UK and International Tax news

Response To Condoc On Relief For Income Tax Losses

Wednesday 8th August 2012

On 30 June 2011, HMRC published a consultation document – High-Risk Areas of the Tax Code: Relief for income tax losses –  on options to deter tax avoidance  exploiting income tax loss reliefs.  The consultation ran for a period of 12 weeks and closed on 30 September 2011. HMRC has just released a paper – Summary of Responses – to the condoc.

The aim of the consultation was to see if a legislative approach could be found that would deter avoidance which exploits income tax loss reliefs whilst ensuring that adverse consequences were minimised for businesses with genuine losses. The consultation covered specific income tax loss reliefs that can be set against a person’s income or gains of the same tax year or another tax year, the main focus being on trade loss reliefs available for set-off against general income and gains, property loss relief available for set-off against general income, and employment losses.

The consultation proposed three options to counter this behaviour, being a principle-based approach, a mechanistic approach of limiting relief to £25,000, and an administrative approach of withholding repayment where the total loss relief claimed for set-off in a year is in excess of £25,000, until claims have been agreed by HMRC.

Since the consultation period closed, there have been a number of developments.  In the 2012 Budget the Government announced a cap on uncapped income tax reliefs to be introduced in April 2013.  Although not an anti-avoidance measure, the cap will affect the amounts of loss relief that may be claimed against general income and as such can be expected to impact on avoidance behaviours.  The relief cap will also include those loss reliefs covered in the 2011 Budget consultation.

A further consultation document seeking views on the operation of the relief cap – Delivering a cap on income tax reliefs: a technical consultation – has recently been published on the HMT website.

The Government also announced proposals for a General Anti-Abuse Rule (GAAR) to be introduced in 2013, following consultation.  The proposed GAAR is targeted at artificial and abusive tax avoidance schemes, and is likely to affect at least some of the schemes that seek to exploit loss reliefs against general income and gains.  The GAAR consultation was published on 12 June 2012.

Since the consultation was completed the Government has also announced that targeted anti-avoidance rules will be introduced in the 2012 Finance Bill for property loss relief with an agricultural connection and post-cessation trade and property reliefs.

In its Summary of Responses to the June 2011 consultation, HMRC has confirmed that,  given the recent policy changes significantly impact on income tax loss reliefs, it will monitor the effect of these developments before considering whether further action is needed against avoidance involving income tax loss reliefs.

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