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The CIOT has issued a technical release giving members advice on:
- the personal capital losses targeted anti-avoidance rule (TAAR), and
- the guidance on how it will be applied by HMRC.
Very little common ground exists between the CIOT and HMRC.
The CIOT disagrees strongly with most of HMRC's guidance, believing it to contradict the 'clear wording of s 16A', by claiming that many transactions are outside the scope of the provision, when according to the CIOT they are actually within it.
The TAAR - introduced by FA 2007, s 27 as a new TCGA 1992, s 16A - refers to restrictions on allowable losses.
In short, s 16A disallows any capital loss realised on or after 6 December 2006, which accrues to a person directly or indirectly in consequence or otherwise in connection with any arrangements - the main purpose or one of the main purposes of which is to secure a tax advantage.
This section is 'very widely drafted', says John Barnett, chairman of the CIOT capital gains tax and investment income sub-committee, which, taken at its word, means that capital losses will rarely be allowable.
The institute drew attention to this during the debates on the Finance Bill last summer, but to no avail.
HMRC subsequently published guidance in relation to s 16A on 19 July 2007, and the CIOT has recently issued a technical bulletin giving its views on the examples described in HMRC's guidance.
HMRC often refer in the examples to whether there has been a 'real economic loss' and to the presence or absence of 'additional, complex or costly steps' in a transaction which could have been dealt with in a straightforward manner.
The CIOT points out that these factors do not appear to be derived from the legislation.
Several of the examples that HMRC believe to be outside the provision begin by saying that a disposal has been made 'to crystallise a loss' with the specific aim of offsetting this against gains made in the same year.
As the CIOT technical release says, it is hard in such cases to argue that obtaining a tax advantage is not one of the main purposes of the arrangements.
Referring to guidance in the form of a statement to the House of Commons on 19 July, the institute notes that s 16A looks at whether obtaining a tax advantage is one of the main purposes of a transaction, which it describes as a 'crucial' distinction from 'the main purpose'.
Practically any capital loss will be affected in theory, says John Barnett. Even end of year tax planning, when taxpayers might be thinking of ways of offsetting gains, could be caught as, effectively, the taxpayer is realising a loss for a tax advantage.
Overall, the institute feels that HMRC's guidance takes a lenient view which it believes would 'be dangerous' to rely on.
Noting that 2006-07 tax returns will potentially be affected if a capital loss has been realised on or after 6 December 2006, the CIOT 'makes no recommendations to tax advisers who are completing tax returns of those affected by s 16A. Decisions must be made on a case-by-case basis.
However, the CIOT would point out the risks of making an incomplete disclosure on a taxpayer's return and the consequent risk of a discovery assessment'.
The bulletin summarises some of the ethical and practical considerations, which tax advisers should take into account in situations where capital losses are an issue.
It also provides a form of white space disclosure, which it believes will protect taxpayers and their advisers against subsequent discovery assessments.
Ideally, says John 'the law should be changed so that it is not so widely drafted', in the mean time, advisers have to decide how best to disclose capital losses depending on the facts of each cases.
