Capping tax reliefs – more information, but more questions

by Tax Faculty Team on 11.04.2012 04:44

A Government press release provides more details of the proposal


Budget 2012 contained an important announcement about tax reliefs. This is the proposal to put a cap on unlimited tax reliefs at £50,000 or 25% of income.


In the immediate post-Budget media frenzy about Granny tax and Pastygate, this announcement was somewhat overlooked by the media. But it could have far-reaching consequences, and the charity sector was quickly up in arms. Further media attention has been focused on it this week when Chancellor George Osborne was reported to be shocked by evidence that very wealthy individuals organise their finances to make big savings in income tax.


The Budget contained very little information about the proposal but more information was provided on 5 April 2012 in a joint HMRC/HM Treasury press release


However, for full details we must await the consultation document which will be published in the summer, with draft legislation later in the year.


The Government proposal

The cap on tax reliefs will take effect from 6 April 2013. It will apply specifically to income tax and to individuals.


It will apply to reliefs which are currently unlimited. The cap will be set at 25% of income or £50,000, whichever is greater.


The principal reliefs affected are loss reliefs that can be claimed against total income, qualifying loan interest relief and reliefs for charitable giving. A number of smaller reliefs which are currently uncapped will also be affected.


The following will not be affected: 

  • Reliefs for double taxation such as foreign and dividend tax credits and notional tax on life insurance gains.
  • Reliefs that are already capped such as pension tax relief, front-end Enterprise and Seed Enterprise Investment Scheme income tax relief, Venture Capital Trusts and the Cultural Gift Scheme.
  • Computational reliefs which determine only how income from a particular source is calculated.
  • The new business investment incentive for resident non-domiciled individuals (as this does not apply as a relief against total income but relieves income that would not otherwise be brought to the UK and so would not be taxable here anyway).
  • The tax reclaimed by charities under the Gift Aid scheme.

The Government says it remains “committed to the principle that people investing in businesses and donating to charity should benefit from tax reliefs”, but believes “it is not right that taxpayers with very high incomes should, year on year, pay little or no tax as a result of unlimited reliefs”. It is going to consult with the charitable sector to ensure that the change does not significantly impact on charities which depend on large donations.


Tax Faculty comments

We were surprised by this Budget announcement, on which there had been no prior consultation. It goes without saying that ICAEW is no supporter of tax evasion or avoidance, but we are concerned that this proposal may deny tax relief for quite genuine commercial or charitable transactions, and could indeed discourage such activities.


We will have to wait for the consultation document to see the full details of what is proposed, but the information available so far raises a number of questions about the practicalities of how the cap will work.


An obvious concern is what will happen to reliefs in excess of the cap. Can they be carried forward or are they lost? The recent press release does say that “other avenues of relief, such as carrying losses forwards or back against profits of the same trade are not affected”, but does not enlarge on exactly what this means.


How will different unlimited reliefs in the same year be treated? For example, what happens when the cap applies and a person has both gift aid payments and trading losses? Can he or she choose which is capped? And how will the interaction work if one or more of those reliefs is carried back?


The individual may choose to have relief for, say, losses over relief for charitable donations – what effect might this have on charitable giving generally?


The cap on relief for genuine business losses could cause problems in the still-sluggish economy and for risk-taking entrepreneurial businesses. The lack of current loss relief could cause cash flow problems, so that the business does not recover and even if the excess losses are carried forward, there will never be any relief.


Risk-taking entrepreneurial businesses and new business start-ups may also be affected by a cap on interest tax relief for the entrepreneurs who need to borrow to invest in the business.


When the consultation document comes out the Tax Faculty will consider the detail and will be keen to have members’ comments.