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Unfortunate mix-up costs taxpayer the chance to claim a loss at a first-tier tribunal

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Two recent decisions of the first-tier tribunal (FTT) serve as an important reminder to make sure that a claim for allowable losses is made under the appropriate statutory provisions.

10th May 2024
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In Tan v HMRC [2024] UKFTT 238 (TC), Ms Tan was a director of Kleos (Holdings) Ltd (KHL), which operated a restaurant business. On 30 September 2017, she subscribed for 150,000 shares in KHL at a price of £1 each, to be paid for by capitalising her director’s loan account. In November 2017, KHL ceased trading and the company was struck off the register in July 2019.

Right Idea, Wrong Execution

On her self-assessment for 2017-18, Ms Tan made a claim for a negligible value loss of £150,000.

Under section 24 Taxation of Chargeable Gains Act 1992 (TCGA 1992), a taxpayer can make a negligible value claim if an asset “has become of negligible value while owned by” the taxpayer. The effect of such a claim is that the asset is treated as having been disposed of and reacquired for negligible value, enabling the taxpayer in question to realise a loss on assets that would otherwise be worthless.

HMRC denied Ms Tan’s claim and, in a brief judgment, the FTT rejected her appeal for one simple reason: the shares had always been of negligible value when they were acquired in September 2017. Therefore, they could not have “become” of negligible value while Ms Tan had owned them. This factual admission had been conceded by Ms Tan’s representatives in correspondence with HMRC during the enquiry in 2019.

Last Chance Saloon

On 12 March 2024, just six days before the hearing was due to take place, Ms Tan’s representatives raised a new argument: that the director’s loan was a capital loss which was relievable under section 253 TCGA 1992.

Under that section, a taxpayer can obtain relief for outstanding loans to trading businesses that have become irrecoverable. In such circumstances, the taxpayer can claim the amount of the loan as an allowable loss for capital gains tax.

However, the FTT refused to consider this new argument. The new argument would require further evidence, which would necessitate an adjournment to the hearing. Moreover, it was accepted by Ms Tan’s representative that there was no good reason why the argument had been raised so late in proceedings and it was acknowledged that her initial claim could have been made on this basis. The FTT also suggested that the overall argument was not a particularly strong one in light of the evidence.

Maybe In Another Life

The same argument that Ms Tan attempted to raise late was given fuller consideration by a contemporaneous decision of the FTT in Bunting v HMRC [2024] UKFTT 275.

Mr Bunting had established a company, Rectory Sports Ltd (RSL), to sell sports books and memorabilia. He was neither a shareholder nor a director because that was discouraged by his then-employer, Goldman Sachs. Instead, his wife was both shareholder and director and he provided funding in the form of a loan to RSL for approximately £3.4 million.

It became clear in 2012 that the business was not sustainable and, in January 2013, Mr. Bunting entered into an agreement with RSL to capitalise a significant portion of the loan. In exchange for 2.2 million shares with a nominal value of £1, Mr Bunting agreed to release RSL from £2.2 million of its debt. The remainder of the loan was released in exchange for RSL’s assets. RSL was subsequently liquidated in April 2013.

Mr. Bunting claimed the £2.2 million as an allowable loss under section 253 TCGA 1992. HMRC denied the claim on the basis that the waiver of the loan caused it to cease to exist and so the loan was not “outstanding” within the language of section 253.

The FTT allowed Mr Bunting’s appeal. It found that the shares which were received in consideration of the waiver were of nil value (just like in Ms Tan’s case). Therefore, Mr Bunting had been paid nothing in exchange for a debt of £2.2 million, which the FTT held was still outstanding, and he was entitled to make a claim under section 253.

Cautionary Tale

If there are any lessons to be learned, it is to make sure that all statutory alternatives have been considered at the earliest opportunity. There is no guarantee that a taxpayer will be entitled to raise new legal arguments at the last minute.

One should be cautious about drawing analogies between first-instance decisions, which always turn on their own facts. Nevertheless, the reasoning in Bunting suggests that Ms Tan’s case could have been decided very differently if her advisors had relied on section 253 TCGA 1992, rather than section 24. This is an unfortunate and costly mix-up for the taxpayer.

Replies (3)

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By FactChecker
10th May 2024 16:34

"Ms Tan’s case could have been decided very differently if her advisors had relied on section 253 TCGA 1992, rather than section 24. This is an unfortunate and costly mix-up for the taxpayer"

... and presumably a potentially costly mix-up for the advisors' insurers?

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Replying to FactChecker:
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By Paul Crowley
10th May 2024 18:43

In each case the issue of the shares seems to be a ridiculous action to take.
Were they really hoping to turn it into Income tax relief?
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg63530

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By AndyC555
13th May 2024 12:03

"Ms Tan’s case could have been decided very differently if her advisors had relied on section 253 TCGA 1992, rather than section 24."

Strange isn't it. When people make the correct decisions and use the tax rules to their advantage , there are bleatings about 'morality' and 'fairness' and a 'duty' to pay tax but when they make the wrong decisions, they just have to accept that "that's the way the law is written".

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