CG56321C - Employment-related securities: Revenue & Customs Brief 60/09
Losses accrued in tax years prior to 1996-97
Losses accrued in tax years 1996-97 onwards: enquiry window now closed
Losses from earlier years only partially used
Gains or losses accruing in tax years 1996-97 onwards: enquiry open
Tax years for which HMRC may still open an enquiry - the position of the taxpayer
Basis for HMRC’s current understanding of the law
Disclosure
Taxpayers who used HMRC’s previous guidance
Following the publication of Revenue & Customs Brief 30/09 (see CG53621B) we received a number of questions regarding the practical implications of our new view. We addressed these questions in Revenue & Customs Brief 60/09 that was issued on 11 September 2009. The text of the Brief is reproduced here.
“Questions arising from Revenue & Customs Brief 30/09
We have received a number of questions concerning the practical implications of Revenue & Customs Brief 30/09 that we are addressing in this Brief.
Losses accrued in tax years prior to 1996-97
Q1. Where a pre-1996-97 loss has been calculated but remains unused, it may have been shown in a pre-Self Assessment return or included in the summary record of the totals of unused losses in a Self Assessment return. Is the quantum of the loss final or does it fall to be recomputed in accordance with the new guidance should gains now accrue from which it must be deducted?
A1. The quantum of the loss is not ‘final’. For years before the introduction of Self Assessment there is no statutory mechanism for agreeing or litigating the amount of a capital loss accruing on a disposal of an asset in the absence of gains for it to be set against. A taxpayer cannot have the quantum of a loss brought before the First-tier Tribunal until such time as a gain arises against which the loss can be set. This statutory position was endorsed in the tax case Tod v South Essex Motors (Basildon) Ltd 60TC598.
Q2. If not final, on what basis has HM Revenue & Customs (HMRC) reached this conclusion?
A2. Where a loss accrues on a disposal in years before 1996-97, HMRC cannot open an enquiry into that loss until it is deducted from chargeable gains. So if a loss arose on a disposal in 1995-96 and is deducted from chargeable gains accruing in 2009-10, HMRC may enquire into that loss as part of an enquiry into the 2009-10 return. There is no statutory mechanism for agreeing or litigating the quantum of the loss arising on the disposal made in 1995-96 in advance of the 2009-10 enquiry. Any such loss deducted in 2009-10 has to be computed in accordance with our current understanding of the law.
Q3. Should such unused losses have to be recomputed, taxpayers would seem to be in an uncertain position as regards pre-1996-97 losses because, if there is a changed understanding of the law, the quantum might change. What is HMRC’s view of a change in legislation to give taxpayers more certainty?
A3. A claims mechanism for allowable capital losses was introduced by Finance Act 1995 with effect for 1996-97 and subsequent years to coincide with the adoption of Self Assessment. Parliament decided at that time not to change the system for pre-Self Assessment years.
Losses accrued in tax years 1996-97 onwards: enquiry window now closed
Q4. In 2001-02 Susie sold shares she had acquired earlier that tax year through the exercise of an unapproved share option. Based on the Revenue note of 8 January 2003 Susie claimed an allowable loss of £18,000 in her 2001-02 return. There was no enquiry into her return. No losses or gains accrued to her otherwise than on this disposal until in 2008-09 Susie realised chargeable gains of £100,000. What losses are deducted from the 2008-09 gains?
A4. Where there has been a claim for an allowable loss accruing in 1996-97 or a later year, the deduction of that loss from chargeable gains does not extend the time limit for opening an enquiry into the original claim. Losses £18,000 are deducted from the 2008-09 chargeable gains.
Losses from earlier years only partially used
Q5. In 1993-94 Ravid sold shares he had acquired on the exercise of an unapproved employee share option. In accordance with the Revenue’s then guidance he returned chargeable gains of £10,000 on that disposal and was assessed to capital gains tax. Subsequently based on the Revenue’s then understanding of the law as published on 8 January 2003 he calculated that there was a loss of £40,000 on the disposal of the shares. He could not claim error or mistake relief and deduct the loss from his 1993-94 chargeable gains as he had made his return for that year in accordance with the practice generally prevailing at the time it was made.
No chargeable gains or losses then accrued until 2004-05. Ravid returned for that year chargeable gains of £25,000 and deducted £16,800 of the 1993-94 losses so as to reduce the gains to the level of the annual exempt amount leaving £23,200 (£40,000 less £16,800) of the losses unused. No enquiry was made into Ravid’s 2004-05 return. No further chargeable gains or losses accrued to Ravid until 2009-10 when he realised chargeable gains of £20,000. On the basis of the HMRC’s understanding of the law as announced on 12 May 2009 there would have been a gain of £10,000 on the disposal in 1993-94 rather than any loss. What are the implications for Ravid?
A5. It is too late now for Ravid to amend, or for an enquiry to be opened into, his 2004-05 return. Ravid made his 2004-05 return in accordance with the practice generally prevailing at the time it was made and so no assessment can be raised to withdraw the losses that were deducted (see A11 below). But as HMRC do not now agree that any allowable loss accrued on the disposal in 1993-94 we would not accept that in calculating Ravid’s 2009-10 liabilities there was any balance of losses accruing in an earlier year that have not been allowed as a deduction from chargeable gains accruing in a previous year.
Q6. In 1998-99 Rowena sold shares she had acquired some years earlier on the exercise of an unapproved employee share option. In accordance with the Revenue’s then guidance she returned chargeable gains of £10,000 on that disposal. Subsequently based on the Revenue’s then understanding of the law as published on 8 January 2003 she calculated that there was a loss of £40,000 on the disposal of the shares. In March 2003 Rowena made a 1998 99 claim for allowable losses of £40,000 - no enquiry was made into that claim. Rowena could not claim error or mistake relief for 1998-99 as she had made her return in accordance with the practice generally prevailing at the time it was made but following the Revenue’s guidance published in March 2003 she set £10,000 of the loss against her 1998-99 chargeable gains and received a repayment of tax. Thus £30,000 of Rowena’s 1998-99 losses had not been allowed as a deduction from chargeable gains.
No chargeable gains or losses then accrued to Rowena until 2004-05. Rowena returned for that year chargeable gains of £25,000 and deducted £16,800 of the losses so as to reduce the gains to the level of the annual exempt amount leaving £13,200 (£30,000 less £16,800) of the losses unused. No further disposals were made by Rowena until 2009-10 when she realised chargeable gains of £20,000. On the basis of the HMRC’s understanding of the law as announced on 12 May 2009 there would have been a gain of £10,000 on the disposal in 1998-99 rather than any loss. What are the implications for Rowena?
A6. As in A5 above, Rowena’s 1998-99 and 2004-05 self-assessments are not now capable of variation. But unlike A5, the 1998-99 losses that were claimed which have not been allowed as a deduction from chargeable gains accruing in a previous year remain available for Rowena to deduct from her 2009-10 chargeable gains (see A4 above). Losses of £9,900 are deducted from the 2009-10 chargeable gains to reduce them to the level of the annual exempt amount leaving £3,300 (£13,200 less £9,900) of the losses unused and available to deduct from chargeable gains accruing in future years.
Gains or losses accruing in tax years 1996-97 onwards: enquiry open
Q7. Does HMRC consider that chargeable gains returned or losses claimed before 12 May 2009 in accordance with HMRC’s previous understanding of the law should be revised where the return is under enquiry?
A7. Subject to A15 below, yes. If there is an enquiry the closure notice issued at the completion of the enquiry and any amendment it makes should be in accordance with the law. Revenue & Customs Brief 30/09 sets out HMRC’s current understanding of the law.
Q8. Where there is an enquiry into a return on an unrelated matter and it is now past the time for opening an enquiry into that return will HMRC amend the chargeable gains returned or losses claimed to reflect HMRC’s current understanding of the law if the chargeable gains or losses were computed in accordance with practice at the time the return was made? Would the position be the same for a ‘full’ enquiry?
A8. Subject to A15 below, yes. An enquiry is opened to check that a return is correct and may extend to anything contained within the return. The closure notice issued on completion of the enquiry and any amendment it makes must be in accordance with the law. The position is the same for all enquiries whether ‘full’ or not.
Q9. Where an enquiry is closed and losses are reduced, how do you deal with later years in which the losses that had been claimed were deducted from chargeable gains accruing? For example, Roderick claimed losses of £40,000 in his 2005-06 return, which was the subject of an enquiry. When the enquiry for that year was concluded the losses were only £12,000. Roderick had set £25,000 of the losses he originally claimed in 2005-06 against the chargeable gains he returned for 2006-07 and the balance of £15,000 against the chargeable gains he returned for 2007-08.
A9. When the allowable losses from an earlier year that have been allowed as a deduction from chargeable gains accruing in a later year are reduced, it may be necessary to amend the return for the later year. If that return cannot be amended, whether on the closure of an enquiry or otherwise, an assessment may be required. In the example Roderick can only set losses of £12,000 against his 2006-07 gains. If Roderick can amend his 2006-07 and 2007-08 returns, or when any enquiry into those returns is closed, the losses deducted should be corrected. If there is no enquiry into either of the returns and they have not been amended, assessments may be needed to correct the losses that are deducted.
Tax years for which HMRC may still open an enquiry - the position of the taxpayer
Q10. Does HMRC consider that any action is required where returns or claims that were made in accordance with HMRC’s previous guidance are not under enquiry but are within the time limit for amendment, and if so why?
A10. We anticipate that taxpayers will ensure that their returns or claims are in accordance with the law and make any necessary amendments if they are in time to do so.
Q11. Is there any question of a taxpayer being at fault if he or she had made a return before 12 May 2009 on the basis of HMRC’s previous guidance? Can HMRC confirm that this was then the ‘prevailing practice’?
A11. We regard our previous guidance as describing the practice generally prevailing from the time of its publication on 8 January 2003 until 12 May 2009 when Revenue and Customs Brief 30/09 was published. HMRC would not regard the fact that a return was made during this period in accordance with the practice then generally prevailing to of itself mean that the return had been made negligently.
Basis for HMRC’s current understanding of the law
Q12. Will HMRC provide details of the legal advice they have received which forms the basis for their current understanding of the law?
A12. HMRC does not supply legal advice that it has received, which is covered by Legal Professional Privilege and in most cases may also be the subject of taxpayer confidentiality.
Q13. What is the detailed explanation of HMRC’s new understanding of the legal position?
A13. HMRC’s current understanding of the interaction of section 38(1)(a) and sections 119A and 120 TCGA 1992 when section 17 TCGA 1992 operates to substitute the market value of the shares acquired at the time an option is exercised is as follows:
So far as the cost in money of shares acquired on the exercise of an employee share option is concerned, subsection (1) of section 38 lays down what may be deducted in computing the chargeable gain on the disposal of the shares as follows:
“(1) Except as otherwise expressly provided, the sums allowable as a deduction from the consideration in the computation of the gain accruing to a person on the disposal of [the shares] shall be restricted to
(a) the amount … of the consideration in money … given by him … for the acquisition …”
subsection (2) of section 119A (and subsection (2) of section 120) then provides that
“(2) Section 38(1)(a) applies as if the [amount counting as income] had formed part of the consideration given by the person making the disposal for his acquisition of the [shares].”
We now consider that the effect of this legislation is that the ‘consideration in money’ as referred to in section 38(1)(a) that was given for the shares is treated as enhanced by the amount counting as income. And the aggregate amount is the sum that would therefore fall to be deducted in the computation of the gain as the cost of acquisition.
However, where section 17 TCGA 1992 applies to replace the consideration given on exercise (and any consideration given for the option that would otherwise be treated by section 144(3)(a) TCGA 1992 as if it were also part of the cost of acquiring the shares) it provides, in subsection (1), that
“(1) … a person’s acquisition … of an asset shall for the purposes of this Act be deemed to be for a consideration equal to the market value of the asset …”
So where section 17 applies we now regard both the consideration actually given for the shares and the amount counting as income that is treated by section 119A or section 120 as forming part of the consideration given for the acquisition of the shares as having been replaced by the market value of the shares on exercise.
Disclosure
Q14. If a taxpayer disagrees with HMRC’s guidance and returns chargeable gains or claims losses on a different basis should he or she disclose in the ‘white space’ within the return that the return has not been made in accordance with HMRC’s published understanding of the law, and if this is done would it provide protection against a discovery assessment?
A14. Statement of Practice SP1/06 contains detailed guidance. The Statement includes the following:
Taxpayers who adopt a different view of the law from that published as the Revenue’s view can protect against a discovery assessment after the enquiry period. The Return would have to indicate that a different view had been adopted by entering in the Additional Information space comments to the effect that they have not followed Revenue guidance on the issue or that no adjustment has been made to take account of it.
The background note states:
“18. It is open to a taxpayer properly informed or advised to adopt a different view of the law from that published as HMRC’s view. To protect against a discovery assessment after the enquiry period, the return or accompanying documents would have to indicate that a different view had been adopted. This might be done by comments to the effect that the taxpayer has not followed HMRC guidance on the issue or that no adjustment has been made to take account of it. This would offer an opportunity to HMRC to take up the return for enquiry. It is not necessary to provide all the documentation that HMRC might need to quantify that insufficiency if an enquiry into the Return is made.
Taxpayers who used HMRC’s previous guidance
Q15. Do taxpayers who before 12 May 2009 computed their chargeable gains or losses in line with the Revenue’s guidance that was published on 8 January 2003 have a ‘legitimate expectation’ that their tax treatment should be more favourable than it would be under HMRC’s current understanding of the law?
A15. HMRC does not accept that its published guidance alone can necessarily create a ‘legitimate expectation’ for a taxpayer. Whether a taxpayer has a legitimate expectation will depend upon the specific facts and circumstances of the case. Chargeable gains and allowable losses included in returns or claims should be calculated on the correct statutory basis, which HMRC now understand to be as described in Revenue & Customs Brief 30/09. HMRC’s primary responsibility is to apply the law correctly and collect underpaid or under-declared tax. However, in some limited circumstances, to apply the statute may be so unfair as to amount to an abuse of power by HMRC and in these circumstances HMRC may be bound by its previous guidance. We will normally be bound by our previous guidance where the taxpayer can demonstrate that he or she:
- reasonably acted in reliance on the previous guidance, and
- would suffer detriment from the correct application of the statute.
To have acted in reliance on the advice the taxpayer must have done or refrained from doing something as a direct consequence of the advice. HMRC understand that in this context ‘detriment’ means real loss, it is not sufficient to have merely suffered disappointment or upset.
These questions and answers address practical implications that may have been raised by Revenue & Customs Brief 30/09. The examples in this Brief are, of course, simplified and are intended to illustrate the general principles. The exact position in any actual case will depend on the precise facts and circumstances of the case.”