Restrictions on loss relief
Will HMRC's proposed restrictions on tax relief
damage small businesses?
The government's plans to restrict income tax relief has given rise to concern that small businesses could be unfairly affected by HMRC's campaign to crack down on aggressive tax avoidance. Foremost among the proposed measures, currently the subject of a consultation (closing date 5 October 2012) is a £50,000 cap on income tax relief, or 25 per cent of an individual's income, whichever is greater.
Small business expert, Robert Stone, a chartered accountant from Ilminster in Somerset, said: "Although this cap is really the government's way of targeting wealthy individuals who are seeking to exploit tax loopholes through various income tax relief schemes (such as the notorious K2 wealth management scheme used by comedian Jimmy Carr), it could also affect the SMEs (small/medium enterprises), who are the backbone of this country."
"The tax impact assessment section of the Treasury's consultation document Delivering a cap on income tax relief, acknowledges that 'The cap is likely to have some limited impacts on small businesses, as it will restrict relief for losses against other income of the same year'.
“For example if a small business makes a loss of £100,000 and the owner has other general income (such as bank interest, share dividends and rents) of £110,000, in the past the business loss could be set against the other income to reduce the owners total income to £10,000 for tax purposes. Under the proposed system only £50,000 could be offset immediately, leaving the owner with taxable general income of £60,000 in a year when he/she has suffered a massive business loss. The unused loss can be carried forward and used against future business profits, but this could take several years to use up, especially in the current poor trading climate, and could have a dramatic impact on cash flow”.
"In addition, the Treasury admits that delaying loss relief will reduce the net present value of investment projects and may therefore have an effect on investment decisions and start-ups."
The cap will only apply to reliefs, which are offset against general income. These will include:
- Trade Loss Relief against general income
- Early Trade Losses Relief
- Post-cessation Trade Relief
- Property Loss Relief against general income
- Post-cessation Property Relief
- Employment Loss Relief
- Former Employees Deduction for Liabilities
- Share Loss Relief
- Losses on Deeply Discounted Securities
- Qualifying Loan Interest
Five ways in which the proposed restrictions could affect businesses:
- Where you have significant losses in a current accounting period, which will end in the 2013/14 tax year, you may be thinking of selling an asset for a gain to off-set those losses. Such plans need to be reviewed as your total loss relief will be restricted in 2013/14.
- Partners who currently pay significant amounts of interest on their partnership loans may need to restructure those loans before 6 April 2013, to ensure their loan interest does not exceed the greater of £50,000 or 25 per cent of their income.
- If you are planning to invest in EIS shares or SEIS shares in the knowledge that if the enterprise doesn't work out, you will get income tax loss relief on the capital invested, you need to know that your loss relief may be restricted.
- Where you have already subscribed for shares in an unquoted trading company, which is sliding into insolvency, you may need to make a negligible value claim for the value of those shares, to ensure the loss falls in the tax year 2012/13 and is not restricted from 2013/14.
- If you are planning to set up a new business which is going to make significant losses in the first couple of years, you need to discuss with your accountant the structure of the proposed new businesses to ensure the losses are used as quickly as possible.
As a further deterrent against what it deems abusive tax evasion schemes, the government has issued a consultation on a General Anti-Abuse Rule (GAAR). According to David Gauke MP, Exchequer Secretary to the Treasure, the GAAR will: "Act as a further deterrent to those engaging in abusive schemes and improve our ability to secure payment of the right amount of tax."
For more detailed information and advice about the cap on income tax relief, please contact Robert Stone, Robert Stone & Co on 01460 55661 or email firstname.lastname@example.org.
Category: Company News