Opinion Former Article

CIOT: Government to tax people on more income than they receive

A government proposal to cap the amount of income tax relief people can receive will result in some people being taxed on more income than they actually receive, the Chartered Institute of Taxation (CIOT) is warning. Many of these people will be on modest incomes.

The CIOT sets out its concerns in response to consultation on draft legislation proposed for this year’s Finance Bill. In its submission1 the Institute calls on the Government to change the proposal so as to allow individuals to net off business profits from one or more business entities against losses and qualifying loan interest from other genuine business entities.

CIOT President Patrick Stevens explained:

“The Government is understandably keen to ensure that those on high incomes pay a fair amount of tax. However, the proposed cap will also affect many situations that we don’t think the Government intended it to.2 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.

“This proposal appears hasty and ill thought through. In the interests of fairness the Government should reconsider it urgently. As a minimum, individuals should be able to net off business profits from one or more business entities against losses and qualifying loan interest arising from other business entities.”

The CIOT is also questioning the Government’s claim that the measure will not have a significant effect on the UK business climate and economy. The Institute’s submission states:

“We think that the restriction on trade loss reliefs will be detrimental to the UK economy as the dynamics will have changed, making all business profits taxable but only some business losses relievable in year. It makes the UK a more aggressive place to do business and risks portraying the UK as a jurisdiction where significant changes to tax policy can be made with little or no real consultation or justification, which is a damaging reputation for any country to acquire in a global economy. Entrepreneurs will become less likely to take a risk and set-up new business activities here because, if the business fails, any losses would be of limited value or translated into tax nothings.”

Notes to editors


1.       The CIOT’s submission to the Government’s consultation on draft Finance Bill 2013 legislation on the limit on income tax reliefs can be read at: http://www.tax.org.uk/Resources/CIOT/Documents/2013/02/130207_FB13_Limit_ITreliefs_CIOT.pdf

The Government’s draft clauses, Tax Information and Impact Note and responses can be read at: http://www.tax.org.uk/Resources/CIOT/Documents/2013/02/121211%20FB13%20Limit%20on%20IT%20reliefs%20-%20package.pdf

2.       Some of the scenarios which will be affected by the cap include:
a.       A farmer who has diversified his farm business activities to remain self-sufficient (see worked example below);
b.      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 (see worked example below);
c.       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;

Worked example for scenario (a) above

Farmer caught by the cap

Before the cap introduced
After the cap introduced

£
£
£
£
Share of loss from farm partnership with son (loss due to poor yield and investment in replacement tractor)
(70,000)

(70,000)

Share of profit from farm wholesale shop and holiday cottages

80,000

80,000
Loss offset before cap
70,000
(70,000)


Loss offset after cap – max £50k or (25% of £80k)


50,000
(50,000)
Loss carried forward to offset against same source in future
Nil

(20,000)

Net income for tax before cap/after cap

£10,000

£30,000
So the farmer is taxed on £20,000 more income than he has received

Worked example for scenario (b) above

Professional services partner caught by the cap

Before the cap introduced
After the cap introduced

£
£
£
£
Profit from Partnership A

120,000

120,000
Loss from Partnership B

(75,000)

(75,000)
Agreed net share of profits from related partnerships – ie amount available to partner:


45,000


45,000
Implication of cap:




Profit from Partnership A

120,000

120,000
Loss from Partnership B
(75,000)

(75,000)

Loss offset before cap
75,000
(75,000)


Loss offset after cap – max £50k (or 25% of £120k)


50,000
(50,000)
Loss carried forward to offset against same source in future
Nil

(25,000)

Net income for tax before cap/after cap

£45,000

£70,000
So the partner is taxed on £25,000 more income than she has received

3.       The Chartered Institute of Taxation


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.

- ENDS -

George Crozier
External Relations Manager

D: +44 (0)20 7340 0569
M: +44 (0)7740 477374

The Chartered Institute of Taxation
Registered charity number 1037771
www.tax.org.uk

The Association of Taxation Technicians
Registered charity number 803480
Registered company number 2418331
VAT Registration Number 497 5390 90
www.att.org.uk

Low Incomes Tax Reform Group - an initiative of the Chartered Institute of Taxation
www.litrg.org.uk

1st Floor, Artillery House, 11-19 Artillery Row, London SW1P 1RT

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