"Pushing the Rules" regarding Income Splitting

ademoore

How far do you allow income splitting before you feel you need to walk away from the client?
Have got a potential client, and still considering whether to take him on or not, but he has expressed explicitly in an email that he wants to push the laws as far as possilbe to save himself tax! On the one hand, no one wants to pay any more tax than the next person, and that is where the accountants come in, on the other hand, is it worth having a client who is always pressurising in areas that you are know are either grey, or just shouldnt happen.
For instance, he is going limited and wants to give wife anything he earns over 35k (expecting income of 60k), in order to stay out of higher rate, as wife on the lower tax rate and therefore spread that income to her lower band. She would be shareholder, but doing next to nothing with regards the business.
I have advised against this 'sharing' but looking around the internet on income splitting, I'm not 100% clear on this area!
Any thoughts?

Monsoon

As i understand it, income splitting is still allowed (or rather, HMRC don't have anything to really challenge it with yet). So what he is proposing is legal but arguably risky.

I think you need to differentiate between dodgy I.e. Pushing the rules further than they allow, and happy to take risks, I.e. Putting things through that may be grey or frowned upon but technically legal and might open him up to possibly expensive investigations if challenged.

In a way, tax avoidance is a bit like investing - there are safe ways that won't save you much tax and more risky ways that come with higher rewards.

Last I heard, income splitting as above is still feasible though if anyone has read anything to the contrary (in terms of actual case law as opposed to someone opinion) it would be very helpful.

Phillip

I have probably missed the point but as they are changing to a Ltd co. As his wife is going to be a shareholder couldn't they declare dividends.

Would this then avoid the pay and little/no work problem?

Monsoon

Phillip wrote: »

I have probably missed the point but as they are changing to a Ltd co. As his wife is going to be a shareholder couldn't they declare dividends.

Would this then avoid the pay and little/no work problem?

Yes this is the point, but there are still grumblings in varying degrees about making the wife a shareholder and getting divis if she is not involved, i.e. Blatant income splitting to avoid higher rate tax on the husband. As per my answer above, for those who don't mind a potential debate about it, I believe it is still a legitimate strategy.

ademoore

Yes, they are proposing to do it through dividends!

burg

I'm with Jenni.

I know of no case law as yet that will stop this but am fully aware that HMRC do not like it and advise clients of the risk accordingly.

If they are fully informed about the benefits v risks then they can make the decision accordingly being aware of the potential costs of defending their decision should and investigation arise surrounding this.

deanshepherd

Standard tax planning. No problem provided set up correctly.