BIM75740 - Trading losses: restriction of relief: contrived trading losses
The astute avoider disguises avoidance as commercial. Certain
allegedly commercial activities are entered into with the objective
of creating artificial losses. Where there is any suspicion that
such losses have been created or that the person claiming the loss
is for practical purposes not suffering or is not liable to suffer
the financial effect of that loss, then the case should be referred
to Anti-Avoidance Group (Investigation), preferably before detailed
enquiries are made.
This instruction is not intended to apply to cases where
losses arising are simply ’uncommercial' in the sense that
the business could not sustain such losses and be said to be
running on a commercial basis (for example, ’hobby' trades).
The key concern is that there exists an element of artificiality
and that the losses are, or may have been, contrived, probably in
order to be relieved against profits. Possible indications of this
are:
- A business which is distinct from the trader’s usual
activities is commenced shortly before the start of a tax year (or,
in the case of a company, an accounting period), and accounts for
the new business disclose a substantial loss in excess of the
capital contributed.
- In the case of a company, the loss is roughly equivalent to the
profits of the accounting period from the company's other trading
activities, or is surrendered as group relief.
- The asset or assets used in the business may be situated in, or
acquired from, a place outside the UK.
- There are substantial borrowings which may be from the vendor
of the asset, a person connected with him, or a foreign based bank
which later assigns its loan to one of these.
- There is evidence of non-recourse finance.
- There is evidence of expenditure matched by allegedly
non-taxable receipts.
- There is evidence of the manipulation of timing differences.
This list is not exhaustive and the absence of any of the above should not be treated as precluding referral.
