On 13 July 2012 HMRC published a consultation paper on the proposed cap on income tax relief – to come into force on 6 April 2013. The cap is aimed at income tax reliefs that are not otherwise limited, and does not include gifts to charities following “…extensive engagement with the charity sector”.
The cap would be set at the greater of £50,000 or 25% of an individual’s income. Income for the purposes of the cap will be net of pension contributions (which are already capped), but gross of any charitable donations.
The cap would apply principally to sideways loss relief for trades, share loss relief under s 131 ITA 2007, losses on deeply discounted securities, and qualifying loan interest.
Trading losses can usually be set off sideways in the year of the loss, or in the previous year for an ongoing trade, or in the previous three years in the opening years. This level of flexibility is not lost, but an individual cannot choose to restrict losses to claim less relief than the cap in order to use losses in another year. This is in accordance with the general principle that partial loss relief claims are not permitted. Carry forward of losses would not be subject to restriction.
Although there are existing limits on the amount that can be invested in EIS shares, a claim for losses on such shares against other income tax is not regarded as a relief that is currently capped. This means that if the loss exceeds the capped amount in the year of the loss and the previous year, any remaining loss would be carried forward to set off against capital gains.
It is relief for qualifying loan interest that may cause most concern for individuals because if relief is not available in the year in which the interest is paid relief will not be available by any other means. This may mean reorganising how businesses are financed, so that relief for loan interest can be treated as a trading deduction. For example, instead of borrowing and making a loan to a trading company, the company could borrow direct from the bank (no doubt with a personal guarantee) and claim relief in its corporation tax computations. This assumes, however, that the company has sufficient profits against which to offset the loan interest.
The purpose of this cap is to help the Government in “balancing the public finances”, and “to ensure that taxation is as fair as possible”. The stated intention is not to specifically target tax avoidance, although it is recognised that the scope for using avoidance schemes would be reduced.
It is welcome that the cap does not affect charitable giving, but it remains to be seen whether this cap will run counter to the Government’s aim of encouraging entrepreneurial activity.
If you would like further information in relation to the proposed cap on income tax relief please contact the TaxDesk on 0845 4900 509 and ask for Paul Howard