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ATT: Relief cap will distort business decisions

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13th Feb 2013
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The government’s proposed cap on income tax relief should be scrapped because it would “distort” decisions on how businesses are structured, the Association of Taxation Technicians has told HMRC.

The warning was in response to draft Finance Bill provisions for capping tax relief at £50,000 or 25% of income, whichever is greater. The change is due to take effect on or after 6 April.

The AAT said it was pleased that some business situations had been excluded from the cap on tax relief in the draft legislation, but added the draft legislation was “still flawed and risks damaging businesses as well as impacting unfairly on individuals.”

Capping relief on interest paid on borrowings used to fund a business will “distort” decisions about business borrowing and business structures, ATT president Yvette Nunn said.

It could mean that tax factors are given more priority than commercial considerations, she said. “If that happens, the cap will deliver no additional tax. It will simply mean that most businesses adopt structures that keep them clear of the capping rules.”

HMRC has said that the cap on income tax relief supports the government's objective of promoting fairness in the tax system.  

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