Sideways loss relief settlement opportunity

What is this?

The opportunity covers situations where an individual has made an investment that has resulted in a loss computed in accordance with Generally Accepted Accounting Practice (GAAP) but HMRC dispute that there is a real economic loss. A case typically involves an individual acquiring an investment with a high risk of failure.

Eg. Individual made a cash contribution of say 20% and borrowed the remainder, usually from the promoter or an associate, where there was  little prospect of the debt being called in. The investment was then unsuccessful leading to a loss that could be set against the individual’s total income for income tax purposes. The tax recoverable by the individual was then worth more than the cash investment. The investment vehicle could have been a company, partnership or sole trade and would often include investments in films, intellectual property, technology, trading partnerships etc. We have seen examples in the press where celebrities have apparently made losses in second-hand car dealerships and music businesses.

Example

An individual invested £100,000 in a “trading” partnership. The investment was made up of £20,000 in cash and £80,000 from non-recourse loans. The partnership failed triggering an apparent accounting loss for the individual of £100,000. The investor was a top rate taxpayer, so the tax recovered through his loss claim was £45,000 but the terms of the borrowing mean that the loss was not called in. The investor paid £20,000 for a tax saving worth £45,000.

HMRC’s settlement terms

HMRC will settle enquiries into such loss claims on new standard terms:

  • Tax relief will be given for the cash amount of the investment e.g. in this example the investor would receive relief on £20,000. The income tax recovered will therefore be £9,000 against the expected £45,000 from the original claim.
  • No relief will be given for unallowable costs e.g. fees for tax advice.
  • There will be specific rules for interest paid by an investor or income received from an investment, depending on circumstances.
  • The opportunity is not available to any investments that are subject to criminal investigation or Civil Investigation of Fraud enquiry.

How can we help?

It will be important for clients to understand where they stand and what the value of settling will be. We can review the circumstances of any claim:

  • Is HMRC able to recover the tax by assessment?
  • Is there any prospect of an Advanced Payment Notice or a Follower Notice being issued?
  • What are the cost and cash flow implications of pursuing a loss claim?
  • Do the particular circumstances provide an alternative basis for settlement?
  • Will the client need time to pay or an instalment arrangement?

Please speak to your normal Forbes Dawson contact if you require assistance here.

 

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