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loss relief - interpretation of s67(1) ITA 07?

Year 1 loss before CA's £10,000, CA's £2,000

Year 2 loss before CA's £10,000, CA's £2,000

Year 3 loss before CA's £10,000, CA's £2,000 

Year 4 loss before CA's £10,000, CA's £2,000 

Year 5 loss before CA's £10,000, CA's £2,000

Year 6 profit before CA's £5,000, CA's £8,000

Is the tax loss of £3,000 in year 6 allowed?

s67(1) fails to define loss.

Is it a loss pre CA's and therefore s67(2) doesn't apply? or is it a loss post CA's like the definition in s67(2) and therefore s67(2) does apply? 

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Eh?

S.67(2) clearly says that you look at the loss (for the tax year, rather than the basis period) without regard to capital allowances, which is consistent with the way the losses are calculated for the earlier tax years under S.70.

I assume this is a 31 March to 5 April year-end? Otherwise you might yet have a loss in the 6th successive tax year.

EDIT: On a re-read, S.67(2) doesn't clearly say that it just says the same as S.70! Meaning that strictly you need to apply S.247 CAA 2001 and S.26 ITTOIA 2005, but I'd suggest that it's the intention of S.67 to look at losses before capital allowances. Try and find the explanatory notes to ITA 2007 on legislation.gov.uk to see if they cast any light.

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By blok
22nd Jan 2013 11:52

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year end is 31 march -

I understand what s67(2) says.

but for s67(2) to apply we need to get through 67(1) and there is nothing defined in s67 (1)

see BIM 75625 , HMRC seem to interpret the defintion of loss differently in s67(1) and 67(2).  particularly tax year 07/08 in their example

edit: 06/07 in their example.

 

 

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By blok
22nd Jan 2013 11:42

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i should mention that this is a live example where hmrc are looking to dissallow sideways relief.

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2007/08

In BIM75625 the amount of relief is the amount after capital allowance, but that doesn't necessarily mean that you deduct the capital allowances for determining whether S.67(2) applies to restrict.  That does seem to be HMRC's interpretation if you look at 2006/07 though!

According to the ITA 2007 explanatory notes, the provision is supposed to be based on the former ICTA 1988 provision (S.397). S.397 ICTA 1988 was clear that all losses were calculated before deducting capital allowances.

I agree that the silence in S.67 causes an ambiguity. So Pepper v Hart says look to evidence of the underlying intention, ie S.397 ICTA 1988.

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By blok
22nd Jan 2013 12:05

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I probably corrected my above reply with 06/07 as you were typing your reply.

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By blok
22nd Jan 2013 12:07

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also.

surely the drafter of 67(1) would not have meant for the effect of s67 to be determiend by a claim to CA's which as we know is subject to a claim and annual variations to annual government policy.

thanks

 

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By BKD
22nd Jan 2013 12:57

Ambiguity?

I agree that ambiguity can be read into s67, but in my mind the intention is clear. In computing losses, capital allowances are allowed as an expense. There is therefore no need to state how the loss for 67(1) is computed. There is either a loss, computed under basic principles, or there is not. Whilst I agree that there is silence on that point, s70 specifically states what is meant by computing s67(2) losses for the 5 preceding periods without reference to capital allowances. If it had been the intention that the 67(1) loss was also to be so computed, I believe that s70 would have made reference to the current year loss as well as the previous 5 years. The CIOT background notes also make the point that s70 exists in order to determine whether prior losses for the purposes of s67(2) were incurred. By implication, the rules in s70 do not apply to s67(1).

Further, 67(2) refers to restriction of loss relief. My interpretation is that because the loss to be relieved is that after deducting capital allowances (because as noted above capital allowances are treated as an expense) and the 'relief' loss mentioned at 67(2) is the same loss referred to at 67(1) that 67(1) loss must be after capital allowances.

Sadly, I think HMRC are right in this case and I suspect it will be one for Tribunal if you do not agree. but do keep us posted of the outcome.

 

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By blok
22nd Jan 2013 12:32

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thanks for your interpretations and I agree there are no clear conclusions to draw.

I need to check whether we can still restrict capital allowances and avoid the issue altogether (which makes a mockery of the legislation), but I would like to push HMRC as far as possible with this particular point.

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By BKD
22nd Jan 2013 12:51

You can restrict allowances

But what will that achieve? Other than to mop up unused losses b/wd.

You will have turned a loss into a profit, therefore s67 is no longer in point.

If you don't disclaim the allowances, you will nevertheless have re-set the 5-year clock.

 

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By the way...

... you might also like to read S.48 CTA 2010 which is unambiguous.

All taxpayers shall be treated equally, but some less equally than others?

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By BKD
23rd Jan 2013 13:11

Exactly, George

If one looks at the legislation from which ss67 and 48 are derived (the last version of s397, not the original to which you linked above):

s67(2) is derived from 397(1)  - which refers to the exclusion of any loss where a loss, without regard to capital allowances, arose in the previous 5 years (no mention of the current year in the context of CAs).

s48(2) is derived from 397(2) - which specifically includes the current year when calculating the loss without regard to capital allowances.

If it were intended that income tax losses for the current period were also to be calculated before capital allowances, then I believe the legislation would have said so - although I accept that there is still a degree of ambiguity the wording of both the old and the current legislation heavily favours HMRC's argument.

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My point remains the same

Was it the intention of Ss. 211-214 FA 1994 (when capital allowances started to be treated as an expense of the trade under the current year basis of asessment) to change the position and change it for income tax purposes only?

Or was is an historical accident that (when a few words got inserted and a few words got deleted) the legislation then ceased to be unambiguous and apparently have a different interpretation to that that it did before, and giving a differing treatment between corporates and unincorporated businesses?

Absent any explanatory notes or other Hansard material, I'd say that on the balance of probabilities the Parliamentary daftsman made an error, and it was not the intention of Parliament to alter the status quo.

If it had been the intention of Parliament to do so, the insertion of a few more words would have put the matter beyond doubt.

After all, the Paliamentary daftsman did overlook deleting S.397(6), which didn't go until CAA2001.

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