Ministers were reported yesterday to be re-examining plans to cap income tax reliefs, after a week in which tax experts expressed disquiet over the direction of public debate on tax avoidance and a tendency for statutory tax reliefs to be classed as ‘loopholes’.
HM Treasury released figures last night showing that one in 10 people with an income over £10m a year paying less than the 20% basic rate of income tax.
William Hague, the Foreign Secretary, told Sky News yesterday that HM Treasury had said ‘all along’ that it would work with charities and philanthropists to ‘look at any impact on charities that rely on big donations’. A consultation document is expected in the summer on a proposal to cap ‘unlimited’ income tax reliefs. The Treasury said in its Budget report that the government would ‘explore with philanthropists ways to ensure that this measure will not impact significantly on charities that depend on large donations’.
David Cameron said in Jakarta last week that the government would look ‘very sympathetically at charities’ concerns. The government wanted to see an increase in charitable giving in Britain, the Prime Minister said, citing recent changes to the gift aid and inheritance tax rules. He was in no doubt, however, that there was ‘a problem with some people who are using a range of tax allowances to reduce their effective tax rate down to very low – often single – figures’.
Hague said the Treasury had already met charities and philanthropists. ‘Nevertheless, remember the important point here ... that some people have used charitable giving in order to reduce their tax bill to almost nothing,’ he said. ‘That is not acceptable in the eyes of the country or the government. But finding a solution that takes account of the concerns that have been expressed is something the Chancellor and the Prime Minister have said they are open to.’
The Sunday Times reported that a YouGov poll for the paper found that ‘60% of people think there should be no cap on tax relief for donations’. Lord Fink, Treasury of the Conservative Party, had warned the Chancellor that the reform would ‘put people off’ giving large sums to good causes.
‘Fiscal equivalent of carpet bombing’
In a letter to The Sunday Telegraph, 46 ‘philanthropists or foundations’ urged the government to think again. ‘We choose to invest in charities for a variety of reasons ... None of us view tax relief as a primary motive, although it may substantially increase our donations,’ they wrote.
‘But [tax relief] is an important signal that the decision to use wealth to help others, rather than to enrich ourselves, is recognised, encouraged and supported by society. All tax reliefs are granted on the basis that the money is spent on charitable purposes, and this is regulated by the Charity Commission.’
The Daily Telegraph quoted Ian Theodoreson, Chief Finance Officer of the Church of England, as saying: ‘If the Chancellor is concerned that the charitable donations are not genuine then there have to be ways of stopping these rogue payments and not take the attitude, which is so often adopted by government, that everyone is on the make so let’s hit the innocent as well as the guilty. This fiscal equivalent of carpet bombing simply is not acceptable.’
Mike Truman, Editor of Taxation, said: ‘Are we really saying that if you’ve got £8m of income we don’t mind you dodging tax on £2m of it but we’re not going to let you dodge any more than that? That’s a crazy way to do it.’ Speaking on BBC Radio’s Jeremy Vine Show last week, he added: ‘If we’ve got frauds, then let’s go after the frauds.’ But Richard Murphy, Director of Tax Research UK, told the programme that tax relief for donations should be restricted to the basic rate of income tax.
The Observer said in an editorial yesterday: ‘[George] Osborne has a point about tax relief on donations. It can foster inequality and give the super-rich undue clout in public services and our cultural life.’
David Aaronovitch, the Times columnist and broadcaster, tweeted: ‘If the very wealthy are as generous as is claimed then they’ll be OK with a tax-free limit.’
Mainstream reliefs ‘have become loopholes’
Tax professionals expressed concern that limiting relief for losses and interest may have an adverse impact on genuine businesses. Paul Aplin said on Twitter that he was ‘struggling with the idea that mainstream tax reliefs granted by Parliament and around for decades have suddenly become “loopholes”’. Aplin is Chairman of the ICAEW Tax Faculty’s Technical Committee.
The Daily Telegraph had reported on 10 April that Osborne was ‘left shocked’ after an analysis of tax returns of multi-millionaires found that they were 'exploiting loopholes to pay little or nothing at all’.
The Financial Times reported at the weekend that accountants and wealth managers ‘warned that the current spotlight being shone on to the financial arrangements of high profile politicians risks making tax planning more risky and complex’.
The paper quoted Richard Mannion, National Tax Director at Smith & Williamson, as saying: ‘We’re seeing morality brought into arguments on tax, which is difficult for something that based on law. The rules are complicated enough without adding moral or reputational issues in as well.’
A cap on unlimited income tax reliefs
The Budget report said (at 1.191-3):
‘Tax reliefs exist for good reasons, to promote activities such as business investment and philanthropy. But it is unfair that reliefs can be used without limit to reduce tax liabilities, so that some taxpayers with very high incomes have very low tax rates.
‘To curtail this excessive use of reliefs the government will introduce a limit on all uncapped income tax reliefs. For anyone seeking to claim more than £50,000 of reliefs, a cap will be set at 25 per cent of income. This will increase effective tax rates and help ensure that those with the highest incomes pay a fairer share. This will not be extended to those reliefs that are already capped, as to do so would reduce the amount of support the tax system gives, for example, to enterprise and pension contributions.
‘The government will explore with philanthropists ways to ensure that this measure will not impact significantly on charities that depend on large donations.’
HMRC and HM Treasury’s Budget update note published on 5 April explained how the ‘cap on unlimited tax reliefs’ would work:
‘This cap will be set at 25% of income (or £50,000, whichever is greater). That means an individual with an income of £4m will still be able to give £1m to charity – or offset £1m of income against their business losses – and still get full tax relief for that £1m …
‘This government believes it is not right that taxpayers with very high incomes should, year on year, pay little or no tax as a result of unlimited reliefs. Other countries already restrict tax reliefs. For example the US caps the income tax relief available for charitable donations, and there is a presumption that all taxpayers should contribute to government costs. In the US, it is not possible to reduce income tax bills to zero by making donations to charity, as is currently possible in the UK.
‘The principal reliefs affected are loss reliefs that can be claimed against total income, qualifying loan interest relief and reliefs for charitable giving. There will also be a number of smaller reliefs which are currently uncapped that will be affected.’
HMRC and the Treasury provided the following example:
‘Consider an individual who has a total income of £250,000 under [a new definition], who claims qualifying loan interest relief of £40,000 and relief for a donation of shares, valued at £25,000, to charity, and has invested £50,000 under the Enterprise Investment Scheme (EIS). As the total uncapped relief claim exceeds £50,000, a cap of 25% of income will apply. This means the total allowable uncapped relief will be £62,500. The investment of £50,000 under the EIS will be unaffected.’
Ministers were reported yesterday to be re-examining plans to cap income tax reliefs, after a week in which tax experts expressed disquiet over the direction of public debate on tax avoidance and a tendency for statutory tax reliefs to be classed as ‘loopholes’.
HM Treasury released figures last night showing that one in 10 people with an income over £10m a year paying less than the 20% basic rate of income tax.
William Hague, the Foreign Secretary, told Sky News yesterday that HM Treasury had said ‘all along’ that it would work with charities and philanthropists to ‘look at any impact on charities that rely on big donations’. A consultation document is expected in the summer on a proposal to cap ‘unlimited’ income tax reliefs. The Treasury said in its Budget report that the government would ‘explore with philanthropists ways to ensure that this measure will not impact significantly on charities that depend on large donations’.
David Cameron said in Jakarta last week that the government would look ‘very sympathetically at charities’ concerns. The government wanted to see an increase in charitable giving in Britain, the Prime Minister said, citing recent changes to the gift aid and inheritance tax rules. He was in no doubt, however, that there was ‘a problem with some people who are using a range of tax allowances to reduce their effective tax rate down to very low – often single – figures’.
Hague said the Treasury had already met charities and philanthropists. ‘Nevertheless, remember the important point here ... that some people have used charitable giving in order to reduce their tax bill to almost nothing,’ he said. ‘That is not acceptable in the eyes of the country or the government. But finding a solution that takes account of the concerns that have been expressed is something the Chancellor and the Prime Minister have said they are open to.’
The Sunday Times reported that a YouGov poll for the paper found that ‘60% of people think there should be no cap on tax relief for donations’. Lord Fink, Treasury of the Conservative Party, had warned the Chancellor that the reform would ‘put people off’ giving large sums to good causes.
‘Fiscal equivalent of carpet bombing’
In a letter to The Sunday Telegraph, 46 ‘philanthropists or foundations’ urged the government to think again. ‘We choose to invest in charities for a variety of reasons ... None of us view tax relief as a primary motive, although it may substantially increase our donations,’ they wrote.
‘But [tax relief] is an important signal that the decision to use wealth to help others, rather than to enrich ourselves, is recognised, encouraged and supported by society. All tax reliefs are granted on the basis that the money is spent on charitable purposes, and this is regulated by the Charity Commission.’
The Daily Telegraph quoted Ian Theodoreson, Chief Finance Officer of the Church of England, as saying: ‘If the Chancellor is concerned that the charitable donations are not genuine then there have to be ways of stopping these rogue payments and not take the attitude, which is so often adopted by government, that everyone is on the make so let’s hit the innocent as well as the guilty. This fiscal equivalent of carpet bombing simply is not acceptable.’
Mike Truman, Editor of Taxation, said: ‘Are we really saying that if you’ve got £8m of income we don’t mind you dodging tax on £2m of it but we’re not going to let you dodge any more than that? That’s a crazy way to do it.’ Speaking on BBC Radio’s Jeremy Vine Show last week, he added: ‘If we’ve got frauds, then let’s go after the frauds.’ But Richard Murphy, Director of Tax Research UK, told the programme that tax relief for donations should be restricted to the basic rate of income tax.
The Observer said in an editorial yesterday: ‘[George] Osborne has a point about tax relief on donations. It can foster inequality and give the super-rich undue clout in public services and our cultural life.’
David Aaronovitch, the Times columnist and broadcaster, tweeted: ‘If the very wealthy are as generous as is claimed then they’ll be OK with a tax-free limit.’
Mainstream reliefs ‘have become loopholes’
Tax professionals expressed concern that limiting relief for losses and interest may have an adverse impact on genuine businesses. Paul Aplin said on Twitter that he was ‘struggling with the idea that mainstream tax reliefs granted by Parliament and around for decades have suddenly become “loopholes”’. Aplin is Chairman of the ICAEW Tax Faculty’s Technical Committee.
The Daily Telegraph had reported on 10 April that Osborne was ‘left shocked’ after an analysis of tax returns of multi-millionaires found that they were 'exploiting loopholes to pay little or nothing at all’.
The Financial Times reported at the weekend that accountants and wealth managers ‘warned that the current spotlight being shone on to the financial arrangements of high profile politicians risks making tax planning more risky and complex’.
The paper quoted Richard Mannion, National Tax Director at Smith & Williamson, as saying: ‘We’re seeing morality brought into arguments on tax, which is difficult for something that based on law. The rules are complicated enough without adding moral or reputational issues in as well.’
A cap on unlimited income tax reliefs
The Budget report said (at 1.191-3):
‘Tax reliefs exist for good reasons, to promote activities such as business investment and philanthropy. But it is unfair that reliefs can be used without limit to reduce tax liabilities, so that some taxpayers with very high incomes have very low tax rates.
‘To curtail this excessive use of reliefs the government will introduce a limit on all uncapped income tax reliefs. For anyone seeking to claim more than £50,000 of reliefs, a cap will be set at 25 per cent of income. This will increase effective tax rates and help ensure that those with the highest incomes pay a fairer share. This will not be extended to those reliefs that are already capped, as to do so would reduce the amount of support the tax system gives, for example, to enterprise and pension contributions.
‘The government will explore with philanthropists ways to ensure that this measure will not impact significantly on charities that depend on large donations.’
HMRC and HM Treasury’s Budget update note published on 5 April explained how the ‘cap on unlimited tax reliefs’ would work:
‘This cap will be set at 25% of income (or £50,000, whichever is greater). That means an individual with an income of £4m will still be able to give £1m to charity – or offset £1m of income against their business losses – and still get full tax relief for that £1m …
‘This government believes it is not right that taxpayers with very high incomes should, year on year, pay little or no tax as a result of unlimited reliefs. Other countries already restrict tax reliefs. For example the US caps the income tax relief available for charitable donations, and there is a presumption that all taxpayers should contribute to government costs. In the US, it is not possible to reduce income tax bills to zero by making donations to charity, as is currently possible in the UK.
‘The principal reliefs affected are loss reliefs that can be claimed against total income, qualifying loan interest relief and reliefs for charitable giving. There will also be a number of smaller reliefs which are currently uncapped that will be affected.’
HMRC and the Treasury provided the following example:
‘Consider an individual who has a total income of £250,000 under [a new definition], who claims qualifying loan interest relief of £40,000 and relief for a donation of shares, valued at £25,000, to charity, and has invested £50,000 under the Enterprise Investment Scheme (EIS). As the total uncapped relief claim exceeds £50,000, a cap of 25% of income will apply. This means the total allowable uncapped relief will be £62,500. The investment of £50,000 under the EIS will be unaffected.’
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