Cap on income tax reliefs will hit many in the squeezed middle and deter Entrepreneurs
The purpose of this measure seems to be to stop abuse of reliefs but in reality hits far more targets than that
Patrick Stevens, tax partner at Ernst & Young comments:
"The new rules restricting income tax relief for losses and other expenditure is being implemented, apparently without further amendment. Contrary to common perceptions, the cap on income tax relief will not only target the wealthy, but may well affect those with more modest earnings.
"For example, those who have had to diversify their business in the light of recent economic developments may find themselves paying tax on more income than they actually receive. The new restriction will prevent losses from one business from being offset against the profits of another, where those losses exceed £50,000 and 25% of the individual’s income. So, a farmer who makes £70,000 profit from his bed and breakfast business but makes a £60,000 loss on his farming businesses will pay tax on £20,000 – despite only really having £10,000 of net income.
"Similarly, those who have had to borrow in their own name to make loans to trading companies may be also adversely affected, as a result of restrictions on an ability to offset payments of interest to the bank. In addition, the restriction on the ability to offset losses against other income will act as a barrier for those looking to start new businesses and a deterrent for business angels and others looking to invest.
"The purpose of this measure seems to be to stop abuse of reliefs but in reality hits far more targets than that. Care needs to be taken in the draft Finance Bill next week to ensure this is properly targeted. "