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The cap and how it fits Back  
The Finance Act 2006 has introduced a cap on the extent to which it is possible to take advantage of certain tax reliefs in aggregate. It will make tax based financing of projects or activities more difficult in the future.
How it works
Broadly, the restriction on relief, or the cap, operates by limiting the amount of relief available in respect of a list of reliefs, to the higher of 50p.c. of the person’s pre relief income, or ?250,000. Put another way, anybody who qualifies for the reliefs in question can have up to ?250,000 worth of reliefs in one year. But if you want more than that, you can have it only if at least half of your income, before claiming the reliefs, remains effectively within the charge to tax.
John Bradley

Since few reliefs have escaped the capping, its practical effect in most instances will not be very different to an alternative minimum tax at the standard rate of income tax.

Not everybody is affected by the cap. If your income is less than ?250,000 per annum before claiming reliefs, the cap will not affect you. If the amount of reliefs you are entitled to in a year does not exceed ?250,000 the cap will not affect you. The cap has been put at a level where it will not affect the vast majority of voters, nor will it affect the highest paid civil servants or politicians. It is likely to affect mainly high earning professionals at the top of their professions, and the more successful of our entrepreneurs and business people.

The reliefs
The idea for a cap on reliefs originated out of opposition party and media criticism of tax incentives for property development. The cap which emerged, however, embraced a much wider range of reliefs including charitable donations; relief for restoration of heritage buildings; incentives for investments in films; BES relief; interest relief on borrowings by individuals for investment in trading companies; tax exemption on patent royalties and distributions out of patent royalties; stud fee income and exempt woodland income; as well as the anticipated targets of the various property based reliefs.

The background to the imposition of the cap was probably twofold. Firstly it is probably the case that many property based reliefs, justified when introduced, may have been kept on longer than was necessary in every instance. Secondly, there has been a campaign of misleading comment in political and media circles suggesting that the very rich do not pay their fair share of tax. In fact Revenue statistics show that the revenue from income tax is heavily dependent on payments by the better off and that it bears exceptionally lightly on the less well off. This campaign of comment was valid only, it would seem from Revenue statistics, in relation to approximately 30 individuals in the entire country.

The fact that the background to the introduction of the cap was partly one of a campaign based on false premises does not mean that the cap is not legitimate. It is for the government to decide the extent of the incentives which it wishes to make available for different forms of economic activity. The cap is merely one such decision.

The implications
It is reported that the Revenue commissioners opposed the introduction of an Alternative Minimum Tax on the grounds that the Alternative Minimum Tax liability would become a target which every higher paid taxpayer would require their tax advisor to achieve for them, in terms of reduction of tax liability. It remains to be seen whether the official approval for relieving at least ?250,000 worth of income, or half of income, if greater, from tax would similarly be seen as a ‘must have’ feature for the better off.

But the truth is that none of the tax reliefs were ‘handouts’. For the most part they required the taxpayer to part with large sums of money far greater than the tax relief he was about to obtain, and run commercial risk as to whether he would or would not recover the balance of his money. Not every taxpayer has in the past availed of these reliefs and it is not to be expected that in the future every taxpayer will.

The more obvious implication is that the financing of ‘tax based’ projects will now become a more difficult matter. Any large project will now require a greater number of taxpayers to participate than might previously have been the case. Taxpayers may be reluctant to invest more than can be covered by tax relief within a year, or at most two years, in the area of property based investment. There are existing restrictions on the maximum number of investors that can be brought together for a particular project (very broadly speaking somewhere in the region of 13-15). However, given that most property based tax reliefs are being phased out anyway, the problem may seem to be short term.

The longer term problem will arise on the next occasion that the government feel it necessary to introduce new tax incentives to promote some project that, on its own economic merits, might not get off the ground, without the alternative of the injection of large quantities of state monies. What then will the government do? Will the new relief be automatically added to the list of capped reliefs, thereby shooting the incentive in the foot at birth? Or will we then start off a whole new cycle of uncapped reliefs, to be followed by politically inspired hysteria, or an insignificant handful of individuals tax planning their tax liabilities out of existence?
It would be contrary to all experience in tax matters to expect that the list of 54 reliefs will remain at that number. Nobody contemplating availing of an uncapped relief will be able to feel confident that, having spent his money as required for the purposes of the relief, he will be allowed the peaceful enjoyment of the relief. There will always be the fear that once his money is spent the relief will be added to the list of capped reliefs. The fact that the capping has been applied from 2007 onwards not only to relief claims on the basis of expenditure incurred after that date, or even after the enactment of the Finance Act in 2006, but applies to reliefs claimed in future years on the foot of expenditure already incurred, involves an element of bad faith. That undermines the credibility of government and reduces the credibility of future reliefs. To take an example, the current Finance Act has also introduced a new tax relief for donations of properties to the proposed national trust. It takes the form of credit against present and future tax liability of an amount equal to the value of the property. What assurance has he that this relief will not be added to the list of capped reliefs once he has donated his property? You cannot break faith and expect to be trusted. Chickens do come home to roost.

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