With the legal position unclear around the precise status of pre-2003 capital loss claims on unapproved employee share options, HMRC is turning the screws to try and encourage claimants to cave in, according to tax advisers.
HMRC has written to taxpayers whose claimed losses unapproved employee share options are under enquiry inviting them to withdraw their claim and asking for a response within 40 days, the ICAEW Tax Faculty reported this week. Copies of the letters were not sent to agents.
Those who are not prepared to withdraw the claim are asked to explain why they believe their claim is still valid.
HMRC’s letter is an update on its position on taxpayers who have claimed capital losses on the disposal of shares acquired on the exercise of an employee share option before 10 April 2003.
In 2003, HMRC lost its appeal in the case of Mansworth v Jelley, which allowed taxpayers who had exercised their options and then sold their shares to claim a capital loss.
The law was changed on 10 April 2003, so that there was a nil gain /loss position which HMRC believed was more equitable.
Prior to the date in the change of law, however, there was a flurry of activity as losses under the court decision were claimed, accountant Baker Tilly notes in its weekly tax briefing.
The issue has resurfaced because HMRC says it has received legal advice that its guidance was incorrect, which meant that taxpayers were paying too little CGT because the amount chargeable to income tax on the exercise of the options was being incorrectly deducted from the disposal proceeds.
Previous guidance by HMRC on the subject said that the gain or loss from unapproved employee share options before this date should be calculated by deducting the market value of the shares at the time the option was exercised and any amount chargeable to income tax on the exercise of the option.
“Where the shares are treated as having been acquired at market value, that value is the full measure of their deemed cost of acquisition,” the HMRC letter to taxpayers says. “The cost is not augmented by any amount chargeable to income tax on the exercise of the option. Thus in computing any capital gain or loss accruing on a disposal of the shares no deduction falls to be made of, or in respect of, any amount that is chargeable to income tax on exercising the option.”
HMRC intends to finalise the enquiries in cases where Mansworth v Jelley losses have been claimed.
HMRC is asking affected taxpayers to withdraw their claim to losses, the ICAEW said. Enquiries will then be closed with an adjustment to the return, where appropriate, to remove the losses and make any other adjustments agreed.
“If you are not prepared to withdraw your claim to losses, please explain why you consider it is not appropriate to withdraw your claim and the basis on which you believe your claim is valid,” the HMRC letter says. “Please provide all documentary evidence on which you rely to support your claim. Please let me have your response within 40 days of the date of this letter.”
For those who don’t want to withdraw their claim HMRC will review your case on an individual basis and decide how best to take your case forward.’
The ICAEW’s TAXGUIDE 1/10 Mansworth v Jelley revisited, in January 2010 advised on the implications of HMRC’s change of view on the CGT treatment of shares acquired before 10 April 2003 by exercising employee share options.