CIOT: Tax reliefs cap will hit business owners with modest incomes

Tax experts are warning that the Government’s proposed cap on income tax reliefs1 will not just affect high earners. As currently framed it will hit people in business with modest incomes, leading to them being taxed on more income than they actually receive. It is feared that those in the professional services industry will be hit particularly hard.

The Chartered Institute of Taxation (CIOT) sets out its concerns in its response to the Government’s consultation on the proposal.

Commenting, 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.”

The types of cases affected by the cap include:

A farmer who has diversified his farm business activities to remain self-sufficient;
A partner in a professional services group of firms who is required on a global basis to take a share of worldwide losses and profits;
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;
Arts and music industry partnerships – often partners in a new venture are required to invest a minimum level of, say, £200,000 for commercial reasons.

Illustrations of the first two of these scenarios are included in the notes below.

Patrick Stevens  added:

“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.”

The CIOT’s response, including further recommendations, can be read at:

Notes to editors

1.       At Budget 2012 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 Government’s consultation can be read at:

2.       Two scenarios to illustrate how particular groups could be affected by the cap:


Tables available on request 

So the partner is taxed on £25,000 more income than she has received

3.       The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives  can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries.  The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 16,500 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.


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George Crozier
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