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Tax reliefs under the spotlight again

A few days ago the BBC ran a story about the alleged exploitation of Employment Allowance by a leading company in the recruitment industry. The Employment Allowance was introduced on 6th April 2014 and enables employers to reduce their liability for employers’ National Insurance (NI) contributions and to pay nothing at all if the employer’s liability for employee NI contributions is less than £2000 per annum. The Allowance was intended to help boost employment and was expected to benefit over a million small businesses and charities.

The BBC investigation alleged that advice was being given to companies in the recruitment industry to operate through a number of small companies, rather than one larger company, so that each could claim the allowance. As a result a call was made on Radio 4’s “Today” programme for the number of tax reliefs to be reduced due to the difficulty in monitoring how these are operated.

This call echoes the findings of a recent National Audit Office report which concluded that the cost of tax reliefs is growing. Following publication of this report the Public Accounts Committee asked the Government to justify those costs.

As far as Inheritance tax is concerned, the National Audit Office report concluded that the cost of Agricultural Property Relief (APR)(which provides relief ranging from 50%-100% on the agricultural value of agricultural property), and Business Relief (BR) (which provides relief on business assets such as shares in limited private companies), has increased by more than half since 2008/09.

It has to be said that the existence of a tax relief is inevitably going to affect taxpayers’ behaviour and, in some cases, is designed to do so. For example, the intention behind the Employment Allowance was to boost employment. In the same way, if particular asset classes have preferential tax treatment attached to them, this will undoubtedly encourage investment in those assets. Perhaps one of the most tax favoured classes of assets is residential property which is the owner’s main home, as this benefits from complete exemption from Capital Gains Tax on sale. This tax preferred status is due to be enhanced further if and when the Government implements its promised main residence Inheritance tax (IHT) relief.  This will give each of a married couple or couple in a registered civil partnership an additional transferable IHT allowance of £175,000 which can be claimed against the value of the family home. It is inevitable that a couple facing an IHT liability on their estates will be influenced by the availability of the proposed relief and invest capital in a family home rather than say quoted shares which carry no tax reliefs.

Similarly, the existence of BR has encouraged taxpayers to invest in AIM shares, or in collective investments investing in companies quoted on AIM, in order to take advantage of the 100% relief from IHT on these assets, which should be available after two years ownership.

Those opposing the existence of  tax reliefs have not, to date, put forward any alternatives as to how the purpose behind them is to be carried out. If BR, for example, was not available, how would the Government ensure that family businesses are not destroyed by the burden of IHT on death? Perhaps the answer is not to reduce the availability of tax reliefs, but monitor their use more carefully to ensure that they are not used for unintended purposes, and indeed that they do not end up preferring one asset class to too great a degree over others.