UK: Inland Revenue Target 'Abuse' of Concessions

Last Updated: 5 May 1999
Inland Revenue Target 'Abuse' of Concessions

One of the more surprising announcements in the Budget was that taxpayers will no longer be able 'to avoid capital gains tax by abusing the terms of certain published concessions'. The statement was surprising because published Inland Revenue concessions are prefaced by the statement that each concession 'will not be given in any case where an attempt is made to use it for tax avoidance'. Given this existing caveat, why is further legislation required?

Several concessions allow a taxpayer's chargeable gains to be deferred from one tax year to a later tax year. This deferral may take the form of a roll-over relief or similar deferral relief, and will include any relief which treats a disposal of a chargeable asset as giving rise to neither a gain nor a loss. The Inland Revenue appears to be concerned with several concessions involving deferral relief and roll-over relief under which a taxpayer is awarded a concessionary reduction in his or her tax liability which would not otherwise have been available under the strict wording of the legislation. The perceived abuse is that the reduced chargeable gain is never subject to tax.

For instance, one concession allows a deferral of tax by a business arising from the disposal of an old capital asset where the disposal proceeds are used to enhance the value of another asset held by the business at the same time.

The intention of the concession is for the deferred gain to be subject to tax when the enhanced asset is sold, principally through a reduction of the capital gains tax base cost of the enhanced asset.

However, unlike the equivalent statutory provision offering a similar relief (based on the acquisition of a new capital asset, rather than enhancement of an existing capital asset), the terms of the concession do not require a re-calculation of the capital gains tax base cost of the enhanced asset. It would be possible, on a strict reading of the concession, for the taxpayer holding the enhanced asset to return the chargeable gain without any amendment of the base cost of the enhanced asset. If the initial award of the concessionary relief was in a period outside the normal six year time limit for assessments, the Inland Revenue will not be able to retrospectively assess the taxpayer disposing of the enhanced asset on the value of the previously deferred gain. The relaxed nature of this and other similar concessions appears to have created a mismatch between the equivalent statutory and concessionary positions, and this mismatch has been exploited by some taxpayers.

The Finance Bill has consequently introduced two new sections to combat this perceived abuse. Where, after 8 March 1999, the benefit of a capital gains tax relief obtained by a taxpayer in an initial tax year, in reliance on a concession published by the Inland Revenue, is 'repudiated' in a later tax year, the benefit of the relief will be assessed in the later tax year on the person repudiating the benefit. The concessions specifically targeted are those involving an element of deferral or rollover relief. The benefit of the relief will be repudiated by a person where, had the relief been available under statute rather than a concession, the relief would have been recovered from that person in a later tax year. Where a taxpayer has not followed the spirit of the concession in returning the deferred gain, the new legislation will result in the taxpayer being charged to tax on the avoided gain.

Where the deferral of the chargeable gain by the original taxpayer is in respect of the transfer of the asset to a third party, the legislation provides that the benefit of the deferral relief can be recovered from the third party if that third party so indicates to the Board of Inland Revenue. The indication is irrevocable, and should be given within 12 months of the date of any assessment to recover the gain arising in the later tax year. The introduction of a notification provision of this type enables third party taxpayers (which could include spouses) receiving assets under a concessionary relief to agree to bear the tax which may otherwise fall on the original taxpayer deferring the gain.

As suggested above, the new legislation is surprising considering the caveat that the concession 'will not be given in any case where an attempt is made to use it for tax avoidance'. If legislation has been required to restore the efficacy of available concessions, it is arguable that a more appropriate method of preventing avoidance would be to give statutory effect to all published concessions, something which would probably be welcomed by all taxpayers seeking to rely on the reliefs they contain.

For further information please contact Adam Blakemore, e-mail: Click Contact Link , 2 Park Lane, Leeds, LS3 IES, UK, Tel: + 44 113 284 7000

This article was first published in the Tax News - Special Finance Bill Edition issue of Hammond Suddards Tax News updates

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.

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