HM Revenue and Customs Brief 60/09
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Issued 11 September 2009
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
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
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
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
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
Q13. What is the detailed explanation of HMRC’s new understanding of the
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
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
“(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
Subsection (2) of section 119A (and subsection (2) of section 120) then
“(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.
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.
19. Provided the point at issue is clearly identified and the stance adopted
is not wholly unreasonable, the existence of an under-assessment or
insufficiency is demonstrated by the statement that a different view of the law
has been followed. In these circumstances the taxpayer achieves finality if no
enquiry is opened within the statutory time limit.”
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
- 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.
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Article Published/Sorted/Amended on Scopulus 2009-09-16 10:07:12 in Tax Articles