The organisation representing UK tax compliance specialists has warned that a proposed government cap on income tax reliefs will distort decisions on how businesses should be structured and lead to more decisions being taken for tax rather than commercial reasons.
The warning comes in a response to HMRC on the draft Finance Bill provisions on income tax relief capping from the Association of Taxation Technicians (ATT).
ATT President, Yvette Nunn explained:
“We are pleased that consultation has resulted in the exclusion of some situations from the capping provisions but the draft legislation is still flawed and risks damaging businesses as well as impacting unfairly on individuals. Two general examples illustrate our point.
“Existing legislation already denies sideways loss relief3 where the loss-making activity is not conducted on a commercial basis. This cap therefore means that the individual is not being allowed immediate relief for a commercial loss and will have to wait until this commercial business turns back into profit to get relief. It really is a “tails we lose; heads they delay any win we might get” situation.
“Capping relief on interest paid on borrowings used to fund a business will distort decisions about business borrowing and business structures. It could mean that tax factors are given more priority than commercial considerations. If that happens, the cap will deliver no additional tax; it will simply mean that most businesses adopt structures that keep them clear of the capping rules. Many businesses, whether newly started or long-established, need to borrow. So long as the borrowings are genuinely used to finance the business, tax relief should be available on that interest regardless of the precise business structure. The total loss of relief for interest paid in excess of the cap in a totally commercial situation could give rise to a serious financial problem for the business, possibly even resulting in the failure of the business.”
Yvette Nunn added:
“On a detailed point, we cannot see why the exemption for shares subscribed for under the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS) should not apply equally to the loss on any qualifying share subscription. EIS did not introduce Income Tax relief on subscriber share losses – it borrowed from a long-standing relief that was itself an incentive to entrepreneurs and their backers.
“Why should a subscriber whose qualifying investment of (say) £100,000 was made before the introduction of EIS be denied relief on part of their eventual loss? At the time of their subscription, they had a statute-based expectation of full Income Tax relief if they made a capital loss on the shares in just the same way as a later EIS investor. Capping their entitlement now is a bad example of retroactive legislation.”
Notes to Editors
- The proposed capping of certain Income Tax reliefs was announced at Budget 2012. The proposals were swiftly amended following objections to their application to donations to charities.
- Consultation in 2012 has resulted in some relatively minor exemptions but the proposals still mean that an individual will be unable to set more than the capped amount against their general income. This will affect diversified businesses: one example might be the farmer who tries to diversify into other trading activities and cannot set farming losses off in full against profits from his new activities or vice-versa.
- Among the situations caught by the relief are:
a. “Sideways” relief of a loss in a trade or profession against other income of the same year;
b. Carrying back of a such loss in relation to a new business against income of earlier years;
c. Interest paid on qualifying borrowings – such as those used to invest in a trading company;
d. Relief as if it was an income loss of a capital loss on a qualifying share subscription.
- The proposed cap is the higher of £50,000 and 25% of the individual’s income for the relevant year.