Income tax – cap on unlimited reliefs
Standard Note:
SN6303
Last updated:
25 October 2013
Author:
Antony Seely
Business & Transport Section
In Budget 2012 the Government announced that from April 2013 it would introduce a cap on
certain unlimited income tax reliefs. For someone seeking to claim more than £50,000 of
relief, a cap would be set on the amount given, set at 25% of the claimant’s income or
£50,000, whichever was greater. Many charities raised concerns that this would undermine
the incentives for those on higher incomes to make charitable donations, even though the
Government had stated in the Budget report that it would “explore with philanthropists ways
to ensure this new limit of uncapped reliefs will not impact significantly on charities that
depend on large donations.” 1
Initially the Government underlined that over the summer it would consult on how the
proposed cap on reliefs would work in practice, 2 though some weeks later Ministers made it
clear that tax relief on charitable donations would be excluded from the cap. 3 In July 2012 a
formal consultation on the cap was launched; responses were invited by 5 October. 4 In the
Autumn Statement in December 2012 the Government confirmed that it would proceed with
this reform, 5 and provisions to this effect are included in the Finance Act 2013. 6
Contents
1
Introduction – the question of tax avoidance
2
2
Budget 2012
7
3
Reactions from the charitable sector
10
4
Decision to remove charitable reliefs from the cap
14
5
Recent developments
19
1
2
3
4
5
6
Budget 2012 HC 1853, March 2012 para 2.40
HM Treasury/HM Revenue & Customs, Cap on unlimited income tax reliefs, 5 April 2012
See, for example, HC Deb 12 June 2012 cc397-8W
HC Deb 13 July 70WS; HMT/HMRC, Delivering a cap on income tax relief: a technical consultation, July 2012.
The document also underlined that charitable reliefs would be excluded from the cap (para 2.13).
Cm 8480 December 2012 para 2.51; Budget 2013, HC 1033, March 2013 para 2.36
specifically s16 & schedule 3 of the Act. These provisions were agreed, without amendment, when debated by
the Committee of the Whole House (HC Deb 18 April 2013 cc506-540).
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1
Introduction – the question of tax avoidance
In June 2010 the Coalition Government published a consultation document on its approach
to making tax law, in which it stated that it would “take a more strategic approach to the risk
of avoidance to prevent increasing complexity and reduce the need for frequent legislative
change”; this would include action to “review areas of the tax system in which repeated
changes have been necessary to close loopholes and seek to strengthen the legislative
framework.” 7 In general respondents welcomed this statement of intentions, 8 and details of
two reviews of certain ‘high risk’ areas were published alongside the 2011 Budget:
Programme of reviews of high risk areas
2.8 This Budget announces the first reviews in the programme of work to strengthen
the legislative framework in areas of the tax code that have repeatedly been subject to
avoidance attack. These will comprise complete reviews which will draw on
consultation with external interested parties to shape proposals for improving strategic
defences in those areas. There will be a rolling programme of work, identifying the
areas of greatest risk where policy reform is not already providing the opportunity for
review.
2.9 The first two areas to be considered are:
Income tax losses
2.10 Reliefs for income tax losses, particularly where losses can be used to reduce tax
due on other income of the same or a previous year, have frequently been exploited as
a mechanism for tax avoidance. The legislation for the reliefs has frequently been
changed to close off avoidance opportunities, but schemes exploiting these reliefs
continue to be marketed and used. The review will examine how the underlying policy
objectives for the relief can be maintained whilst ensuring that it is effectively targeted
on those who were meant to benefit from it.
Unauthorised Unit Trusts
2.11 The legislation governing Unauthorised Unit Trusts is complex and such trusts are
used by companies to create tax advantages. The review of the legislation will aim to
ensure that commercial use of these structures is not disadvantaged, whilst minimising
the scope to use them for avoidance. It will also cover the mechanics of the legislation
which currently imposes burdens on both commercial users of Unauthorised Unit
Trusts and HMRC. 9
In its report on the Finance Bill 2011, the House of Lords Economic Affairs Committee looked
at the Government’s strategy, and commented briefly on this programme of reviews:
Anti-Avoidance: The Government's Strategy
136. The Government's anti-avoidance strategy and the focusing on the three
elements set out earlier met with wide-spread approval from our private sector
witnesses. The Chartered Institute of Taxation (CIOT) thought that "the idea of a
strategic approach to tackling avoidance is sensible and in many ways much needed."
They continued "We are pleased to note that the new Protocol on unscheduled
announcement of changes to tax law explicitly recognises that retrospective changes
to tax legislation will be wholly exceptional … It is good to see that the Forum for Tax
7
8
9
HM Treasury, Tax policy making: a new approach, June 2010 para 2.15
HM Treasury, The new approach to tax policy making: a response to the consultation, December 2010 - see in
particular para 2.31
HC 836 March 2011 para 1.142; HM Treasury, Tackling tax avoidance, March 2011 p10
2
Professionals will be monitoring the operation of the Protocol and recommending
changes where appropriate" [Written evidence to the Committee (WE)].
137. The Institute of Directors (IoD) thought that although the "detailed articulation of
the strategy may be new, we would be surprised and concerned if more than a small
proportion of the practices that it mentions were new."[WE] They agreed with taking
"away the cash-flow advantage of using high-risk avoidance schemes that fail."[WE]
The CBI echoed this "We support the Government's adoption of a more strategic
approach to tax avoidance."[WE] The Institute of Chartered Accountants (ICAEW)
thought that "Tackling Tax Avoidance makes a number of sensible recommendations.
We have welcomed previously the new Protocol on unscheduled announcement of
changes to tax law which reiterates the fundamental principle that any tax changes
should be made prospectively and not retrospectively."[WE]
138. Mr Alex Jackman of the Forum of Private Business (FPB) was positive "I
appreciate the Government's need to crack down on tax avoidance." But he had a
concern "We do not want to see small business unfairly targeted. The government has
given something like £900 million to HMRC to tackle tax avoidance and, while there
are a few big wins out there, I think the view might be taken by HMRC that there are a
few more easy wins at the lower end of the business spectrum. That is something we
would be seeking to avoid."[Q231]
139. On the rolling programme of reviews of high-risk areas of the tax code, most of
our private sector witnesses were content with HMRC having chosen income tax
losses and unauthorised unit trusts as the first two areas to be considered. Only
Mr Murphy 10 thought that these areas "seem to be relatively minor compared to major
issues such as profit shifting, the use of tax havens, the abuse of the domicile rule, the
residence rules and what they are giving rise to."[Q90]
140. We welcome the introduction of the strategic approach to anti-avoidance
set out in Tackling Tax Avoidance. If the measures set out in the document are
pursued vigorously, it should improve the tackling of avoidance and reduce the
loss of tax therefrom. 11
In this context it may be helpful to say a little about the scale of tax avoidance, and its cost to
the Exchequer. In recent years HM Revenue & Customs has produced annual estimates of
the tax gap - the difference between tax that is actually collected and the tax that is
‘theoretically due’. As the department explain:
The theoretical tax liability represents the tax that would be paid if all individuals and
companies complied with both the letter of the law and HMRC’s interpretation of the
intention of Parliament in setting law (referred to as the spirit of the law) ... An
equivalent way of defining the tax gap is the tax that is lost through non-payment, use
of avoidance schemes, interpretation of tax effect of complex transactions, error,
failure to take reasonable care, evasion, the hidden economy and organised criminal
attack. 12
In September 2011 the department published updated figures, which put the gap at around
£35 billion for 2009/10. In its report the department also give a breakdown of the gap by
reference to the type of behaviour - though as they observe, the figures involve “some
judgement and can only be used to give a broad indication of the behaviours driving the tax
gap”; this suggests that the annual cost of tax avoidance is in the region of £5 billion: 13
10
11
12
13
Richard Murphy, Tax Research LLP
Select Committee on Economic Affairs, The Finance Bill 2011, 17 June 2011 HL Paper 158 2010-12 pp32-3
Measuring Tax Gaps 2011, 21 September 2011 p5
Measuring Tax Gaps 2011 pp10-11. In October 2013 HMRC updated these estimates, putting the tax gap in
2011/12 at £35bn, and the cost of avoidance at £4bn (Measuring Tax Gaps 2013, October 2013 p6,p11).
3
It is important to note that there has been some debate over the department’s estimates of
the tax gap, in response to competing estimates calculated by the commentator Richard
Murphy and published by the Tax Justice Campaign, which put the ‘tax gap’ in the region of
£70-£120 billion. 14 In a debate on tax avoidance in June 2010, the Exchequer Secretary,
David Gauke, acknowledged this work, but argued that it was ‘deeply and systematically
flawed’; one of these flaws related to the estimate put to the size of tax avoidance:
The final and most significant point concerns tax loss due to tax avoidance, which Tax
Research estimates at £25 billion. That estimate includes the use of legitimate reliefs
promoted by the Government to encourage certain activities, such as capital
allowances to encourage investment and research and development tax credits to
encourage innovation. Tax avoidance is generally regarded as the use of legal
structures and allowances to reduce tax bills in manners not intended by Parliament
when enacting the legislation. It is simply nonsense to categorise as tax avoidance the
use of allowances for purposes intended by Parliament … Furthermore, the Tax
Research estimate does not provide HMRC with any credit for the significant amount
of tax that it recovers by challenging avoidance schemes. The figure of £25 billion
therefore seems somewhat wide of the mark. 15
In a report on the department’s administration published last summer, the Treasury
Committee noted Tax Justice’s opinion that HMRC’s numbers were much too low, as well as
the view that the department’s estimates were far too high: “Andy Wells, a tax practitioner,
argued HMRC's estimate is inflated through the inclusion of legitimate legal disagreements
about the amount of tax to be paid.” 16 The Committee did not take a view on the figure itself,
though in a report on HMRC’s performance in ensuring tax compliance, published in March
14
15
16
For details see Mr Murphy’s paper, Tax Justice and Jobs: The business case for investing in staff at HM
Revenue & Customs, March 2010. Mr Murphy’s estimates have been quoted by commentators, such as Polly
Toynbee in the Guardian (“On charity George Osborne must stand up to the self-interested super-rich”, 16
April 2012) and editorials (“Tax: share the burden fairly or anger will grow”, Observer, 15 April 2012).
HC Deb 16 June 2010 cc 190-1WH. HMRC have published a detailed critique of Mr Murphy’s methodology in
response to concerns raised by the Treasury Committee; for details see, Treasury Committee, First special
report, 18 May 2012 HC 124 2012-13 pp15-18.
Sixteenth report : Administration and effectiveness of HM Revenue and Customs, 30 July 2011 HC 731
2010-12 para 156-7, Ev w43-w44
4
2012, it argued that estimates of the annual cost of evasion and avoidance should not be
combined in this manner:
11. HMRC’s calculation of the tax gap includes the tax it judges has been lost owing
to a number of different behaviours. These are: error, criminal attacks, evasion,
operating in the hidden economy, avoidance, legal interpretation, non-payment, and
failure to take reasonable care.
12. It is unhelpful to aggregate these different behaviours. They lie on a broad
spectrum from criminal activity to innocent difference in legal interpretation.
Combining them in a single figure implies they are of equal gravity and does not
acknowledge that the action needed to address these different behaviours varies with
the behaviour. A large loss of tax arising from the hidden economy requires a quite
different kind of intervention to a difference in opinion between HMRC and a taxpayer
on the tax due under an ambiguous law [See Q 114 (Chas Roy-Chowdhury)]. Judith
Freedman, Professor of Taxation Law, University of Oxford, questioned including any
behaviour where HMRC felt the taxpayer had not adhered to the “spirit of the law”
(see paragraph 6) [Q 72] …
17. We recognise that it is useful for HMRC’s employees to have some idea of the
difference between what HMRC should be collecting and what is collected, particularly
in the case of criminal activity. However, in other areas it would be more useful for it to
identify ambiguities in tax law rather than employ resources in calculating how much
tax would be collected if everyone shared its interpretation of the law. Separate
reports on how much tax was lost through criminal activity and areas where HMRC
had encountered different interpretations of tax law would be a better use of
resources. 17
In turn the department have given a robust defence of why they have taken this approach to
quantifying the tax gap:
HMRC believes the aggregate tax gap analysis is a valuable tool in prioritising
resources, as the Committee recommends, and agrees that the focus of work on tax
gaps needs to be proportionate and help the best use of the resources available.
HMRC does identify areas where there are different interpretations of tax law.
Quantifying the scale of these issues helps set priorities for policy development and
resource deployment. This allows the department to compare these priorities against
tax losses resulting from other types of behaviour.
There have been recommendations from both the Public Accounts Committee and the
National Audit Office 18 to develop and use tax gap estimates in this way, and to
publish the figures. In the interest of clarity HMRC thinks it makes sense to describe
all of our tax gap estimates in one document so that a reader can understand more
easily how the figures are calculated and the methodological issues which underpin
them. 19
17
18
19
Twenty-ninth Report - Closing the Tax Gap: HMRC’s record at ensuring tax compliance, 9 March 2012 HC
1371 2010-12 pp5-6
Following the NAO 2003 report ‘Tackling Fraud against the Inland Revenue’ PAC recommended ‘The revenue
should focus their work on making a reasonable estimate of the tax gap so they can judge the effort needed
for a given reduction in losses’. Following the NAO 2007 report ‘ Management of Large Business Corporation
Tax’ PAC recommended ‘The department does not have a robust measurement of the corporation tax gap… it
should develop such a measure and publish the result, with separate estimates for large businesses and small
and medium sized businesses.’
First special report, 18 May 2012 HC 124 2012-13 p2. The report includes a detailed submission from HMRC
on its approach to measuring the gap and questions over its size (Appendix 2 to the report, pp11-18).
5
Consultation papers on both income tax losses and unauthorised unit trusts were published
in summer 2011; 20 in the former case, the department asked for views on approaches that
could be taken to limit the scope of ‘sideways loss relief’ – including the option of a cap to the
amount that this relief could be used to offset tax on other income. The paper gives a short
explanation of how this relief operates:
2.1 A person who makes a loss carrying on a trade, profession or vocation (“a trade
loss”) may make a claim for the trade loss to be deducted in computing their general
income of the same tax year, the previous year, or both years (“trade loss relief”). A
claim may also be made to treat any unused part of the trade loss as an allowable
loss for capital gains tax purposes. Where the trade, profession or vocation is first
carried on by an individual there is an alternative relief for a loss made in any of the
first four years of the trade, profession or vocation. This alternative relief enables the
individual to make a claim for the trade loss to be deducted in computing their general
income of the three tax years before the year of the loss (“early trade losses relief”).
These reliefs are commonly known as “sideways loss relief” …
Sideways loss relief
2.5 Trade loss relief enables a person making a trade loss to claim for the loss to be
set off against their general income.
2.6 Early trade losses relief is available to individuals who incur losses in the first four
years of a trade, profession or vocation. This relief is intended to help start-up
businesses by providing additional cash by way of tax repayments during the early
years of business when losses are more likely to arise.
2.7 Sideways loss relief is intended for income tax payers who genuinely carry on a
trade, profession or vocation with a view to a profit but who suffer a true economic
loss from the carrying on of that trade, profession or vocation. It is not the policy
intention that a taxpayer should be able to effectively transfer that loss to another
person.
2.8 The availability of sideways loss relief for deduction against general income or
capital gains has led to it being regularly targeted by persons seeking to abuse the
intention of the reliefs for tax avoidance purposes. The level of attempted tax
avoidance has resulted in the introduction of a significant number of restrictions both
historically and in recent years. 21
It went on to describe a number of options for limiting its use for avoidance purposes,
including a £25,000 cap:
[This option] would limit the amount of loss relief against general income or capital
gains in any tax year to a maximum of £25,000 loss relief per person. This amount is
the level of the cap that currently applies to non-active traders and limited partners
and would have the advantage of making the tax avoidance uneconomic while
preserving relief for the vast majority of genuine loss makers. The cap would not
prevent a loss being carried forward against profits of the same trade, profession or
vocation or property business. There is a possibility that in circumstances where
businesses cease some losses might never be relieved. However, the cap could help
target the relief more effectively to businesses with viable business plans. 22
20
21
22
HC Deb 28 June 2011 c43WS
High risk areas of the tax code: Relief for income tax losses, June 2011 pp7-8. The paper goes on to give
details on certain restrictions that apply to sideways loss relief, including a purpose test: that is, a general antiavoidance rule to obstruct schemes where the main purpose is to generate tax savings through this relief.
op.cit. pp16-17
6
2
Budget 2012
In the weeks running up to the Budget there was some speculation that the Government
were considering some form of charge on those very wealthy individuals who, by means of
tax planning, were paying very little tax in practice. In an interview with the Daily Telegraph
on 9 March, the Deputy Prime Minister, Nick Clegg, argued, “if you’re earning millions per
year, if you’re able to pay an army of lawyers and accountants to basically pick and choose
what tax you are paying, if you are paying as low as 25, 20 per cent or even less in tax, there
should be a minimum fair share that you should pay to society.” 23
In his Budget speech on 21 March 2012 the Chancellor George Osborne announced several
measures to tackle aggressive tax avoidance, including provision to “deal with the unlimited
use of income tax reliefs”:
It is also right that we have tax reliefs that promote investment, support charitable
giving and reflect genuine business loss. But it cannot be right that some people make
unlimited use of these reliefs year after year. Everyone in this country, and particularly
those with the highest incomes, should contribute a fair share to the Exchequer. Some
reliefs, such as the enterprise investment scheme and pensions relief, are already
capped, and I do not intend to make any significant changes to pensions relief in this
Budget. But, to make sure that those on the highest income contribute a fair share, I
am introducing a new cap on those reliefs that are currently uncapped. 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% of their income. We have capped benefits. Now it is right to cap
tax reliefs too. 24
The Budget report gave a little more detail, confirming that the Government would introduce
legislation to this effect in 2013, after consultation:
2.40 Cap on unlimited reliefs – The Government will, from 6 April 2013, introduce a
new cap on income tax reliefs to ensure that those on higher incomes cannot use
income tax reliefs excessively. For anyone seeking to claim more than £50,000 of
relief, a cap will be set at 25 per cent of income (or £50,000, whichever is greater).
The Government will explore with philanthropists ways to ensure this new limit of
uncapped reliefs will not impact significantly on charities that depend on large
donations. (Finance Bill 2013). 25
The deadline for tax payments under self-assessment is 31 January in the year after the
relevant tax year – so the Budget report gave projected receipts from the change as being
negligible in 2013/14 rising to £450m in 2014/15. 26 The forecast took account of the
behavioural response that the department expected from this reform – as explained in the
Treasury’s Budget Costings:
Cap on unlimited tax relief
The tax base : The tax base is estimated using data on reliefs from self assessment (SA) tax
returns for 2008-09. These are projected forward in line with the OBR’s forecast for earnings growth.
23
24
25
26
“Nick Clegg goes after the ultra-rich”, Daily Telegraph, 9 March 2012. Further to this many papers reported
that the Treasury were not considering proposals for a minimum tax rate, or ‘tycoon tax’; for example, “Clegg
rebuffed over ‘tycoon tax’ plan”, Financial Times, 12 March 2012
HC Deb 21 March 2012 cc804-5
HC 1853, March 2012 p59
Tax liabilities for these years – as opposed to tax yield on a National Accounts basis – are estimated to be
£350m in 2013/14 & £270m in 2014/15 (HC 1853 March 2012 : Table 2.1 – item 4, footnote 2).
7
Static costing : The static yield is generated from individuals claiming income tax reliefs in excess
of the cap. It is estimated by multiplying the restricted reliefs by the income tax rate.
Exchequer impact (£ million)
2012/13
2013/14
2014/15
2015/16
2016/17
0
0
+870
+680
+720
Post-behavioural costing
The costing makes allowance for a range of behavioural responses to the measure:
• Loss relief: some, but not all, losses will be relieved in alternative ways, for example through
using carry-forward loss reliefs.
• Qualifying loan interest: there will be some relief shifting as interest payable is restructured.
• Gift Aid and Charitable gifts of land and shares: There will be some scope to maintain existing
relief by smoothing the level of donations across years. A small proportion of these reliefs
result from avoidance activity; an adjustment is made to allow for some of this avoidance
activity being diverted to other routes.
1
Exchequer impact (£ million)
2012/13
2013/14
2014/15
2015/16
2016/17
0
neg.
+490
+240
+300
1
The effect on tax liabilities underlying the exchequer receipts is £0 in 2012/13, £350m in 2013/14, £270m in 2014/15, £290m
in 2015/16 and £310m in 2016/17. There is a lag between the tax liability arising and the tax revenue being collected via self
assessment.
Some forestalling behaviour has been anticipated. Given the interactions between this measure and
the costing of the reduction of the additional rate of income tax to 45 per cent, these effects have been
captured in that costing. 27
A few days after the Budget the Chancellor gave an interview to the DailyTelegraph, in which
he shed some light on his decision to cap reliefs:
The Chancellor personally studied the “anonymised” copies of the tax returns
submitted by some of the country’s wealthiest citizens which showed some people are
able to avoid paying income tax entirely. The analysis convinced Mr Osborne that
millionaires must pay a minimum rate of tax equivalent to about a third of their
earnings, which has been described as a “tycoon tax”.
Mr Osborne told The Daily Telegraph: “I was shocked to see that some of the very
wealthiest people in the country have organised their tax affairs, and to be fair it’s
within the tax laws, so that they were regularly paying virtually no income tax. And I
don’t think that’s right. … I’m not allowed to be shown the names of the individuals but
I’ve sat with the most senior people at the Inland Revenue, the people who run some
of the high net worth units there. They have given me examples, anonymised
examples, and so we are taking action.”
The report found that Britain’s 20 biggest tax avoiders have used three main
loopholes to legally reduce their their income tax bills by a total of £145 million in a
year. Two thirds of them wrote off business losses in one of their companies against
their income tax bill, reducing it by as much as half . Several of them offset the cost of
business mortgages or borrowing on buy-to-let properties against their income tax bill,
while others took advantage of relief on donations to charity. 28
The Chancellor did not publish any further details of these ‘anonymised’ tax returns.
However, two months later, in response to an FOI request by the BBC, the Treasury gave
27
28
HM Treasury, Budget 2012 policy costings, March 2012 p19. In Budget 2012 the Government also proposed
cutting the additional rate of income tax on incomes over £150,000 from 50% to 45% from 2013/14.
“George Osborne: I'm going after the wealthy tax dodgers”, Daily Telegraph, 9 April 2012 – see also “Wealthy
face cap on income tax relief”, Financial Times, 14/15 April 2012
8
details of three ‘illustrative cases’ that had been given to Mr Osborne; in turn the BBC’s FOI
specialist, Martin Rosenbaum published these:
According to the Treasury, these were "stylised examples based on an analysis of the tax
records of those individuals most affected by the change" and "not actual taxpayers' details".
That said, Mr Rosenbaum noted that, “what is clear from this disclosure is that it is indeed
charitable donations rather than other allowable reliefs which was the focus of the Treasury's
concern to extract more tax from some of the country's richest individuals.” 29
29
“The tax return evidence that 'shocked' George Osborne”, BBC News online, 14 June 2012
9
3
Reactions from the charitable sector
Initial reactions to the Budget focused on other personal tax measures – the proposed cut in
the 50p additional rate of tax to 45p, the phased withdrawal of age-related personal
allowances – though some practitioners suggested that the cap on unlimited reliefs might
have a knock-on impact for charities. 30 In brief, Gift Aid allows charities receiving donations
from taxpayers to claim the tax that has been paid by the donor on the gift, at the basic rate
of 20%. If the donor is a higher or additional rate taxpayer, then they can claim the extra tax
that they will have paid on the gift, through their annual tax return. 31 For those on very high
incomes who donate a great deal of money, the tax saving can be quite significant.
Some days after the Budget, several leading charities and wealthy donors argued that
restricting tax relief would result in a sharp drop in charitable giving, 32 and the Charities Aid
Foundation carried out surveys of both donors and charity executives which supported this
claim. 33 They also disputed suggestions about the scale of avoidance using Gift Aid: as the
Financial Times reported, “[charities and donors] argued that any abuses are minuscule
compared with the collateral damage on a wide swathe of organisations and institutions that
depend on philanthropy.” 34
Writing in the Financial Times Jonathan Ford argued, “while the Treasury has claimed that
some wealthy people use charities to avoid tax, no numbers have been supplied to back this
contention up. It is hard to believe that the incidence is huge or that fiddles could not be
stamped on in some other way. Meanwhile the measure threatens to add both complexity
and cost to the charitable world – not least if the new arrangement requires every gift-aided
donation to be tracked. This hardly seems sensible at a time when many charities are facing
a slump in big donations.” 35 Writing in the Guardian the director of the National Theatre,
Nicholas Hytner, said: “As the chancellor is so keen to associate himself with the general
distaste for the super-rich, let me – as a representative of what his party probably looks on as
the leftwing arts establishment – spring to the defence of a significant number of them …It is
frankly slanderous to suggest that any of them are involved in tax avoidance. It is also
ridiculous. To qualify for tax relief of £2,500, a higher-rate (40%) taxpayer would have to give
£10,000 to charity. In other words, the so-called tax avoider would be down £7,500. Call me
a financial illiterate, but I can't see what's been avoided here – and many wealthy
philanthropists give millions away each year.” 36
Subsequently many commentators argued that Gift Aid relief should be excluded from any
cap – for example, in editorials carried in both the Financial Times and the Times:
30
31
32
33
34
35
36
“Donors deterred by cap on tax relief”, Financial Times, 22 March 2012
HMRC’s site gives a summary of the way the rules work for donors at:
http://www.hmrc.gov.uk/individuals/giving/gift-aid.htm
“Charity gifts to be hit by tax squeeze”, Sunday Times, 25 March 2012; “Charities threaten boycott of donors’
summit”, Financial Times, 26 March 2012
CAF gave details in two press notices : Top charity execs: Government cap on tax relief will hit donations from
major donors, 12 April 2012 & Philanthropists say Budget change will slash charitable donations – survey 30
March 2012. See also the campaign site established by CAF and the National Council for Voluntary
Organisations: http://giveitbackgeorge.org/
“Charities fear fallout from new limits on tax relief”, Financial Times, 15 April 2012
“Kicking a gift horse in the teeth”, Financial Times, 12 April 2012
“On tax avoidance, allow me to leap to the defence of the super rich”, Guardian, 12 April 2012
10
Rather than recognising the special nature of donations to charity, the cap treats them
similarly to a far wider range of tax reliefs which do little to benefit others, such as
pension contributions. The chancellor’s upper rate tax relief cap on donations might
only affect a small number of people, but it risks reducing the total value of giving
substantially.
Almost half of charitable contributions today come from less than one-tenth of donors.
Some wealthy individuals who have already met their material needs regularly give
away a high proportion of their income. Many more do so periodically, such as after the
windfall gains of selling off a business.
These large lump sums are important to fund-raisers, who use them to kick-start
campaigns with matching support from others. Reducing tax relief means that many
donors would simply give less. It is also possible that with a lower financial
commitment they will then feel less motivated to provide time and other assistance.
While not all donations are well spent, charities have proved they are able to meet
many pressing and often unpopular needs; they can be nimble, flexible and efficient;
and they have been ready to innovate in partnerships with business and in other areas.
The UK still lags behind the US significantly in philanthropy. The best way to close the
gap is to encourage more donations, not to discourage those already being made. 37
*
These new proposals, should they come into force, will indeed hinder fundraising for a
great many charities. But the substantial error of Mr Osborne and Mr Cameron is
greater than that … [Recently] Mr Cameron told of practices, reported by HMRC,
whereby foreign charities are used to funnel money in and out of Britain, avoiding tax in
the process. Such practices, if they exist, should not be an incentive for the
Government to change the law. … The problem of aggressive tax avoidance through
the use of charitable relief would be much better dealt with by an effective HMRC
backed up by a muscular General Anti-Avoidance Rule … The Coalition must draw
back from its position on charitable giving. Regardless of immediate political cost, the
Prime Minister must give an unequivocal indication that philanthropy is both valued and
essential to Britain’s future. Then he must safeguard loudly the structures that enable
it. It’s the Big Society, stupid. 38
A few more details were given in a letter published by the department on 5 April 2012. The
letter emphasised that the proposals would not affect the amount of tax that charities were
entitled to claim back under Gift Aid; moreover, the cap would not prevent anyone in future
making donations of a size that, at present, would deliver a tax saving above the
£50,000/25% cap – only that the individual would not get the extra tax relief. It also
underlined that, “a consultation document on the detail of the policy, including the
implications for philanthropic giving, will be published in the summer.” 39 However, this
clarification does not appear to have muted opposition to the proposals, 40 and suggestions
that the Government might amend these plans by setting a higher 50% cap for charitable
donations, or allow donors to roll over unused reliefs from one year to the next, appear to
37
38
39
40
“Editorial: Budget threatens the gift of giving”, Financial Times, 2 April 2012
“Leader : Charity case”, 12 April 2012
HM Treasury/HM Revenue & Customs, Cap on unlimited income tax reliefs, 5 April 2012.
eg, “Disaster appeal”, Sunday Times, 15 April 2012; “Tories join calls for U-turn on tax relief cap”, Financial
Times, 16 April 2012; “Letters : Philanthropy tax is at odds with the Bid Society idea”, Times, 18 April 2012.
11
have been widely unpopular. 41 The Times published a second editorial on the issue
suggesting that “the arguments against [the Chancellor’s] policy are overwhelming”:
Such a cap acts as a strong disincentive to philanthropy just when it is needed most. It
sends a message to wealthy charity-donors that the Government looks askance at
their generosity, regarding it as a tax fiddle. It undermines David Cameron’s
contention that he believes in society, but thinks that it isn’t always the Sate. The one
defence that the Government could mount – that it needs the money – falls away when
the amounts involved are revealed. Most estimates of the revenue raised by the
measure suggest it is as little as £50 million … George Osborne is both political
strategist and finance minister. And both these responsibilities point to one thing. He
needs to drop the charity cap. He needs to own the change and accept the error was
his. And he hasn’t a moment to lose. 42
Similarly, a second editorial in the Financial Times argued that the Government should
change its approach entirely:
The first thing Mr Osborne must do is to draw a clear distinction between charitable
giving and other activities that attract reliefs. Tax breaks that are purely self-interested
should be separated from those that arise from acts that benefit the wider public.
A bigger question is whether there should be a cap at all. The case against is largely
practical. The UK lags behind the US in philanthropy. The government wishes there to
be more charitable provision in areas that have been the province of the state. If more
is to be given, then policy should be skewed to encourage it. Mr Osborne’s proposed
cap might actually deliver less.
Mr Osborne has advanced a feeble counter-case – that a cap is needed to combat
fraud and the endowment of unworthy charities. But these problems can be dealt with
directly through regulation. A better argument is that a cap is necessary to protect
taxpayers. This is because tax relief on charitable donation in effect entitles the donor
to give away other people’s money to the causes that the donor selects.
Not all donations are well spent, but charities have proved they are able to meet
pressing and unpopular needs. That said, the government need not offer unlimited
relief to ensure that the sector flourishes. Americans, who give several times as much
to charity, can only claim relief on gifts up to half their income. If the US is the role
model, the UK should look at something similar. 43
Though much of the commentary has been very critical of the Government’s case for reform,
Philip Stephens wrote a piece alongside this editorial arguing that “there is no reason why
the relief should be open-ended”:
Lost in all the wailing has been the simple insight that tax relief is public spending by
another name. The deduction on my big-hearted gift to the Royal Opera House could
otherwise be used to pay down the deficit or help build a new school – even to cut
someone else’s tax bill.
41
42
43
“Charities reject ‘tokenistic’ tax concessions”, Financial Times, 17 April 2012; Charity Finance Group press
notice, Relief cap could not come at worse time, say charity leaders, 16 April 2012
“Leader: Taxing Questions – the Treasury must rethink its approach to charities”, Times, 20 April 2012
“Editorial: Giving ground on charitable giving”, Financial Times, 17 April 2012
12
The case for entirely open-ended relief rests on the curious premise that charitable
giving is invariably superior to public spending. What’s more, it assumes that rich
philanthropists always make better choices than voters or elected politicians in
deciding what counts as a deserving cause. So if I tear up my cheque to the National
Gallery and divert the funds to the Dedanists’ Foundation or to Surfers Against
Sewage, my fellow citizens must continue to chip in with their own contribution.
It is fair to say that the Treasury has bungled its response to the outcry. It has focused
too much on evidence that some self-styled philanthropists funnel cash to dodgy
charities. There may well be such abuse, but the intelligent rationale for the cap is the
broader one – that charitable giving should not be seen by the wealthy as an
alternative to paying tax. It is hard to see why a family struggling to get by on, say,
£25,000 a year should be obliged to contribute to my favourite causes.
There is no reason to doubt the good intentions of many big donors. Their generosity is
to be applauded. There is also an indisputable case for government to support
charitable giving. One or two of the charities mentioned above may sound a touch
eccentric, but I am sure they are all well-intentioned. That said, there is no reason why
the relief should be open-ended. The parameters set by Mr Osborne are eminently
reasonable – to my mind over-generous. If David Cameron’s Big Society is ever to be
built, it will be the work of the nation’s little platoons rather than a product of tax
incentives for rich philanthropists. 44
Statistics on the Exchequer costs of tax reliefs for charities are collated on HM Revenue &
Customs’ site; 45 there are no official figures showing numbers of Gift Aid donations over
£50,000 – the closest that the statistics come to this are two tables breaking down the
characteristics of donors benefitting from higher rate relief – by income range, - and by size
of donation. 46 Some details of the characteristics of higher income donors were given in a
research report commissioned by the department, published in December 2009, on the
possible responses by donors to changes in Gift Aid relief – though the authors made some
interesting comments about donors’ motivation:
The majority of donors reported that they would not change their donations out of netof-tax income if faced with changes to Gift Aid … When asked why they would not
adjust their donations if the tax system were to change, the majority said that it was
because they decided how much to give before thinking about the tax incentives. This
may be a consequence of the complexity of the current system. One of the major
donors who had calculated the effect of the tax system on net and gross donations
described working it out as “a long and painful process”. Around one-fifth of those who
said they would not adjust their donations said that tax incentives did not matter at all. 47
The research was cited in a recent editorial in the Guardian, which was more sympathetic
toward the idea that there should be some form of cap or limit to this type of tax relief:
There is an entirely reasonable principle behind limiting the relief on donations: namely
that people should pay their taxes – whatever else they may choose to do. As a letter
to the FT pithily put it: no one would openly suggest that the rich should be given
44
45
46
47
“Philanthropy is no alternative to paying tax”, Financial Times, 17 April 2012
http://www.hmrc.gov.uk/stats/charities/menu.htm. Donations through Gift Aid were worth £4.9bn in 2010/11;
higher rate relief was worth £430m in this year. (Table 10.3, June 2012 & Table 10.2, January 2013).
The figures are for 2003/04 only. National Statistics : Tables 10.6-7 – available at the page cited above.
Sarah Smith (University of Bristol) & Kimberley Scharf (Warwick University), Gift Aid donor research: exploring
options for reforming higher-rate relief (HMRC Research report 91), December 2009 pp9-10
13
special power to divert some large chunk of scarce public funds towards their pet
priorities. 48 But that is what happens where donations can be deducted from taxable
income without any limit.
There are, of course, powerful counter-arguments – nobody in their right mind would
risk discouraging giving in less straitened times. Philanthropy has particular strength in
advancing the frontiers of knowledge, and in enabling the artistic endeavours which
nourish the nation's soul – both splendid causes which regular public expenditure can
overlook because it is overwhelmed by everyday concerns. But therein lies the rub.
After decades of democracy, the state has assumed those responsibilities that the
public have used the ballot box to prioritise. The system is far from perfect; it neglects
much of importance while financing dangerous white elephants like Trident, but – as a
great man once said – it is the least-bad system that we have. Millionaires' priorities
are not always the same as those of everyday people, and every pound of tax relief on
a gift to an Oxbridge college or an opera house is a pound that is not available to fund
a tax credit or a social services department.
But what of the pragmatics? Everything turns upon how far the bribe of tax relief
induces more generosity. The best evidence suggests that each extra pound that the
state forgoes from the rich will induce them to give more – but not as much as an extra
pound more, perhaps something more like 60p. 49 That makes sense when you
consider the mix of motives that can spur you to drop a coin in a tin, and has also been
backed up by interviews in which philanthropists were asked about the effects of relief.
Some said it made a difference while others insisted it made none.
Were it starting from scratch, the government would chew over such analysis and
strike an appropriate balance. As things stand, the risk is that it backs off without
thought, for fear of becoming a charity case. 50
4
Decision to remove charitable reliefs from the cap
The potential impact of the Government’s proposal for capping reliefs was raised during the
second reading debate on the Finance Bill, on 16 April 2012. In response to a query from
David Ruffley MP, the Chief Secretary to the Treasury, Danny Alexander, cited some figures
showing that a small, but significant number of the very highest earners had exploited these
rules so as to pay very little tax in practice:
Mr David Ruffley (Bury St Edmunds) (Con): Many charities, including the Suffolk
Foundation, estimate that the cap on tax reliefs will lead to a 20% reduction in their
charitable donations. Will the Chief Secretary consider exempting charitable donations
to UK charities? It would be comparatively inexpensive but terribly important to the
charitable sector.
Danny Alexander: It is important that the House is clear about what is being
proposed. What we are proposing is a limit, on what are currently uncapped tax reliefs,
of £50,000 or a quarter of someone’s income, whichever is the higher; so someone
earning £10 million a year can still receive tax relief on donations of £2.5 million to
charity each and every year. However, as I say, we will discuss this with philanthropists
and charities—indeed, those discussions are ongoing. Some features of the American
48
49
50
[“Letters: Every £1 of tax relief leaves £1 of tax to be raised elsewhere”, Financial Times, 17 April 2012]
[The paper’s online edition gave a link to the Smith & Scharf report, without further comment.]
“David Cameron : charity case”, Guardian, 17 April 2012
14
system, for example, may be attractive, which we will certainly examine and consider
as part of that process.
The basic principle that the wealthiest in the land should pay a fair proportion of their
income in income tax must be absolutely right, not least because last week we
published data showing that last year some of the wealthiest people in the country had
reduced their tax bills to below the basic rate of income tax … the figures [are] based
on the tax system from 2010-11, under the tax rules put in place by [the previous] …
Government. They show, for example, that 6% of those earning over £10 million a year
were paying tax at under 10%, that 3% were paying it at 10% to 20%, that 8% were
paying it at 20% to 30%, that 12% were paying it at 30% to 40%, and that 72% were
paying it at above 40%. 51
The figures were widely reported in the press, though not officially published at the time; 52 in
a piece on this issue, Robert Peston, the BBC’s business editor observed “it is striking quite
how many people paid tax greater than 40% - a proportion 10 times greater than those who
succeeded in paying almost no tax. Or to put it another way, perhaps the highest earners
have had a slightly unfair press, because the majority of them seem to have been paying
their proper share.” 53 Subsequently the Exchequer Secretary, David Gauke, set out these
estimates in answer to a number of PQs:
Debbie Abrahams: To ask the Chancellor of the Exchequer (1) what information HM
Revenue and Customs holds on the number of taxpayers with annual incomes of over
(a) £150,000, (b) £500,000, (c) £1 million and (d) £2 million who pay an average tax
rate on their income of less than (i) 10, (ii) 20, (iii) 30, (iv) 40 and (v) 50 per cent; (2)
what the average tax rate paid on income and gains combined by those with annual
incomes of over (a) £150,000, (b) £500,000, (c) £1 million and (d) £2 million was in the
latest period for which figures are available; (3) what the average rate of capital gains
tax paid by those with annual incomes of (a) £150,000 or more, (b) £500,000 or more,
(c) £1 million or more and (d) £2 million or more was in the latest period for which
figures are available.
Mr Gauke: The information requested is as follows:
(i) The proportion of taxpayers liable to income tax by their total income and average
income tax rate are shown in the following table:
Proportion (%) of individuals reporting various average tax rates by total income category (2010-11)
Income
£250,000 to
£500,000 to £1,000,000 to £5,000,000 to
£500,000
£1,000,000
£5,000,000
£10,000,000
Average tax
rates
£100,000 to
£150,000
£150,000 to
£250,000
Above 40%
0
6
73
81
80
81
72
30% to 40%
67
77
18
11
10
8
12
20% to 30%
24
13
5
4
5
4
8
10% to 20%
8
3
2
2
2
3
3
Under 10%
1
2
2
2
3
4
6
51
52
53
HC Deb 16 April 2012 cc32-3
For example, “Treasury reveals how little tax the super-rich pay”, Guardian, 16 April 2012
“More than 70% of high earners paid 50% tax rate”, BBC News online, 16 April 2012
15
Over
£10,000,000
Figures are based on an analysis of self-assessment (SA) returns for the 2010-11 tax
year, as available at Budget 2012. Income bands include those with average rates at
the lower limit (e.g. a tax rate of exactly 30% falls in the “30% to <40%” category).
(ii), (iii) Rates of capital gains tax range from 10% to 28% in 2011-12. 54
Turning back to the second reading debate on the Finance Bill 2012, speaking for the
Opposition on this occasion, Rachel Reeves MP was strongly critical of the suggestion that
tax relief on donations had been exploited in this way:
We are serious about cracking down on tax avoidance, but tax avoidance is not the
same as giving donations to UNICEF, Macmillan nurses, the Red Cross, the National
Trust and thousands of charities in this country that rely on the money they get to do
their important work, often supporting some of the most vulnerable people in society. If
the Government cannot tell the difference between tax avoidance and doing the right
thing and supporting valuable charity work, it shows the extent to which they have lost
their grip on reality.
Mr Ben Wallace (Wyre and Preston North) (Con): Does the hon. Lady agree that
before people give money to charity, they must also fund their obligation to society?
They must do that first, before they start funding charity.
Rachel Reeves: If the hon. Gentleman extended that logic, there would be no tax relief
for giving to charities … As the British Red Cross said, “Not only is such a measure at
odds with the Government’s own announced agenda of increasing and facilitating
philanthropy, it would reduce our ability to achieve our charitable objectives and reduce
our help to people in a crisis.” Is that really what the Government intended when they
announced these changes to tax relief in the Budget? …
Christopher Pincher: Earlier the hon. Lady was extolling the virtues of the United
States. She will know that even the US, which is possibly the most philanthropic
society in the world, has a cap in place on philanthropic donations, so is she opposed
to the principle of what the Government are doing, or does she accept that there is a
role for a cap?
Rachel Reeves: In the US there is much more generous tax relief for legacies, for
example, so it is a very different tax system. In many ways it is more generous than the
system in this country. What I would like to see is policy being made in the proper way,
which is by consulting the people who will be affected by it—consulting the charities,
which stand to lose tens and perhaps hundreds of millions of pounds and which do
such good work. Like the Red Cross, they say that their ability to do their work will be
hampered by the changes in tax relief. That consultation should have happened
before, rather than after, the Government’s policies were announced and the financial
changes to Treasury revenues were introduced. 55
The Treasury Committee published their report on the Budget a couple of days after this
debate. On this issue, the Committee received representations from both the Chartered
Institute of Taxation, and the Institute of Chartered Accountants, raising concerns as to the
practicality of limiting tax reliefs – extracts from this evidence are given below:
54
55
HC Deb 25 April 2012 cc898-9W
HC Deb 16 April 2012 cc47-8
16
Chartered Institute of Taxation
The plan to cap reliefs may appeal as an anti-avoidance measure but scores badly
under [an assessment that tax reforms meet the principle of coherence.] On the one
hand, taxpayers are encouraged through the tax system to give to charity, invest in
risky areas (EIS, enterprise zones) and take risks in business (through allowing loss
offsets). Now we have a provision that seems to cut directly against that
encouragement. What does this say about commitments to philanthropy, the
environment and regeneration? We believe it would be much better to target the
specific abuses the government is concerned about (abuses of charity status, artificial
loss offsets) rather than attempt a blanket measure.
Institute of Chartered Accountants in England and Wales
Last year the Government consulted on possible approaches to counter high risk areas
of the tax code and one such identified was the use of income tax losses. Three
options were put forward, one of which was to cap the amount of loss which could be
relieved against other income at £25,000 …
In our response to the 2011 consultation (published as TAXREP 62/11), we considered
that sideways loss relief for commercial losses should continue to be allowed without
restriction, and that a limit of, say, £25,000, would penalise genuine businesses where
commercial losses had been incurred. We remain of that view and are very concerned
to see that this earlier work appears to have been overtaken by a general restriction on
tax reliefs.
We are aware already of serious concerns in the charitable sector about the impact of
this restriction on charitable donations, although we appreciate that paragraph 1.193 of
the Red Book states that the ‘Government will explore with philanthropists ways to
ensure that this measure will not impact significantly on charities that depend upon
large donations. Clearly, this measure could have a considerable impact on the
charitable sector, potentially at a time when the UK is looking to rely on the third sector
to a greater extent than in the past. It is also likely to have wider commercial
implications.
While we welcome the announcement that the rule will not be introduced until 2013,
given the importance of this measure we would have expected it to be subject to a full
consultation in accordance with the Government’s consultation framework. Instead, it
appears that draft legislation will be published for consultation later this year – in other
words the policy decision and approach have already been taken. 56
Similar concerns were raised by Mike Truman, the editor of the journal Taxation; Mr Truman
was particularly critical of the Government’s failure to consult on the principles to this reform
which, in his mind, lead to much of the confusion as to the rationale for this type of cap:
[The Budget announcement of the cap on unlimited reliefs noted that] “there were to be
consultations to ensure that this did not have too great an effect on philanthropic
donations [but] there was no suggestion that the overall principle was up for debate.
There was no worthwhile detail provided in the Budget documentation, which suggests
that it was a policy cooked up before the now obligatory deliberate leaking of all the
chancellor’s proposals to The Sunday Times on Friday night and the actual delivery of
the speech on Wednesday lunchtime.
The pressures of working in a coalition meant that there had to be a payback for the
reduction of the highest rate of tax from 50% to 45%. The increase in the personal
56
Thirtieth report – Budget 2012, 17 April 2012 HC 1910 2010-12 p79, p72
17
allowance did not count, as that was already part of the coalition agreement, albeit with
a speeded-up implementation. Nick Clegg had been pushing some form of ‘tycoon tax’,
so it appears the proposals about high-risk tax avoidance were morphed into a cap on
unlimited reliefs.
This led to the biggest problem with the presentation of the new policy, which was that
the government was not sure whether it was an attack on tax avoiders or the
introduction of something like a minimum tax rate. Initially the narrative focused on the
former. There were off-the-record briefings about donations into Romanian charitable
trusts which would end up back with the donor. If that had been the target, the phrase
‘sledgehammer to crack a nut’ would never have been more appropriate. It appears
that at least one such scheme does exist, but it equally does not appear to be a
widespread problem, and could have been stopped by the existing rules if only HMRC
had put some manpower into investigating those running such ‘charities’.
Conscious that the argument was getting away from it, the government tried to regain
some ground, explaining that the chancellor had seen anonymised tax returns of highearning individuals who had significantly reduced their tax bills by offsetting losses and
charitable donations. Crucially, because they were anonymised, there could have been
no way of knowing whether the losses were genuinely and economically incurred (and
therefore correctly available for relief), and whether any charitable donations were
genuinely made for truly charitable purposes, so what the chancellor saw was
meaningless. 57
In its report the Treasury Committee argued that the department should publish a detailed
assessment of how the cap would affect business investment and charities: “a more detailed
explanation of the problem the cap seeks to address is needed, along with consideration of
other possible means of dealing with it as the Red Book proposes.” 58
On 31 May 2012 the Chancellor announced that the cap would not apply to charitable
donations. 59 Mr Osborne did not make a statement to the House, but the Financial Times
quoted him as saying, “it is clear from our conversations with charities that any kind of cap
could damage donations, and as I said a the Budget that’s not what we want at all.” 60 This
followed decisions to amend proposals announced in the Budget to remove certain loopholes
and anomalies in VAT – in particular, measures to amend the VAT liability of hot takeaway
food and holiday caravans – and on these grounds it was strongly criticised. 61
In a short debate on these reversals on 11 June, Rachel Reeves, speaking for Opposition,
argued that “the Minister has tried to make a virtue out of the Government’s abandonment of
policies that prove to be unpopular and unworkable by saying that they are listening.
However, failing to do the necessary work on a policy before announcing it and then
sneaking out a reversal … is not consultation – it is total incompetence.” 62 In response to
these criticisms, the Exchequer Secretary, David Gauke, argued that they were sensible
changes with relatively little Exchequer impact:
57
58
59
60
61
62
“Cap doesn’t fit”, Taxation, 3 May 2012
HC 1910 2010-12 para 120
“Government confirms U-turn on charity tax”, Guardian, 31 May 2012
“Charitable Hunt decoy gives Osborne cover to make third Budget U-turn” & “Osborne completes his Budget
backdown”, Financial Times, 1 June 2012
“U-turn on charity gifts leaves Chancellor’s Budget in shreds and credibility damaged”, Times, 1 June 2012.
The proposals regarding VAT are discussed in, VAT : Budget 2012 changes to loopholes and anomalies,
Library standard note SN6298, 17 September 2012.
HC Deb 11 June 2012 c24
18
The Budget contained 282 measures. Having said that we would consult on some of its
measures, we have made changes to three. …
On tax reliefs, we continue to think that the system we inherited—which allows the
wealthiest to pay the least tax, meaning that cleaners can pay a higher rate than their
bosses—is unfair. We will therefore move to cap reliefs to ensure that this is
addressed. However, having engaged with the sector, we will exclude reliefs relating to
charitable giving from the cap … The amounts concerned are tiny compared with the
total tax changes announced in the Budget—in monetary terms, less than 2% of the
Budget changes … In the last year of the forecast period, the Budget measures that
we announced in March would have resulted in an additional £1.14 billion for the
Exchequer. As a consequence of these changes, that figure will now be £1 billion.
These are relatively small items, but we have listened to the specific cases that have
been made on the three elements. 63
Unsurprisingly the charitable sector enthusiastically welcomed this decision, 64 and one
practitioner writing in the Tax Journal suggested that “although [this was] politically
embarrassing for the government, this is an example of consultation in action.” 65
5
Recent developments
The Government published its consultation document on implementing its cap on income tax
reliefs in July 2012. 66 The document listed 10 reliefs which would be capped:
There are currently more than 350 special rules that can apply when calculating
income tax, and the term ‘relief’ is used in connection with many of these. These
‘reliefs’ can operate in a variety of ways. Some exclude certain items from taxable
income, reducing the amount of general income liable to tax; others alter the tax rate
applicable; and some allow individuals to deduct amounts from certain income
streams, such as expenses … The cap will only apply to reliefs that are offset against
general income … [that in general] are listed in section 24 of the Income Tax Act 2007
(ITA); and not currently capped …
The following income tax reliefs will be capped to the extent that they can be relieved
against general income:
1 Trade Loss Relief against general income [s64 of ITA] – available for losses made
by an individual carrying on a trade, profession or vocation;
2 Early Trade Losses Relief [s72 of ITA] – available to an individual in the first four
years of the trade, profession or vocation;
3 Post-cessation Trade Relief [s96 of ITA] – available for qualifying payments or
qualifying events within seven years of the permanent cessation of the trade;
63
64
65
66
HC Deb 11 June 2012 c23, c25
For example, Charities Aid Foundation press notice, Our response to Government u-turn on charity tax, 31
May 2012
“U-turn announced on charity relief cap”, Tax Journal, 8 June 2012
HC Deb 13 July 70WS
19
4 Property Loss Relief against general income [s120 of ITA] – available for property
business losses arising from capital allowances or agricultural expenses;
5 Post-cessation Property Relief [s125 of ITA] – available for qualifying payments or
qualifying events within seven years of the permanent cessation of the UK property
business;
6 Employment Loss Relief [s128 of ITA] – available in certain circumstances where
losses or liabilities arise from employment;
7 Former Employees Deduction for Liabilities [s555 of Income Tax (Earnings &
Pensions Act 2003] – 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;
8 Share Loss Relief [chapter 4, part 4 of ITA] – available for what would otherwise be
a capital loss on the disposal (or deemed disposal) of certain qualifying shares;
9 Losses on Deeply Discounted Securities [ss 446-448 & 453-456 of Income Tax
(Trading and Other Income) Act 2005] – available only for losses on gilt strips and on
listed securities held since at least 26 March 2003; and
10 Qualifying Loan Interest [chapter 1, part 8 of ITA] – 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. 67
The document underlined that several categories of tax relief will be unaffected by the cap,
including charitable reliefs:
Computational rules
Computational rules affect the calculation of individual income streams. As such, they
cannot be offset against general income. 68 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. 69
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. 70 Where rules exist allowing computational relief 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.
67
68
69
70
HMT/HMRC, Delivering a cap on income tax relief: a technical consultation, July 2012 paras 2.3-4, 2.14
Since April 2011, losses arising from furnished holiday lettings can only be offset against the future profits of
the same furnished holiday letting business. As these losses cannot now be used to offset general income,
they will be unaffected by the cap.
Similarly, losses arising from miscellaneous transactions can only be relieved against income from certain
other miscellaneous transactions, rather than general income, and so will also not be affected by the cap.
The new business investment exemption provided in Part 2 of Schedule 12 of the 2012 Finance Act prevents
income or capital gains that is remitted to the UK by non-domiciled individuals becoming liable for tax. This
exempted income is not included in the UK tax calculation and is therefore not a relief and will not be affected
by the cap.
Similarly, an individual’s relief for annual payments or patent royalties paid under deduction of tax (where
exceptionally relief cannot be given against trading income) is considered as computational in nature, and will
be excluded.
Except in the case of Business Premises Renovation Allowances [see below]
20
Structural credits
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 capped.
Reliefs subject to existing limits
Some income tax reliefs are subject to existing limits as part of the rules governing
their operation. Where this is the case, the relief is presumed to have been designed
with a specific policy objective in mind and the relevant cap set at the optimal level to
achieve this. Therefore reliefs that have their own limits will not be affected by the
cap. 71
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
Charitable reliefs support donations to charity by providing tax relief on those
donations. At the Budget, the Government was clear that it does not want donations to
charity to be affected by the relief cap. Therefore, following extensive engagement with
the charity sector, the Government has excluded the following from the cap: Gift Aid;
Relief for gifts of land and shares; Payroll Giving; and Community Investment Tax
Relief. 72
The consultation document gave details of how the cap might work in practice. As stated in
the Budget, the cap would be set at the greater of £50,000 or 25 per cent of an individual’s
income. In turn, this requires a measure of total income that takes into account the fact that
some reliefs are given before a person pays tax:
The starting point for [calculating a person’s income for the purposes of the cap] … will
be [a person’s] total income liable to income tax. This figure will then be adjusted
based on an individual’s net pay arrangements (ie, 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:
•
71
72
the different ways that people make tax-relievable pension and retirement
annuity payments and charitable donations;
The cap will include reliefs currently only limited in part, for example qualifying loan interest.
Delivering a cap on income tax relief …, July 2012 paras 2.6-13
21
•
•
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. 73
From this baseline, the document provided a practical example of how the cap could work:
Claims for income tax relief are made in respect of the year in which the relevant event
occurs (e.g. a loss arising or loan interest being paid). The cap will apply to the year of
the claim and any other earlier or later year in which the relief claimed is allocated. This
means that in instances where for example losses have been carried back, the cap will
be calculated to apply in each year that a calculation is made. The following examples
illustrate how this will work in practice …
Example 1 – Jenny
In 2013-14 Jenny’s income is £650,000 from employment and £100,000 share of profit
from a partnership. She has losses from a property rental business in 2013-14 of
£250,000 for which she makes a claim for loss relief against her general income for
2013-14. Her individual relief cap in 2013-14 is £187,500 (25 per cent of £750,000, as
this is greater than £50,000).
Jenny can relieve £187,500 of her property losses in 2013-14, leaving £62,500
unrelieved. As the provisions for property loss relief enable claims in the same or next
tax year, she is able to offset – subject to how much 2014-15 cap she utilises – the
remaining 2013-14 loss relief of £62,500 against her 2014-15 income.
In 2014-15 her income is £675,000 from employment and £75,000 from a partnership.
She has losses from her property business in 2014-15 of £100,000 for which she
claims loss relief against her 2014-15 income.
Her cap in 2014-15 is £187,500 (25 per cent of £750,000). She can fully claim 2014-15
loss relief of £100,000, plus 2013-14 losses carried forward of £62,500 against her
general income, as together these total less than 25 per cent of her income in that
year.
The existing processes for claiming reliefs will not change – a claim for relief must be
for the full amount of a loss made and not already utilised. 74 So in [the example given
above] given that her losses are greater than her relief allowance, Jenny would not be
able to claim relief for less than her cap in 2013-14. Similarly, she could not claim less
than her actual losses of £100,000 arising in 2014-15, and choose to carry some of
these forward. This will limit the extent to which reliefs can be spread across years to
circumvent the cap. 75
The consultation noted that although the cap would apply from April 2013, there would have
to be transitional arrangements where individuals wish to offset trading losses incurred in
2013/14 against their tax liability in earlier years:
While the cap will apply to reliefs in 2013-14 and later years, some people will elect to
carry trading losses arising in 2013-14 and later back to years prior to this. In these
instances, the claim for relief will still be made after the introduction of the cap,
73
74
75
Delivering a cap on income tax relief …, July 2012 paras 3.4-5. The document gives practical examples of
how different arrangements for making pension contributions or charitable donations would adjust this
calculation of ‘adjusted total income’ for calculation of the cap.
The case of Butt v Haxby (1982) 56TC547 determined that partial claims are not permitted
Delivering a cap on income tax relief …, July 2012 paras 3.13-4
22
notwithstanding the calculation of the individual’s tax liability by reference to a year
prior to the cap’s introduction. As such, the cap will be applied in these ‘pre-cap year’
calculations. 76
At the time of the Budget the Government had estimated that the cap would raise £240m by
2015/16, rising to £300m in 2016/17. The consultation document estimated that the decision
to exclude charitable reliefs would decrease receipts by about £50-£80m a year. It also
estimated that about 8,000 individuals would be affected by the introduction of the cap. 77
As noted above, the possible exploitation of income tax losses for tax avoidance was raised
initially in a consultation document published by HMRC in July 2011, one of two looking at
certain ‘high risk’ areas of the tax code. In July 2012, after the consultation on a cap on
reliefs was launched, the department published a short document summarising the
responses it had had to this, earlier, exercise, and confirmed that, given subsequent
developments, it would monitor the situation:
At the 2012 Budget the Government announced a cap on uncapped income tax reliefs,
to be introduced in April 2013. Although this is not an anti-avoidance measure, it will
affect the amounts of loss relief that may be claimed against general income and as
such can be expected to impact on avoidance behaviours. … The Government also
announced proposals for a General Anti-Abuse Rule (GAAR) to be introduced in
2013 78… [In addition] since the consultation was completed the Government has also
announced that targeted anti-avoidance rules will be introduced in Finance Bill 2012 for
property loss relief with an agricultural connection and post-cessation trade and
property reliefs. 79
As these policy changes significantly impact on income tax loss reliefs the Government
has decided that HMRC will monitor the effect of these developments before
considering whether further action is needed against avoidance involving income tax
loss reliefs. 80
In December 2012 the Government confirmed that it would introduce legislation in the
forthcoming Finance Bill, to apply the cap from 6 April 2013. 81 In its summary of the
responses it had received to the consultation document, the Government noted that the
majority had agreed with the proposed approach – specifically, taking account of pension
savings and charity donations. There had been some concerns on the way the cap might
apply in certain circumstances to ‘share loss relief’ and ‘overlap relief’:
Comments on the practicality of applying the cap included the following points:
•
76
77
78
79
80
81
the Enterprise Investment Scheme and Seed Enterprise Investment Scheme
already have their own limits and to apply the cap to share loss relief on such
shares would either not be understood or would act as a disincentive to
individuals participating in these schemes for whom the financial risks of
investment would be complex to assess; and
Delivering a cap on income tax relief …, July 2012 paras 3.21
op.cit. p19. The Autumn Statement gave revised estimates, showing the exemption of charitable reliefs
costing £80m in 2014/15, and £60m in 2015/16 (Cm 8480, December 2012 : Table 2.1 – item 38).
For details see, Tax avoidance: a General Anti-Abuse Rule, Library standard note SN6265, 20 June 2013.
HC Deb 12 January 2012 c17WS; HC Deb 13 March 2012 c11WS; Budget 2012 HC 1853, March 2012 paras
2.209-10
HMRC, High-Risk Areas of the Tax Code: Relief for income tax losses - Summary of Responses, July 2012
para 1.19-23
Cm 8480, December 2012 para 2.51
23
•
where trade losses or early trade losses arise wholly or partly from the
deduction of overlap profits, overlap relief might be denied where the cap
applies. Eight respondents questioned whether this was the intended technical
outcome and expressed concern that applying the cap in these circumstances
would add further complexity to the Self Assessment process and would
require clear guidance to help taxpayers get it right. 82
In the light of these concerns, the way the cap applied to both share loss relief and trade loss
relief:
In the light of the arguments made, the Government has decided that share loss relief
for shares qualifying for EIS/SEIS should be excluded from the cap. Share loss relief
on shares not within EIS/SEIS will remain within the cap.
The Government is grateful to respondents, of which a significant number were tax
agents, for highlighting the issue of ‘overlap relief’. This is provided to prevent the
double taxation of profits over the lifetime of a business. The Government agrees with
respondents that applying the cap in these circumstances may cause the unintended
consequence of denying overlap relief. Therefore, the Government will make a
technical adjustment and remove trade loss relief and early trade losses relief
attributable to overlap relief from the scope of the cap. Overlap relief will now align with
the other computational reliefs originally excluded from the cap. 83
Many respondents raised concerns about the impact the cap would have, and in particular,
that it could be seriously damaging for start-up businesses and affect individuals on lower
incomes who had significant losses or loans. In response the Government stated that it was
still “confident in the Impact Assessment which set out that this change will affect only around
8,000 people with the highest incomes, with a median loss of around £20,000. Over 90 per
cent of the revenue from the measure will come from those with income over £150,000.” 84
Draft legislation to introduce the cap was published at this time, along with the majority of the
provisions to be included in Finance Bill 2013. 85 There has been relatively little comment on
these proposals, although the Chartered Institute of Taxation has argued that capping
income tax reliefs in this way may significantly affect economic growth:
We welcome the changes to the original proposals to exclude both share loss relief for
shares qualifying for EIS or SEIS2 and also overlap relief from the cap. These were
highlighted during the consultation and it is good to see that the Government listened
on these points.
However it is very disappointing that the other changes were not made to make the
proposals more business friendly. Restricting the ability to offset genuine business
losses and interest relief could suppress UK entrepreneurship. It is not uncommon to
fragment business interests for commercial or regulatory purposes; the results are
currently effectively aggregated for tax purposes and the person is taxed on the net
income from all activities. The cap as drafted will prevent this happening in many
cases, taxing many in business on more than they earn …
We hope that the Government will continue to listen to concerns and reconsider the
decision to include those on modest net incomes, such a farmer who has diversified
82
83
84
85
HMT/HMRC, Delivering a cap on income tax reliefs: a technical consultation – summary of responses,
December 2012 para 2.7
op.cit. paras 2.11-2
op.cit. para 2.13
This is available on HMRC’s site; see also, HMRC, Cap on income tax reliefs (TIIN2426), December 2012
24
his farm business activities to remain self-sufficient and incurs losses in one business
due to investing in machinery and claiming the recently proposed higher annual
investment allowance. 86
In a comment piece Mike Truman, editor of Taxation, highlighted another aspect of the cap’s
operation – the rules on transitional years. As noted above, the Government envisages that
the cap will apply so as to prevent ‘uncapped’ losses made in 2013/14 and beyond being
used to offset tax for earlier years. 87 Mr Truman suggested that, while the consultation had
not asked for views on this, from one perspective the practical implications of this rule would
be to impose a tax charge on a loss: “the real point of this proposal is to make a whole
swathe of possible tax avoidance schemes uneconomic. The fact that it also ensures that a
further swathe of people will end up being taxed on income they did not, in aggregate earn,
seems not to bother the government one jot.” 88
Following the publication of the draft Finance Bill in December 2012, the House of Lords
Economic Affairs Committee has held an inquiry into certain elements of the Bill, including
the proposed cap on income tax reliefs. In its report, published on 13 March 2013, the
Committee concluded that “failure to consult [on this measure] from the outset meant that
alternative ways of addressing excessive reliefs had not been properly explored.” 89 The
Committee went on to note concerns about the impact of the cap, particularly for businesses
with genuine trading losses, which had been raised by several witnesses:
The CIOT explained how the cap might discourage businesses “from making that very
expenditure or taking risks that are essential in a growing business because the scope
for obtaining relief for the loss arising from such expenditure will be curtailed” (Oral &
Written Evidence (OWE) pp79-80). This was echoed by other witnesses.
[Richard Murphy, Tax Research LLP] thought the cap “entirely arbitrary” and referring
specifically to the restriction on trading losses wrote: “in general a loss is considered to
be negative income for tax purposes. These provisions are therefore not reliefs as
such, but are instead offsets against other income to be made when calculating what a
person’s income for tax purposes might be. I have real difficulty seeing how such a cap
can encourage entrepreneurship. It would be better to have enhanced provisions
restricting the use of losses not incurred in the ordinary course of trade.” (OWE p224)
The ICAEW thought the cap “potentially restricts the effective offset of ordinary
commercial losses.” They continued “We have a real concern that these proposals
simply seek to raise money through a further form of tax on business.” Their
understanding was that: “The policy purpose of this measure was to target ‘wealthy
individuals using reliefs year after year and to excess to reduce their income tax bills to
zero’. We understand that policy target but that is not what the measure in the Finance
Bill actually does: there is no targeting of ‘year after year’ but instead a blunderbuss
that limits relief in the very first year that it might apply.” (OWE pp164-5). ICAS thought
the “justification of fairness is therefore flawed in principle. This instrument is too blunt.”
(OCE p174).
Gary Richards (Chairman, Law Society Tax Law Committee) [said] “Essentially, we are
not really attacking the problem. We are attacking a symptom by putting a cap on
86
87
88
89
CIOT press notice, Tax experts surprised over few changes to proposed reliefs cap, 11 December 2012
Delivering a cap on income tax relief …, July 2012 paras
“One last try”, Taxation, 27 September 2012
The Draft Finance Bill 2013, 13 March 2013, HL 139 2012-13, para 241
25
reliefs rather than saying, ‘Are we giving relief in the right circumstances?’” (OCE Q92
p201). 90
When the Committee took evidence from officials, Mike Williams, Director of Business &
International Tax at HM Treasury, set out the rationale for the cap as follows:
[The cap on reliefs] has always been about fairness to taxpayers but, equally, it will
have some impact in tackling abuse of loss and other reliefs. But the main aim is a
fairness one: the proposition is that wealthy individuals should not be able to reduce
their income tax bills to zero, year after year, by using some of these reliefs in
circumstances where other individuals could never take advantage of them. You have
to have other income and many people will have pretty insignificant other income (OCE
Q136, pp148-9).
The Committee asked Mr Williams about the particular issue of loss relief. On this occasion
he said:
Given that the first £50,000 of loss is entirely unaffected by this and that most people
will not have other income beyond their trade of anywhere near £50,000, in most
circumstances, most people will not be affected by this. When we did the costing, the
outcome, taking into account all the assumptions, was that most of the impact of this
would be on people on higher incomes, for example more than £100,000 or £150,000.
That is precisely because they are more likely to have significant amounts of other
income, whereas in most circumstances at the moment, there is already a cap, based
on the fact that most people have very little other income against which they can take
the loss relief (OCE Q137, p149). 91
Nevertheless the Committee concluded that “the effects of this cap on genuine trading losses
could have significant, adverse effects on economic growth.” They went on to recommend
that the Government should carry out “a more detailed review, including a wider consultation,
to understand better the effect of this measure on business investment. This review should
be carried out in time to inform the Finance Bill debates in the House of Commons.” 92
In the 2013 Budget the Government confirmed that it would proceed with the cap on
unlimited reliefs, and that it would not make any significant changes to the draft provisions as
published in December 2012. 93 The decision announced at that time to exempt EIS share
loss relief and overlap relief is now estimated to reduce receipts from the cap by £20m in
2014/15, falling to £10m a year in following years. As a consequence the cap is forecast to
raise £280m in 2014/15, falling to £170m in 2015/16. 94
Provision for the new cap was included in the Finance Bill 2013 (specifically clause 16 and
schedule 3), which were among those parts of the Bill selected for debate on the floor of the
House, at the first part of its Committee stage. In the event clause 16 was debated alongside
the provision in the Bill to charge income tax for the 2013/14 tax year, and most contributions
focused on the controversial decision to cut the additional rate of tax to 45p from April 2013. 95
Speaking for the Opposition Catherine McKinnell referred briefly to the cap, stating that “like
90
91
92
93
94
95
HL 139 2012-13 paras 222-4
HL 139 2012-13 para 234, 236
HL 139 2012-13 para 243
Budget 2013, HC 1033, March 2013 para 2.36; HM Treasury/HM Revenue & Customs, Overview of Tax
Legislation and Rates, 20 March 2013 p16
HC 1033, March 2013 (Table 2.1 – item 13; Table 2.2 – items r & u)
HC Deb 18 April 2013 cc506-540
26
many others, the Opposition are pleased that this provision no longer includes the original
proposal to limit tax relief on charitable giving”, though she noted the concerns of several
organisations – including the CIOT and the ICAEW – that it could damage entrepreneurship,
and suggested that “any genuine losses sustained in starting or developing a business
should be relievable, in accordance with existing legislation, in a way that enables the
entrepreneur to recover tax previously suffered as quickly as possible in order to help to fund
their new venture.” 96 In response the Exchequer Secretary, David Gauke, said the following:
One question that has been asked is whether the provision will hurt start-ups and
SMEs. Some 90% of trading losses set against general income in a tax year are less
than £15,000 a year, well below the threshold for the cap. Business loss reliefs are not
intended to subsidise businesses that have no chance of success. We have a
generous regime, but we do not believe that it should be without limit. Unlimited reliefs
mean that some people, often with high incomes, can pay little or no income tax year
on year. We do not believe that that is fair. There will be no limit on trade or property
losses set against profits from the same trade or property business in another year and
business loss reliefs are not intended to subsidise established businesses that make
losses year after year. 97
In the event the provisions were agreed, unamended, without a vote. They now form s16 and
schedule 3 of FA2013. Guidance for taxpayers on the new rules, which apply from 6 April
2013, has been published recently by HMRC. 98
96
97
98
HC Deb 18 April 2013 c513
HC Deb 18 April 2013 c535
HMRC, Limit on Income Tax Reliefs: Guidance, October 2013
27