping to 2% on profits over £42,475 p.a., plus a small Class 2 weekly charge of £2.65. Importantly, the self-employed do not pay a NIC charge equivalent to the 13.8% charge paid by employers (all figures for 2012–13). Lower NIC rates for the self-employed can be justified to some extent by their reduced benefit entitlement, e.g. they are not entitled to contribution-based jobseeker's allowance. Even after accounting for this reduced benefit entitlement, however, the Government estimates that for the 2011–12 tax year, the Treasury will take in £1.65 billion less in NICs from the self-employed than it would have done had the employment NIC regime applied.Footnote 19 The NIC treatment of incorporated businesses is even more favourable since NICs are not levied on the profits of companies, whether retained or distributed as dividends, or on capital gains on the sale of company shares.
The potential tax and NIC savings from choosing one legal form over another can be substantial. Assuming a gross profits/income of £83,200, an employee is subject to an average combined tax and NIC rate of 40%, whilst a self-employed worker pays an average rate of 33%. The resulting tax/NIC savings for the self-employed as compared to an employee at that level of activity is approximately £6,000 p.a. If the economic activity is carried on through a company and the profits paid out in the form of a mix of salary and dividends, the average tax/NIC rate can drop to as low as 27%. This provides a savings of nearly £5,000 p.a. compared to self-employment, and over £11,000 p.a. compared to an employee.Footnote 20
II. Income Splitting Through Family Companies
The tax and NIC benefits from carrying on economic activity in a corporate form can be increased further still by engaging in family income-splitting arrangements through the company. Building on the previous example of a worker with profits/income of £83,200 p.a., assume now that the work is carried on through a company owned 50%–50% by a husband and wife, where the husband works full-time for the company providing consulting services to company clients and his wife works a few hours a week on company administration and has no other source of income.
If the husband and wife each draw salary from the company of between £5,564 and £7,592 p.a. (for 2012–13), they each will accumulate NIC contribution records for the purposes of contributory benefits including basic State Pension—without they or their employer-company actually paying any NICs at all. As this level of salary is below each spouse's personal allowances no income tax will be payable either. The company is liable to corporations tax at the small profits rate of 20%, but, importantly, this will be the only tax charge. The remaining after-tax funds can be distributed equally to the spouses as dividends, and will attract no NICs and also no income tax since both spouses in the example are basic-rate taxpayers. In this scenario, the resulting average combined tax and NIC rate can be reduced from the previously identified 27% to a mere 16%. The previously-identified tax savings of over £11,000 p.a. from earning through a company rather than as an employee nearly doubles to £20,000 p.a. Compared to operating as an unincorporated sole trader, the benefits are still sizable—over £13,500 p.a.
An example of such a spousal income-splitting arrangement is the well-known case Jones v Garnett, discussed in Professor Tiley's 2006 article and ultimately decided in the taxpayer's favour by the House of Lords in 2007.Footnote 21 To briefly repeat the key facts, Mr. and Mrs. Jones each owned 50% of a private company, Arctic Systems Limited (Arctic). Mr. Jones was appointed sole director, and Mrs. Jones agreed to handle the financial and administrative requirements of the company and to act as company secretary. At all relevant times the company's business consisted entirely in providing Mr. Jones's IT services to outside users, through agencies, for fees. At the outset the couple decided that the company would pay them both salaries to meet their basics needs, with any excess profits distributed as dividends. The company proved to be profitable and dividends were paid to each spouse. If the dividends had all been paid to Mr. Jones, the overall tax payable would have been higher—a fact he admittedly understood. HMRC reassessed Mr. Jones under anti-avoidance rules known as the “settlement provisions”Footnote 22 for tax on the full amount of the dividends paid to his wife. HMRC was successful before the Special Commissioners (by casting vote)Footnote 23 and in the High Court,Footnote 24 but a unanimous Court of AppealFootnote 25 found for Mr. Jones and this result was affirmed by the House of Lords.
The general thrust of the settlement provisions is that if income from property arises under a “settlement”, which term is widely defined to include an “arrangement”, and the “settlor” has an interest in the property, then the income is treated for income tax purposes as the income of the settlor and not the income of the person whose income it actually is. Further, the settlor is treated as having an interest in the property in a situation where income from the property may become payable to his or her spouse. However, the provisions do not apply in the case of an “outright gift” from one spouse to another, unless the gift is wholly or substantially a right to income.Footnote 26
When Jones v Garnett reached the House of Lords, the House first confirmed that the word “arrangement” has a broad, imprecise meaning for the purposes of the settlement provisions. Lord HoffmannFootnote 27 (with whom all the other Lords and Baroness Hale said that they agreed) and Lord WalkerFootnote 28 (in separate reasons) adopted the approach taken by Donovan L.J. in Crossland v Hawkins where he refers to an arrangement merely requiring “sufficient unity”.Footnote 29 That is not the end of the matter because the courts have decided that a statutory settlement further requires an element of “bounty”,Footnote 30 which Lord Hoffmann interpreted as meaning the settlor must provide a benefit under the arrangement that would not have been provided in a transaction at arm's length.Footnote 31 Whilst the Court of Appeal had concluded that there was no bounty in Mr. and Mrs. Jones's circumstances and that it was a “normal commercial transaction”,Footnote 32 the House of Lords strongly and unanimously disagreed.
The Court of Appeal also had concluded, in obiter, that if they were wrong and there was a bounteous arrangement, then they would have held that there was no outright gift and the settlement provisions would have applied. Again the House of Lords unanimously disagreed, holding that once the element of bounty was established on the facts, it necessarily followed that there was also an outright gift. Lord Hoffmann stated:
It was Mr Jones's consent to the transfer of a share with expectations of dividend to Mrs Jones for £1 which gave the transfer the “element of bounty” for the purposes of [Taxes Act 1988] s 660A. By the same token, I think it made the transfer a “gift” for the purposes of sub-s (6). And there is no dispute that, if it was a gift, it was outright.Footnote 33
Lastly, the House unanimously decided that this gift did not represent “wholly or substantially a right to income”. According to Lord Hoffmann, Mrs. Jones's share “… was an ordinary share conferring a right to vote, to participate in the distribution of assets on a winding up, to block a special resolution, to complain under section 459 of the Companies Act 1985. These are all rights over and above the right to income.”Footnote 34 Consequently, the spousal outright gift exception applied, which meant the settlement provisions did not apply to the dividends paid on Mrs. Jones's share.
The day after the House of Lords released its judgement in favour of the taxpayer, the then Labour Government announced its intention to introduce new legislation to “clarify” the law as it applied to the taxation of family income-splitting arrangements.Footnote 35 Draft legislation was duly released in December 2007, but at Budget 2008 the Government announced it was delaying implementation of the new legislation in order to allow for a further period of consultation to “ensure that the legislation in this area provides clarity and certainty for businesses and their advisers.”Footnote 36 Ultimately the draft legislation was withdrawn and no new legislative developments have occurred.
Thus, the present state-of-play on income-splitting arrangements involving a family company is that the term “arrangement” in the settlement provisions is to be interpreted broadly, and the common law bounty requirement does not appear to be a particularly difficult hurdle for HMRC to overcome so long as the arrangement at issue would have been entered into only by parties dealing not at arms' length. This means an income-splitting arrangement is likely to be caught, at least initially, by the settlement provisions. Certain outright gifts between spouses and civil partners then may be excluded, but this exception is somewhat limited since it does not apply to arrangements involving other family members or even cohabiting unmarried couples.
Even in the case of married couples and civil partners the exception has its limits. It will be recalled that the shares in Arctic were ordinary shares, and the dividends paid on those shares were paid in equal amounts to Mr. and Mrs. Jones. In one post-Jones v Garnett husband and wife income-splitting case involving a family company, a Special Commissioner held that the outright gift exception did not apply where a husband waived a dividend payable to his wife because the property given was wholly or substantially a right to income and also because the shares giving rise to the income were not transferred.Footnote 37 Non-voting preference shares also have been held to be wholly or substantially a right to income.Footnote 38
III. Options For Reform
What, if anything, should be done to reduce the tax incentives to incorporate generally and to restrict the tax benefits from undertaking income-splitting arrangements through a family company in particular. One option is the application of stronger anti-avoidance rules, including a statutory general anti-avoidance rule. A second option is to follow the recommendations of the Mirrlees Review and the OTS and pursue deeper structural reform aimed at closer alignment of tax and NIC rates on economic activity carried out across a range of legal forms.
A. Policing with Anti-Avoidance Rules
1. Disguised Employment
I begin first with the comparatively narrow problem of taxpayers disguising employment, bearing in mind that this will be of no consequence to the great many workers who are clearly “in business” not employment, even if their businesses are limited to the provision of personal services. The IR35 legislation,Footnote 39 now in the Income Tax (Earnings and Pensions) Act 2003, Part 2 Chapter 8, was introduced in 2000 in order to combat disguised employment through the use of a personal services company or other intermediary. IR35 applies where (i) an individual worker personally performs services for the ultimate client, (ii) the worker has a material interest in the intermediary, (iii) the intermediary receives a payment for the services performed by the worker, and (iv) the worker would otherwise be regarded—absent the intermediary—as an employee of the ultimate client under the usual case law tests for contract of service. If these conditions are satisfied, then the worker is deemed by the legislation to receive a payment from the intermediary of an amount determined by reference to the payments received by the intermediary. This deemed payment to the worker is treated as his or her employment income and is subject to the usual PAYE and NIC treatment. The deemed payment is also deductible in computing the profits of the intermediary company for corporation tax purposes to prevent double taxation.Footnote 40
If these rules actually operated as originally intended, they could go some distance towards limiting the problem of disguised employment. However, the IR35 rules have proved to be less than entirely successful in practice. This is partly because the IR35 regime relies on the common-law test for employment, which is quite fact-dependent and difficult for HMRC to police. The regime also does not operate effectively in situations where the worker has many contracts during the year because IR35 requires looking at each contract separately to test whether the regime applies.Footnote 41 The OTS recently reviewed the operation of IR35 and found general agreement that the current legislation is little used and “largely ‘managed round’ by contractors and others within its ambit, though often at some expense”.Footnote 42 On the other hand, HMRC views IR35 as an important deterrent,Footnote 43 despite the fact that in the three years ending 5 April 2011, HMRC opened, in total, only 60 taxpayer reviews where the IR35 rules were identified as a risk.Footnote 44
Rather than address the root problem—the more favourable taxation of business profits as compared to employment income—the Government's preferred course of action is instead to apply yet more sticking plasters to IR35. Minor changes to the administration of IR35 were announced in Budget 2012,Footnote 45 with yet more amendments promised in the Autumn Statement.Footnote 46 In addition, new public sector hiring guidance was issued in an attempt to reduce the use of off-payroll arrangements in the civil service. The BBC is reportedly considering adopting similar internal practices.
2. Family income-splitting
Turning next to possible options to address the problem of income-splitting of earnings through a family company, one such option is a new legislative regime along the lines proposed in 2008 and then withdrawn. Briefly, the proposed regime provided that if Individual 1 has the power/influence to forego dividends or partnership profits that would otherwise come to him and instead shifts the income to Individual 2 other than on a commercial, arm's length basis in order to avoid/reduce income tax, any shifted income would be taxed in Individual 1's hands and not Individual 2's.
The 2008 draft proposals suffered from a number of serious drawbacks, however. Firstly, the proposals focused too heavily on the work done by Individual 1 rather than the relative work and contributions of both Individuals 1 and 2 (and others). In a situation involving the joint efforts of two or more family members (e.g. Mr. and Mrs. Jones), a sounder approach would have been to attribute a portion of the resulting income to each individual using a recognised transfer pricing method, such as profit-split (which divides profit generated by the joint efforts of associated entities based upon the relative value of the functions performed by each entity). Secondly, the regime was poorly targeted, and its ambit too wide. The draft rules applied in the same way to arrangements between spouses, unmarried partners, siblings, adult children, parents, cousins, aunts and uncles, and close friends—anyone potentially dealing otherwise than at arm's length. It seems unlikely that there is a significant amount of taxpayers shifting income to cousins, aunts and uncles, and it was overly ambitious to draw up income-splitting rules to cover such a broad spectrum of relationships.
Alternatively, the Government could amend the settlement provisions. Oliver and Harris have argued that the settlement provisions are looking “substantially archaic” in the current services era, and that if income splitting in family businesses is not to be tolerated “as a bare minimum … it is time the settlement provisions were morphed into something more fit for purpose”.Footnote 47 Most obviously, the provisions could expressly exclude Jones v Garnett-type arrangements from the spousal outright gift exception. The difficulty, of course, lies in adequately describing the structures that should be so excluded, whilst also ensuring that the administrative burdens of the legislation are minimised. In addition, there is the very real possibility that clever taxpayers and their advisors will come up with new arrangements to exploit gaps in the amended legislation, which will lead to yet more legislation, and so on.
Others have argued against any further legislation in this area, principally on the basis that it will cause disproportionate complexity and uncertainty for small family businesses.Footnote 48 Another reason for hesitation is that although HMRC lost in Jones v Garnett, the result was not a complete disaster for them by any means. The bounteous arrangement requirement has been broadly interpreted, with the result that many income-splitting arrangements will be statutory settlements. In commenting upon the Court of Appeal decision in Jones v Garnett, Tiley described the outright gift exception as a sensible exercise in line-drawing.Footnote 49 He noted that once separate assessment was introduced, those drawing up the legislative changes had to choose how far spouses should be allowed to assign income between each other. The outright gift exception was the resulting compromise; the transfer of assets is permitted to be effective for income tax purposes between spouses living together but it must be “real”. Tiley went on to argue that the language of the exception, which avoids being over-prescriptive, requires the courts to draw the line – and he was content with where the Court of Appeal had drawn it. Ultimately, the House of Lords drew the line in a slightly different place, but not so differently as to invalidate Tiley's conclusion. As it now stands post-Jones v Garnett once bounty has been established it will be difficult for HMRC to argue that there has not been an outright gift between spouses, at least in a situation involving ordinary shares. In other, “less-real” circumstances (e.g. involving non-voting preference shares or a dividend waiver), the outright gift exception will not apply and the settlement provisions will prevail.
3. A General Anti-Avoidance (or Anti-Abuse) Rule
An alternative strategy is to restrict tax minimisation arrangements involving family companies with a statutory general anti-avoidance rule (GAAR). The New Zealand Supreme Court recently applied that country's broadly-drafted GAAR to thwart a family business income-splitting arrangement,Footnote 50 and the Australian tax authorities believe their GAAR could apply in such situations as well.Footnote 51 In 2010 the Exchequer Secretary asked Graham Aaronson Q.C. to lead a new study examining the desirability of legislating a UK GAAR.Footnote 52 Mr. Aaronson, helped by a study group which included Lord Hoffmann and Professor Tiley,Footnote 53 recommended the introduction of a narrowly-focused general anti-abuse rule. In 2012, the Government launched a consultation on just such a rule, and the Chancellor in his Autumn Statement confirmed the Government intends to introduce it in Finance Act 2013.Footnote 54 The proposed GAAR is aimed only at egregious, contrived, and abusive tax schemes and incorporates a number of safeguards, including explicit protection for arrangements that can reasonably be regarded as reasonable tax planning. The burden of proof that the planning could not reasonably be so regarded is to be on HMRC.
Would such a narrowly-focused GAAR be of any assistance in addressing the use of companies to minimise tax on earnings in the ways so-far discussed? The answer must almost certainly be “No”. Nearly all such arrangements should fall within the proposed safeguard for reasonably regarded as reasonable tax planning because the legislation clearly offers (1) a range of tax consequences depending on a taxpayer's choice of legal form (and has done so for decades), and (2) married couples and civil partners the opportunity to engage in some degree of earned income-splitting through a family company, so long as it falls on the right side of the line drawn by the settlements provisions.
B. Closer Alignment of Tax and NIC Rates
A second option is more fundamental reform. Both the Mirrlees ReviewFootnote 55 and the OTSFootnote 56 have concluded that the existing difference in the combined tax and NIC treatment of employees, self-employed and corporations is undesirable. First, it is potentially distortionary as it may lead to a choice of business form that is not the most appropriate and efficient in the particular circumstances.Footnote 57 Second, it penalises some activities that are unable to adopt the most advantageous form of organisation. Third, it creates incentives for taxpayers to convert earned income into unearned income where possible, such as by choosing to take remuneration in the form of dividends rather than highly-taxed salary. Lastly, the discrepancy in tax treatment may favour more economic activity being undertaken by small firms and less activity being undertaken by employees of larger firms.Footnote 58
The Mirrlees Review recommended aligning the personal and corporate tax rates to equalise the tax/NICs on income derived from employment, self-employment and running a small company.Footnote 59 The key ingredients of this rate alignment were (1) uniform application of NICs to income from employment and self-employment, and to distributed profits and capital gains, (2) lower personal tax rates for dividend income and capital gains on company shares to reflect corporate tax paid; and (3) abolition of the small profits corporation tax rate.Footnote 60 The OTS and Crawford & Freedman also have argued that such alignment could go some way towards reducing the present difficulties with the employee/self-employed classification and the application of IR35.Footnote 61
To take one possible example of how the Mirrlees Review alignment proposals might operate in practice,Footnote 62 assume a new 6% employer-like NIC charge on self-employed earnings and on dividends, a single corporate tax rate of 26% and an income tax charge on dividends of 12% for basic-rate payers and 35% on income taxed at the higher rate. By more closely aligning the combined income tax, corporation tax and NICs, the fiscal incentives to choose incorporation or self-employment over employment at an annual income/profits of £83,200 nearly disappear. Primarily this is due to the NIC charge on self-employed earnings and dividends. The benefits from husband and wife income-splitting through a company are not eliminated by the Mirrlees proposals, but they are drastically reduced—from nearly £20,000 p.a. under the present rules to just over £8,000 in this example. Additional measures, such as specific anti-avoidance rules or changes to the settlement provisions would be necessary to address fully the advantages from family income splitting, as the Mirrlees Review editors acknowledged.Footnote 63 Unlike neutral treatment of economic activity carried out in a variety of legal forms, however, it is not obvious that attempting to eliminate the possible benefits from family income-splitting completely is a goal fully worth pursing, for the reasons discussed above including the complexity and uncertainty for taxpayers that this would entail. As Tiley said in 2006, “the matter is finely balanced”.Footnote 64
IV. Conclusion
The use of private companies by BBC presenters, senior civil servants and others in order to minimise tax on their earnings is a perfectly rational and entirely predictable response to a tax regime that applies a much lower charge on income earned through companies compared to similar income earned in unincorporated businesses or by employees. While additional amendments to the IR35 rules and the settlement provisions have the potential to reduce to some degree the fiscal benefits from engaging in such arrangements, closer alignment of tax and NIC rates across these legal forms could go much further in enhancing the equity and neutrality of the tax system. Rate alignment could eliminate the current distortion in favour of companies and level the playing field between companies, unincorporated entities and employees engaged in similar activity, while at the same time making it much less attractive to use companies as family income-splitting devices. Reform along these lines invariably will cause political difficulties as it would require levying higher taxes and NICs on small businesses. In fact the Coalition Government has already publicly stated it will not seek to levy NICs on dividends or savings.Footnote 65 On the other hand, given the recent media attention and the state of the public finances, this may be the ideal time to pursue a more equitable and neutral tax regime through closer alignment of rates across legal forms.
