UK: Loss From The Transfer Of Timebarred Claims

Last Updated: 6 November 2015
Article by Michał Bernat

Ruling description

The Director of the Tax Chamber in Katowice bucked the now prevailing trend in court rulings and found in his tax ruling dated 1 September 2015 (ref. no. IBPB-1-2/4510- 184/15/MS) that losses from sale of time-barred claims against consideration may not be deemed tax-deductible costs, even when the claims at issue had previously been recognized as revenues due.

The CIT Act both prohibits the classification of time-barred claims as tax-deductible costs (Article 16(1)(20)) and allows tax-deductible costs to include losses resulting from the transfer—against consideration—of claims previously recognized as revenues due (Article 16(1)(39)).

In the case at issue a taxpayer transferred a package of claims, previously classified by it as revenues due, against consideration, to an affiliate whose business activities include debt recovery. The claims were sold at a much lower price than their nominal value, which resulted in the taxpayer incurring a loss on this sale transaction. Some of the claims were already time-barred on the date of this transaction. The taxpayer applied for a tax ruling to confirm that the loss on the sale of the timebarred claims is classifiable as tax-deductible costs. The tax authority disagreed, however, assuming that the mentioned Article 16(1)(20) of the CIT Act must be applied together with Article 16(1)(39) of this Act. The tax authority thus held that although the general rule set out in Article 16(1)(39) of the CIT Act is that losses from a transfer, for consideration, of claims recognized as revenues due may, in principle, be classified as taxdeductible costs, it follows from Article 16(1)(20) of the CIT Act that if the claims had been time-barred, these losses may no longer be viewed as tax-deductible costs. The tax authorities also argued that the ban provided for in Article 16(1)(20) of the CIT Act is to be interpreted in terms of a penalty for dilatory taxpayers letting their claims become time-barred. In other words, the tax authority believed the taxpayer cannot seek the tax benefits that go with recognizing a loss from a transfer, against consideration, of a claim which, due to the taxpayer's negligence, is no longer subject to enforcement, and therefore represents a loss.


The tax ruling reviewed here is in line with the stance being taken by fiscal authorities, consistently disadvantageous to the taxpayer (cf. e.g. the tax ruling issued by the director of the Tax Chamber in Poznań on 29 April 2014, ref. no. ILPB3/423-40/14-2/KS; a similar position was also presented in previous years).

This position of the fiscal authorities is, however, inconsistent with the position the courts have taken until now (cf. e.g. the judgment of the Provincial Administrative Court in Wrocław of 8 January 2015, case file no. I SA/ Wr 2017/14, the judgment of the Provincial Administrative Court in Warsaw of 28 August 2012, case file no. III Sa/Wa 2835/11, or, with some reservations, the judgment of the Provincial Administrative Court in Warsaw of 27 January 2014, case file no. III SA/Wa 1703/13) whereby losses on the sale of time-barred claims against consideration may be deemed tax-deductible costs provided the claims had previously been recognized as revenues due. The courts are of the view that the scopes of application of the two regulations mentioned above are distinct: Article 16(1)(20) of the CIT Act prohibits the classification of claims as taxdeductible costs for the sole reason of the claims having become time-barred, while 16(1)(39) of the CIT Act is an entirely separate regulation governing transfers of claims previously recognized as revenues due for consideration. The two regulations cannot, therefore, apply jointly and the only regulation that applies to a transfer of claims for consideration is Article 16(1)(39) of the CIT Act which refers precisely to this kind of transaction. The courts also point out that the said Article 16(1)(39) of the CIT Act applies equally to time-barred claims and those that are yet to become time-barred. Moreover, according to the courts, given the unequivocal wording of Article 16(1) (39) of the CIT Act and the absence of any reasonable axiological reasons to challenge it, there are no grounds for any additional interpretations aimed at modifying how the literal wording of this regulation is construed.

In an important development, the Supreme Administrative Court recently reiterated the above position in a judgment of 5 February 2015 (case file no. II FSK 3113/12). As can be seen from the tax ruling reviewed here, this judgment is yet to have a practical impact on the pronouncements of the fiscal authorities.

Taxpayers transferring their time-barred claims against consideration must therefore reckon with the risk that tax authorities will challenge the classification of the losses incurred as a result of such transfer in the taxdeductible costs category. In order to minimize this risk, taxpayers would be well advised to consider applying for a tax ruling, especially if the transaction involves substantial amounts of money or if it is one of many of its kind. If the tax authority comes back with a negative opinion, the taxpayer will have an opportunity to appeal the ruling to a court and will quite probably win the case. Taxpayers which had already effected transactions of this kind must be aware of the risks they are facing when accounting for the losses they incurred. These risks may only be mitigated by adopting an appropriate litigation strategy. In any case, it will be interesting to monitor future developments to see if the cited Supreme Administrative Court judgment eventually prompts the tax authorities to abandon their rigidly held views that are disadvantageous to taxpayers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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