Weekly Tax Update - Monday 16 July 2012

1. PRIVATE CLIENTS

1.1. Delivering a cap on income tax relief

At Budget 2012 the Government announced a limit on currently uncapped income tax reliefs which will have effect from April 2013. The cap will be set at £50,000 or 25 per cent of an individual's income, whichever is greater.

The Treasury has now issued a consultation document setting out the scope of the cap. This consultation invites comments on the implementation and delivery of the cap, including, in particular, responses on:

how an individual's income will be defined and calculated for the purposes of the cap; when the cap will apply; how reliefs will be ordered; and the operation of the cap through Income Tax Self-Assessment (ITSA). The Government stated in the Budget that the cap would not extend to those reliefs that are already limited. Specific caps have been put in place to reflect policy objectives, and the Government does not consider that these are open to excessive use. To further cap them would reduce the amount of support the tax system gives, for example, to pension savings. After extensive engagement with the charity sector following the Budget, the Chancellor has also decided to exclude charitable reliefs from the cap, to ensure that there is no impact on charitable donations.

The cap on reliefs will only apply to those reliefs that are used to reduce the amount of general income liable to tax. The cap will only apply to reliefs that are:

offset against general income (at step 2 of the income tax calculation and listed in s24 ITA 2007); and not currently capped. The reliefs affected by the cap will include, among others, loss reliefs that can be claimed sideways against general income, and qualifying loan interest relief.

Reliefs that do not meet both the criteria set out above will not be affected by the cap. The categories of relief that will therefore not be covered by the cap are:

Computational rules that affect the calculation of individual income streams. As such, they cannot be offset against general income. They include capital allowances, items with tax exempt status (for example statutory redundancy payments) and allowable expenses. These will not be affected by the cap. However, to the extent that computational reliefs, such as capital allowances, create or augment a loss that may be set against general income, that loss relief will be capped. Where rules exist allowing computational reliefs to be carried forward from one year to the next, these will remain. So for example, individuals will continue to be able to offset trade losses against income from the relevant trade in a later year. Structural credits (such as foreign tax credit and dividend tax credit) exist to prevent or mitigate the double taxation of certain forms of income that have already been taxed prior to the calculation of income tax. These will therefore not be subject to the cap. Relief obtained directly under the Enterprise Investment Scheme (EIS) is already capped and is therefore also excluded. It should however be noted that losses on shares purchased under such a scheme are considered as currently unlimited, and so will be included in the relief cap alongside non-EIS shares. Venture Capital Trust (VCT) and seed EIS investments are also already capped and therefore excluded. Similarly, the cap will not apply to Business Premises Renovation Allowances (BPRA), where the relief available is limited for each qualifying project. Any loss or part of a loss directly attributable to (or augmented by) BPRA claims will not be subject to the cap that will otherwise apply to trade loss or property loss reliefs. Other examples include relief for pension savings that have annual and lifetime limits. Charitable reliefs support donations to charity by providing tax relief on those donations. Despite what was said at the Budget the Government has excluded the following from the cap:

Gift Aid. Relief for gifts of land and shares. Payroll Giving. Community Investment Tax Relief. Reliefs subject to the cap

The following income tax reliefs will be capped to the extent that they can be relieved against general income: Trade Loss Relief against general income– available for losses made by an individual Early Trade Losses Relief – available to an individual in the first four years of the trade, profession or vocation. Post-cessation Trade Relief – available for qualifying payments or qualifying events within seven years of the permanent cessation of the trade. Property Loss Relief against general income– available for property business losses arising from capital allowances or agricultural expenses. Post-cessation Property Relief – available for qualifying payments or qualifying events within seven years of the permanent cessation of the UK property business. Employment Loss Relief – available in certain circumstances where losses or liabilities arise from employment. Former Employees Deduction for Liabilities– available for payments made by former employees for which they are entitled to claim a deduction from their general income in the year in which the payment is made. Share Loss Relief – available for what would otherwise be a capital loss on the disposal (or deemed disposal) of certain qualifying shares. Losses on Deeply Discounted Securities – available only for losses on gilt strips and on listed securities held since at least 26 March 2003. Qualifying Loan Interest – available for interest paid on certain loans. These include loans to buy an interest in certain types of company, or to buy an interest in a partnership, and loans taken out by personal representatives to pay inheritance tax. How the cap will be calculated

The cap will be set at the greater of £50,000 or 25 per cent of an individual's income.

The starting point for this calculation will be the same for all affected individuals: their total income liable to income tax. This figure will then be adjusted based on an individual's net pay arrangements (i.e. the arrangements they make for pension deductions and/or charitable donations), to create a level playing field between those whose deductions are made before they pay income tax, and those whose deductions are made after tax. The result – "adjusted total income" – will be the measure of income for the cap.

The principle is that individuals are treated equally by taking account of:

the different ways that people make tax-relievable pension and retirement annuity payments and charitable donations; the impact the above payments can have on the amount of their income for the purposes of income tax; and how they receive tax relief at their highest rate of tax on those payments. Following the consultation, draft legislation will be published later in the autumn.

www.hm-treasury.gov.uk/consult_income_tax_relief_cap.htm

1.2. Whether penalty should be suspended

The First Tier Tribunal has considered the case of Mr Philip Boughey. In his 2008/9 tax return Mr Boughey incorrectly claimed an exemption of £30,000 in respect of a redundancy payment which had already been taken into account via the PAYE system. As a result tax of £12,000 was underpaid and HMRC levied a penalty of £1,800.

Mr Boughey had appealed against the penalty and asked for it to be suspended, pursuant to the provisions contained in paragraphs 14 to 17, schedule 24 of the Finance Act 2007.

HMRC had written to Mr Boughey on 22 June 2011 as follows:

"The reason I have been unable to agree your request for suspension is as follows: to enable a penalty to be suspended, I have to ensure...