It is understandable that the Government has a desire to prevent the exploitation of tax reliefs merely in order to obtain a tax deduction, but considering that there is already legislation to prevent tax avoidance using schemes and progress is being made towards introducing a General Anti Abuse Rule next year, there does not seem to be a convincing argument that these proposals are needed to counter avoidance schemes.
At the very least, the limits for calculating the cap should be increased considerably to the greater of £250,000 or 50% of an individual’s income. This would ensure that the cap was targeted only at those with considerably higher levels of income.
The concern is that these proposals simply seek to raise money through a further form of tax on business. For example, sideways relief for losses and relief for the types of loan interest mentioned, are only available in specific business related situations and the legislation restricts relief to commercial situations.
The real losers will be ordinary small and medium sized businesses, which is completely at odds with the Government’s growth agenda and could conflict directly with some (very welcome) measures to promote growth that the Government has already taken. It is hard believe that this is the Government’s intention. For small businesses, tax is an important element of cash flow. Many such businesses are currently on a knife edge, just coping with their level of borrowing and are likely to falter or even fail if interest rates rise or cash flow stalls.
These proposals are also targeted at people who have made genuine investments in business with a legitimate expectation of being taxed on the resulting income or profits and obtaining tax relief for losses.
Taxpayers who have previously entered into medium/long term borrowing arrangements, for example, to acquire interests in family companies or trading partnerships, will now face a restriction on the income tax relief they were entitled to at the time such agreements were entered into. Transitional provisions are needed to exempt loans obtained before this legislation is enacted.
Unincorporated businesses are already trading in accounting periods where loss relief will be restricted, that is accounting periods ending in 2013/14. These businesses have had no certainty over how they can use their losses and for that reason alone the cap should be postponed until 2014/15 at the earliest.
EIS reliefs are specifically excluded from these proposals because they are already capped under existing legislation. Accordingly, the proposal to further restrict the relief which can be claimed in the event of a capital loss arising on an EIS investment appears to be at odds both with these proposals, and with the Government’s stated objective to encourage investment in early-stage and growing businesses. The effect of this proposal will be to remove a measure of protection currently available to investors in early stage companies, which will inevitably increase the risks and make such investments less attractive.