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HMRC Reveals Sideways Loss Relief Settlement Opportunity

13th Aug 2015
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HM Revenue and Customs (HMRC) has launched a settlement scheme for those in dispute over sideways loss relief schemes. The settlement scheme is aimed at sole traders, corporates and UK GAAP partnerships that have looked to create a loss via the write-off of expenditure or the value of rights or assets through generally accepted accounting practices (GAAP).

Broadly speaking, these schemes work by generating a large loss by accounting for the arrangement as a trade and either writing down the value of trading stock or claiming deductions or allowances for purported trading expenditure. Often, schemes like these are funded by borrowing and may include a mechanism that means repayment is guaranteed. The individuals claim the loss as sideways loss relief against their other tax liabilities.

HMRC’s view is that these schemes do not meet the commercial and other fundamental requirements for sideways loss relief, and therefore the participants are not eligible to claim relief.

HMRC has written to users of such schemes, identifying the broad terms under which it is proposing to allow settlement. Though the settlement options differ for sole traders and companies, they broadly take the following form:-

  • loss relief against other income will be allowed in an amount equivalent to the taxpayer’s contribution to the scheme, less any element expended on unallowable fees (unallowable fees are those spent on tax advice or circular funding arrangements - HMRC will tell you if it believes a disallowance for fees is required);
  • the balance of the loss claim will not be allowable
  • any share of income attributable to the cash element of expenditure will be taxable in full
  • for GAAP corporates, any share of income attributable to the loan financed element will only be taxable in so far as it represents investment income over and above the return of the initial capital
  • for sole traders, loan interest will only be allowable to the extent that it represents the allowable expenditure paid out of the initial cash contribution

As a result of pressure from the government to reduce the tax gap – along with negative public opinion for those who do not pay the right amount of tax - HMRC’s stance on tax avoidance has toughened in recent years, and it is not afraid to pursue legal action. Sideways loss relief has also been progressively challenged by legislation as well as through the courts and tribunals such as in the cases of Samarkand Film Partnership No.3 v HMRC and Eclipse Film Partners No.35 v HMRC.

Those who do not grasp this opportunity may find themselves under increased scrutiny from HMRC, who may intensify their investigations and look to push for a criminal prosecution where appropriate. Furthermore, when settlement is no longer on the table, users of such schemes may well find themselves being issued with an Accelerated Payment Notice and/or a Follower Notice, thus increasing their liability to potential penalties.

View my blog at Gary Rowson's blog - OneE Group

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