The Chartered Institute of Taxation (CIOT) fears that those in the professional services industry will be hit particularly hard.
In this year's Budget, the Government announced the introduction of a limit on currently uncapped income tax reliefs to have effect from April 2013. From next year anyone seeking to claim more than £50,000 of these reliefs in any one year will have a cap set at 25 per cent of their income. (That is, the cap will be set at the higher of £50,000 and 25 per cent of income.)
The CIOT set out its concerns 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.”
Among the types of cases affected by the cap could be a sole trader or partner that is retiring from the business where the final year loss including ‘overlap profits’ brought forward from previous years of UK double taxation may be lost.
Patrick Stevens said: “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.”
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Susie Hughes © Shout99 2012