Tax risk and tax planning for family business owners

No-one is more aware than family businesses that reputations are built over years and destroyed over minutes. Recent tax legislation uses reputational damage as one of the penalties that can be imposed if you become non-compliant.

Family businesses are a significant driver of wealth in UK plc but in one area of productivity they cannot match the Government. Unfortunately for UK plc, the area in question is the ability to produce new tax legislation. Finance Acts 2016, 2017 and 2018 alone managed to produce about 1,000 finely printed pages of additional complexity to add to an already byzantine tax code.

The impact on family businesses is to create an ever-heavier compliance burden: how to treat family members who provide services; how to compute trading income; changing rules on pensions, entrepreneurs' relief, loan relationships, SDLT, the list goes on.

In all this complexity, the line between what is acceptable tax planning and unacceptable tax avoidance is becoming increasingly hazy. In 2013, a General Anti-Abuse Rule was introduced to catch unacceptable avoidance. In 2017, a new penalty regime was introduced to deal with "Defeated Tax Arrangements". The change in language from "anti-abuse" to "defeated tax arrangements" indicates, some would argue, a lowering of the bar, as to what is and is not acceptable tax planning.

Increasing legislative complexity makes it more difficult to get it right. Alongside that, there is new legislation which can result in draconian consequences for getting it wrong: financial, reputational and criminal.

This can raise particular issues for family businesses. Should one reward family members for their contribution by employment, by an agency arrangement, by awarding shares? The nature of the contribution and the circumstances of individual family members means the answer will vary. In some instances, a business structure will have been set up to achieve tax consequences but has the nature of the business changed over the years in a way which calls that original planning into question? Have there been legislative changes which impact on the structure's efficiency? Have the circumstances of family members changed? What is the nature of any new risks?

Crucially, tax planning for family businesses must involve real dialogue between the tax adviser and the stakeholders in the business. The adviser must understand the nature of the business and what the family members really want to achieve both for today and tomorrow. In turn, family members need to understand and have bought into what the planning entails.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, February 2019