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Government moves to block loss relief

26th Oct 2009
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The Government has acted decisively to clamp down on tax avoidance through the use of marketed tax avoidance schemes. The target of the new legislation published on 21 October and taking effect from that date is the use of losses against other income and capital gains.

The announcement is backed by Revenue & Customs Brief 66/09, which includes draft legislation, explanatory notes and draft HMRC guidance on the subject. The new legislation restrict the use of losses against other income under sections 64 and 72 of ITA 2007. These sections provide general sideways loss relief (including against capital gains) and relief for losses incurred in the early years of a trade.

The restriction will apply when the person incurs a loss from trading alone or in partnership and the loss arises directly or indirectly in consequence of, or otherwise in connection with, relevant tax avoidance arrangements. For this purpose, relevant tax avoidance arrangements means arrangements :

(a) to which the person is a party, and

(b) the main purpose, or one of the main purposes, of which is the obtaining of a reduction in tax liability by means of sideways relief or capital gains relief.

Arrangements includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).

The draft guidance makes clear that a loss which arises through normal commercial operations will not be affected, but that losses which the person incurs through the operation of a tax avoidance arrangement will no longer attract relief. One particular example may be of interest as it touches on avoidance through EBT arrangements which have been very widely marketed recently.

Example 3 – loss arising to an individual from a marketed tax avoidance scheme
Individual Y carries on a building trade. He also has a large, mixed portfolio of investments which give rise to income of £100,000 per year. Y enters into a scheme that is being marketed by a tax adviser which is designed to generate losses through contributions to an employee benefit trust and which is said to circumvent the anti-avoidance legislation relating to employee benefit contributions. Y claims the loss, of £100,000, for set-off against his investment income.

The loss arises in consequence of relevant tax avoidance arrangements. To decide whether a main purpose of those arrangements is to obtain a reduction in tax liability by way of sideways loss relief it is necessary to look at all the circumstances in which the arrangements were entered into, including the participant’s overall economic objective. In this case the main purpose of Individual Y entering into the arrangements was to obtain a reduction in tax liability by means of sideways loss relief. ITA/S74ZA therefore applies and no sideways loss relief is given for the loss.

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By User deleted
26th Oct 2009 13:13

EBT Example

Not quite sure what they are trying to say with the EBT example. I think they are just trying to get Employee Benefits Trusts in there somewhere to scare people off, but their example seems to have nothing to do with even companies to start with, let alone how EBTS usually work!

I'll probably get castigated for saying so, but if this measure works then about time too. I've seen all sorts of schemes creating a loss in ever more convoluted ways, and there's no justification is there really?


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By gilbertdeclare
28th Oct 2009 15:25

Shot in the foot

These  changes in dealing with side ways loss relief are not unexpected  because of the very agressive marketing  of tax avoidance schemes by certain advisers. They killed the goose that laid the golden egg.   Pity - I was going to offer the scheme to some of my clients.

Please note the examples used by the HMRC are not comprehensive  enough  show how these schemes worked.  The HMRC attitude will work against them in the longer term  -more and more I am advising clients of a certain type to quit the UK for  foreign lands !



Anthony Gilbert

UK Tax & Property

3 Claverton Street

London SW1V 3AY


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