Accountancy warns tax relief cap to bankrupt entreprenuers
Government plans to introduce a cap in income tax relief have been criticised by accountancy firm PKF, which has warned that the plans could cause small and medium sized enterprises to fold and entrepreneurs to be pushed into bankruptcy.
The government published a consultation on Friday (13 July) and is now seeking views on the implementation of the proposals in Finance Bill 2012 on the capping of tax relief.
The paper confirms that the reliefs that will be subject to the new cap of the greater of £50,000 per year or 25 of earnings are those that are not currently capped and that can be offset against general income.
The rules will take effect from the 2013-2014 tax year onwards, but claims on any losses that occur after 6 April 2013 will be subject to the cap even where the normal rules allow losses to be carried back and offset against income for 2012-2013 or earlier tax years.
Losses made against shares, including EIS shares, are currently uncapped and so will qualify under the definition and be subject to the new cap.
Lisa Macpherson, national director of tax at PKF, believes this is an “incredibly badly conceived idea” as it will cause pain for entrepreneurs who could, in future, get a smaller refund on their losses or have to wait much longer to get tax relief.
She said: “The proposals threaten the survival of many SMEs at a time when they are already finding it difficult to keep their heads above water, and may also discourage entrepreneurs from setting up new businesses in the future.
“I fear that companies will fold and entrepreneurs will be pushed into bankruptcy as a result of these plans.”
Ms Macpherson pointed out that no entrepreneur sets out to make losses over the long term but the existing rules recognise that new businesses are especially vulnerable, particularly during a downturn.
She said: “The owners of micro-businesses are unlikely to be affected because of the £50,000 limit, but entrepreneurs who make larger losses could easily lose out on tax refunds that could be vital to their financial survival.
“If the government really must press ahead with these proposals, it must at least consider raising the cap to somewhere north of £100,000 per annum so that fewer entrepreneurs are adversely affected by the proposals.”