Thursday, August 16, 2012 | Posted by: Francesca Lagerberg
Categories: Personal | Tags: Francesca Lagerberg, income tax, tax relief, Budget 2012, donations, budget2012, cap, income tax relief cap, income tax liability, tax losses, cap on reliefs, business losses, loss
The charitable sector has been successful in its campaign to keep unlimited tax relief for charitable giving. So, who will be affected by the proposed income tax relief cap? Following the release of the consultation document, it has become clear that the cap won’t just affect wealthy individuals but may be unfavourable for small-business owners, too.
Charity cap U-turn
The proposals for a new cap on income tax relief were announced at Budget 2012 and are expected to apply from next April. They were released without prior warning, or consultation, and caused significant controversy, particularly in relation to the potential impact on charitable donations. In the weeks following the Budget, many charities campaigned against the introduction of a cap on income tax relief for charitable giving, claiming it would discourage charitable donations substantially. Following significant media coverage the Government backed down and announced that the proposed cap would no longer apply to charitable giving.
Following a Freedom of Information Act request from the BBC, HM Treasury released the details of the returns that “shocked” George Osborne which were said to be the trigger for the income tax relief cap proposals. It is clear from the published examples that it was relief for charitable donations that was the main target of the proposed cap. However, the Government is pressing ahead with its plans to introduce the cap for all other currently uncapped reliefs, and a consultation document has now been released.
The consultation confirms that the cap will not apply to:
- Gift Aid
- Relief for gifts of land and shares
- Payroll giving
- Community investment tax relief.
Small businesses to feel the impact
So, with the charitable sector succeeding in its campaign to keep unlimited tax relief for charitable giving, who will be affected by the cap?
According to exchequer secretary to the Treasury David Gauke’s foreword to the consultation: “Wealthy individuals should not be able to reduce their income tax bills to zero, year after year by using these income tax reliefs to excess.” The Government’s target is clear. It believes that it is unfair for wealthy individuals are able to pay little or no income tax each year through the use of income tax reliefs. But I suspect that these wealthy individuals will not be the only ones affected.
The level of the cap will be set at £50,000 or 25% of an individual’s income, whichever is greater. The cap could, therefore, affect anyone with an income of more than £50,000. Indeed, the tax impact assessment, contained within the consultation, confirms that “the cap is likely to have some limited impacts on small businesses”.
Given the current state of the economy, this is not good news.
Business reliefs capped
The reliefs that the cap will apply to are listed within the consultation document. They include:
- Trade loss relief against general income
- Early trade losses relief
- Share loss relief
- Qualifying loan interest.
These reliefs are all well-established, and are used by many small-business owners and entrepreneurs each year.
Being able to set business losses against other income is one of the most useful tax reliefs available to a business owner. It keeps money in the hands of the business owner, who can then reinvest it in the business. This can be particularly valuable in the early years of a business when losses are often made. It can also soften the blow of any reductions in income or unexpected expenditure.
By way of a simple example, broadly speaking, under the current rules a business owner who has taxable income for the year of £100,000, but whose business has made a tax-adjusted loss of £100,000, can fully utilise the loss against other income, leaving no income chargeable to tax.
Under the proposed cap only £50,000 of the loss will be available to be offset against other income, leaving £50,000 of taxable income. The unused loss can be carried forward to use against future business profits, although it may be several years until the loss-making business is profitable, especially in current economic conditions.
The cash flow implications of this for the business owner, and therefore the business, are clear.
The Government has acknowledged that in order to encourage growth it needs to support small businesses, and measures (such as the new Seed Enterprise Investment Scheme and the National Loan Guarantee Scheme) have been introduced with this in mind.
However the cap on income tax relief as currently constituted seems to go against this. As the consultation continues, it is time to take stock and rethink how to truly deliver on this aim.
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