HMRC have signalled their intention to introduce in FB13 two new TAARs to counter loss-buying, as well as to tighten up the existing rules on capital allowances-buying and loss relief.
These changes are to take effect from today (20 March 2013). As with all anti-avoidance rules, taxpayers will be concerned to establish whether their legitimate transactions could inadvertently be caught by an overly wide rule.
New anti-avoidance rules – TAARs
Two new TAARs are being introduced in order to counter loss-buying schemes. The schemes which are being targeted exploit the fact that companies can exercise a certain amount of choice over the time when certain deductions arise. In this way, the timing of losses can be delayed until after the company has been sold, thus by-passing the existing restrictions on loss-buying.
Draft legislation is not yet available, but HMRC have issued a technical note which provides some indication of the scope of the new rules. Broadly, where there is a change in a company’s ownership and it is highly likely that a deduction will later become available to the company, that deduction will not be available for relief against non-trading profits or for group relief (the first TAAR). If the availability of the deduction involves arrangements to transfer profits to the company, the deduction will be denied completely (the second TAAR).
On the face of it, the first TAAR in particular is potentially wide-ranging. However, both TAARs contain a purpose test, which provides some measure of comfort that legitimate transactions will not be caught.
The new TAARs are triggered by a “qualifying change” in a company (as defined in the capital allowances legislation) which occurs on or after 20 March 2013. Therefore, any transaction which involves such a “qualifying change” could potentially be affected and a taxpayer who is a party to such a transaction should review its position and seek advice. Once draft legislation is available (expected on 28 March 2013), the scope of the new rules should become clearer.
Changes to the capital allowances-buying rule
The existing rule against capital allowances-buying (contained in Chapter 16A, Part 2, CAA 2001) restricts the availability of capital allowances where a company with unclaimed allowances is sold. The mischief at which this rule is aimed is broadly the same as that at which the new TAARs are aimed. This rule is subject to a purpose test.
Two changes are proposed.
First, the existing purpose test will be disapplied where the tax written down value of the company’s capital allowances assets exceeds those assets’ balance sheet value by £50million or more. If the excess is £2million or more but less than £50million, the purpose test will be disapplied if the excess is “significant” in the context of the transaction (HMRC indicates that “significant” will usually, but not always, mean more than 5%).
Second, the scope of the rule will be widened to cover allowances taken into account in calculating the profits of all qualifying activities listed in section 15, CAA 2001 (the rule currently only applies to allowances taken into account in calculating the profits of trades).
Again, any transaction which involves a “qualifying change” in a company on or after 20 March 2013 could potentially be affected.
Changes to existing loss relief rules
Three changes will be made to the loss relief rules:
- Shell companies which undergo a change of ownership will be restricted in their ability to bring into account debits and to carry forward deficits under the loan relationships rules where those debits or deficits relate to the pre-change of ownership period. Relief under the intangibles assets rules will be similarly restricted.
- The interaction of the “transfer of trade without change of ownership” rules (in Chapter 1, Part 22, CTA 2010) with the “loss restriction on change of ownership” rules (in Part 14, CTA 2010) will be amended. The new rules aim to ensure that a successor company which acquires a trade with losses after a change of ownership in the predecessor company, inherits any liability of the predecessor company to lose the losses if there is a major change in the nature or conduct of the trade within three years.
- The ability to surrender deductions for charitable donations, property business losses, management expenses and non-trading losses on intangible fixed assets will be further restricted by including CFC profits in the “gross profits” threshold which these amounts must together exceed before they can be surrendered.
These changes take effect from 20 March 2013 and any taxpayer who thinks they may be affected should seek advice as necessary.