Clarke puts PRP tax relief on trial


Economics Editor

Chancellor Kenneth Clarke, in hot water over executive share options, is understood to be examining the tax treatment of profit-related pay as part of an attempt to give himself elbow room for cuts in the next Budget.

Any such move would cause a furore, but removal of the relief could give him pounds 1bn to finance cuts in the standard rate of tax. According to the Treasury, the cost of cutting the basic rate of income tax by 1p would be pounds 1.6bn.

Tax relief on profit-related pay (PRP) currently stands at pounds 4,000 or 20 per cent of an employee's pay, whichever is lower. With 2.4 million people on PRP schemes, the cost to the Exchequer has escalated at an extraordinary rate in the Nineties. Five years ago, cost of the relief was no more than pounds 25m. The Treasury and Inland Revenuehave become increasinglyconcerned at its burgeoning cost.

Malcolm Gammie, a tax specialist at law firm, Linklaters & Paines, says of PRP that "as soon as you start using the tax system to create incentives, people pile in and then you find the tax benefit being given to people who shouldn't really benefit".

Another tax exemption that may stand in the firing line is the relief from income tax on the first pounds 30,000 of redundancy payments. The cost to the Treasury of this longstanding provision has risen by half in just two years and stands at pounds 1.5bn in the current tax year. One clear warning is that the Inland Revenue is toughening up its approach to such payments. "Are the Revenue pulling the plug?" asks accountancy firm Arthur Andersen in a recently published pamphlet on redundancy payments.

Arthur Andersen warns that "the Inland Revenue are adopting a more aggressive stance" when considering whether relief is applicable.

For example, payments made to employees on "gardening leave" are now treated as taxable. The Inland Revenue is also viewing payments made in lieu of notice as taxable.

According to Tony Atkinson, Warden of Nuffield College at Oxford University and a specialist on public finance: "There is no case for simply exempting redundancy payments; why should one form of remuneration be treated differently from another?"

When marginal rates of tax were so much higher, there was an argument for shielding individuals from high taxes on redundancy payments. That was no longer the case - and the effect could be cushioned by "averaging provisions" which are applied to actors and others with highly variable earnings.

A further exemption looking vulnerable is the income tax relief that the self-employed can claim against half their Class 4 National Insurance Contributions.

The cost to the Exchequer of this exemption in the current fiscal year stands at pounds 150m. Paul Johnson, a director of the personal tax programme at the Institute for Fiscal Studies, says "the well-off self-employed do pretty well out of the tax system". More bluntly, Tony Atkinson says "there is no justification for the relief".

Relief given on the first pounds 8,000 of relocation could also come under the axe. This was radically curbed by Norman Lamont in his spring 1993 budget, but the cost still stands at pounds 300m.

Attacking these reliefs would undoubtedly cause an outcry, although the Chancellor might gamble that was a price worth paying for worthwhile cuts in the basic rate of tax. But Malcolm Gammie at Linklaters warns that "such changes have to be made as a part of a coherent package. Picking at areas is a hopeless way to undertake tax reform".

The cost of tax reliefs


Profit-related pay pounds 800m

Redundancy payments pounds 1.5bn

Half of class 4 National Insurance Contributions pounds 150m

Relocation packages pounds 300m

peopleFrankie Boyle responds to referendum result in characteristically offensive style
Lewis Hamilton will start the Singapore Grand Prix from pole, with Nico Rosberg second and Daniel Ricciardo third
F1... for floodlit Singapore Grand Prix
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvHe is only remaining member of original cast
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
Fans hold up a scarf at West Ham vs Liverpool
footballAfter Arsenal's clear victory, focus turns to West Ham vs Liverpool
New Articles
i100... she's just started school
ebooksAn unforgettable anthology of contemporary reportage
New Articles
Life and Style
Couples have been having sex less in 2014, according to a new survey
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
New Articles
i100... despite rising prices
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam