The government has published a consultation document following Budget proposals to introduce a limit on currently uncapped income tax reliefs with effect from April 2013. The stated intention of the proposals is to prevent wealthy individuals from reducing ‘their income tax bills to zero, year after year by using these income tax reliefs to excess’.
The proposals would limit a range of income tax reliefs to £50,000 or 25% of general income, whichever is the greater. As has previously been announced, tax relief for charitable donations has been excluded from the proposed cap.
It is proposed that the following reliefs are affected:
- trade loss relief against general income;
- early trade losses relief;
- post-cessation trade relief;
- property loss relief against general income;
- post-cessation property relief;
- employment loss relief;
- former employees deduction for liabilities;
- share loss relief;
- losses on deeply discounted securities; and
- qualifying loan interest.
Excluded from the cap are:
- gift aid;
- relief for gifts of land and shares;
- payroll giving; and
- community investment tax relief.
Concerns
Writing in Tax Journal (dated 20 July 2012), Paul Aplin, Tax Partner at AC Mole & Sons, questioned whether the proposed measures would deliver the stated policy objective without creating unintended damage to genuine businesses. ‘More effective targeting could be achieved by increasing the £50,000 cap or by ... only applying the cap on serial users of the reliefs, not those who use them for genuine business reasons only occasionally’, he wrote. ‘Why not allow unrestricted relief for say two or three successive years and then apply a cap?’
Aplin also suggested that the proposals could adversely affect businesses seeking venture capital, and were at odds with some of the government's other recent tax initiatives. ‘The government has made some welcome moves to stimulate the venture capital market by considerably enhancing the enterprise investment scheme [EIS] and by introducing SIES [the new seed enterprise investment scheme] but is now intending to cap the availability of relief for losses on such shares against general income’, he wrote. ‘The cap seems to run directly to counter to the policy intention underlying the enhancements to the EIS.’
Lisa Macpherson, National Director of Tax at PKF, also suggested that the proposals were bad news for entrepreneurs. ‘This is an incredibly badly conceived idea. It has the potential to cause real pain for entrepreneurs as, in future, they may get a smaller refund on their losses or have to wait much longer to get tax relief’, she commented. 'If the government really must press ahead with these proposals, it must at least consider raising the cap to somewhere north of £100,000 per annum so that fewer entrepreneurs are adversely affected by the proposals.’
Similar concerns were expressed by Katharine Arthur, Tax Partner at MHA MacIntyre Hudson. ‘The Treasury states that these measures are not designed to specifically target tax avoidance, but to reduce the scope for those who do wish to exploit income tax reliefs for avoidance purposes. This sweeping approach means that that those running genuine loss making businesses may be worse off, not just those investing in perceived avoidance schemes. Is this a good incentive for individuals to set up businesses in the current economic climate?'
The consultation document Delivering a cap on income tax relief: a technical consultation is available via www.lexisurl.com/VpoKF. Comments are invited by 5 October 2012.
