Reliefs capped

Small businesses - and the modestly-rewarded people who run them - are set to be crippled by the introduction of draconian new limits on currently uncapped income tax reliefs.

That’s the stark warning from the Chartered Institute of Taxation (CIOT) which says the limit – which comes into play next April - will ensnare far more people than just the high earners the government hoped to target when it announced the measure at Budget 2012.

From next year, anyone seeking to claim more than £50,000 in these reliefs in any one year will have a cap set at 25% of their income. The CIOT fears many in the professional services industry will be hit especially hard.

In its response to the Government’s consultation on the proposal, CIOT president Patrick Stevens, said:

‘The chancellor is understandably keen to ensure that those on high incomes pay a fair amount of tax. However, the proposed cap will also affect many business scenarios that we don’t think the Government wanted to catch.’

‘These are where a person’s business interests are fragmented for commercial or regulatory purposes. Currently, these are effectively aggregated and the person is taxed on the net income from all activities. The cap will prevent this happening in many cases, taxing many in business on more than they earn.’

‘While initial media coverage of this proposal focused on the inclusion of tax relief on charitable donations in the cap – a decision that has since been reversed – the effects on individual business owners of the proposed cap have been largely missed.’

He highlighted a number of illustrative scenarios where the cap would have a detrimental tax impact.

These include a farmer who has diversified his business activities to remain self-sufficient and a professional services group partner who is required to take a share of worldwide losses and profits.

Other examples are a sole trader or partner retiring from their business where the final year loss, including ‘overlap profits’ brought forward from previous years of UK double taxation, may be lost, and arts and music industry partnerships, where partners in a new venture are frequently required to invest a minimum level of several hundred thousand pounds, for commercial purposes.

Stevens added:

‘In its current form, this measure will be seen by many as anti-business. Restricting the ability to offset genuine business losses and interest relief could suppress UK entrepreneurship. A taxpayer who is prepared to risk his or her life savings in an enterprise, or a series of enterprises in parallel, ought to be able to net off profits and losses and only pay tax on the net amount.’

‘Our key recommendation is that business profits and losses, including relief for interest on a loan to the business, should be able to be offset against each other before considering if the cap applies.’

More information is available from the CIOT.