Sideways loss relief settlement opportunity

Sideways loss relief settlement opportunity

Back to Newsletters

What is this?

The settlement 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 very little opportunity for a return on the investment.

For example, an 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 partnership or sole trader would incur ‘upfront’ expenditure creating a year 1 loss which could be set against the individual’s total income for income tax purposes. The tax recoverable by the individual was worth more than the cash investment. The investment vehicle could have been a partnership or sole trade and would often include investments in films, intellectual property, technology, trading partnerships etc. There have been several 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 limited recourse loans. The partnership business failed triggering an accounting loss for the individual of £100,000. The investor was a top rate taxpayer, so the tax recoverable through his loss claim was £45,000 but the terms of the borrowing mean that the loss was not called in. Therefore, the investor suffered an economic cost of £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, for example fees for tax advice or other advice in relation to the investment made.
  • 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 enquiries by HMRC.

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 or have time limits expired?
  • 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?

If you would like to discuss whether the settlement opportunity might be appropriate for you please contact a member of the team.

Subscribe to our newsletter

Keep up to date with the latest tax news.