Unlike the many uncertainties people and businesses face over Brexit, the EU caused another one in July that will not be solved by canny negotiations between Michel Barnier and Dominic Raab (assuming that he is still the UK’s negotiator when you are reading this). In another twist, this one may be of benefit to UK taxpayers, while the EU Commission gets to tweak the tail of UK officialdom.

On 19 July, the Commission announced its decision to send ‘letters of formal notice’ to the UK over two longstanding reliefs that, it believes, impinge upon the freedom of movement of capital (see bit.ly/2uySrqg). These reliefs are:

1. the ‘share loss relief’(ITA2007s134(5)), which allows capital losses made upon shares in enterprise investment schemes (EIS), or qualifying trading companies, to be set against income; and

2. the ‘loan to traders relief’(TCGA1992s253),which allows capital loss relief in respect of loans made to traders (or someone carrying on a profession or vocation) that have become irrecoverable.

The basis for the letter concerning share loss relief is that the relief is only available if the qualifying company has wholly or mainly been carrying on its business in the UK, which excludes companies that carry on their business outside of the UK. For the loan to traders relief, the Commission is concerned that relief is only available where the borrower is resident in the UK, thus denying relief where the borrower is abroad. It is important to note that in both cases the Commission is asserting that the reliefs conflict with the freedom of movement of capital. This then extends the remedy to providing relief in respect of businesses worldwide.

The letters from the Commission give the UK two months to amend the legislation. I think we can take it as read that the UK will not take any remedial action, as the UK’s general position is that UK legislation is compliant with all obligations required of it under membership of the EU.

If the UK does take this route, then the Commission will almost certainly take the next step, which is to issue a reasoned opinion. At this point we may and out more about the Commission’s case, although its position already looks clear cut. Again, with the UK’s firmly held position that all
of its legislation is EU compliant, there is unlikely to be any domestic action taken to amend the relevant legislation. On the assumption that there is not a meeting of minds, the Commission can and will most likely then refer the matter to the CJEU.

On the fairly safe assumption that a decision is handed down after Brexit (and after any transition period), the UK is unlikely to take any action in respect of an adverse judgment. at being said, the UK/HMRC may decide to make a statement that they will honour claims for periods while the UK was part of the EU. Unless the legislation is widened, however, and there is no imperative to do so after Brexit, it will still only apply in respect of UK based traders and borrowers.

If claims are allowed, or if individual taxpayers take action themselves, then following the decision the years for which relief is due will depend on a number of time limits. First, taxpayers may be able to file or amend their returns to make claims in respect of losses suffered in respect of traders or borrowers outside of the UK. is is unlikely to cover many people, given how long the CJEU is likely to take and how close we now are to Brexit.

For closed years, taxpayers should be able to rely upon much longer, but quite disjointed, time limits. First of these limits is under a ‘Woolwich claim’ (following Woolwich Equitable Building Society v IRC [1993] AC 70) that the tax was not in fact due. is runs for six years from when the tax was paid, which in a case such as this will be when the tax that is due to be repaid was actually paid. The second limit relates to the longer ‘mistake of law’, which runs from when the mistake was discovered, or could reasonably have been discovered. Originally, for EU claims, this went all the way back to when the UK joined. It has been somewhat shortened now due to FA 2004 s 320. is stops mistake of EU law claims in respect of tax paid after September 2003, but not that paid before.

Therefore, taxpayers could make claims now back to 2012/13 under Woolwich, and then from 1 January 1994 to August 2003 based on mistake of law. The reason for the 1994 limit is that under the freedom of movement of capital, restrictions enacted before 1994 are allowed providing they have not been materially altered; and, in the writer’s opinion, neither of these have.

Of course, being in time to make a claim is not the end of the matter. It is fair to say that HMRC will look at any claim very carefully. How many taxpayers, though, will have sufficient evidence from the last century to satisfy HMRC (or the First-tier Tribunal) that a claim is good? Happy hunting in the archives!

Interestingly, the corporation tax version of the share loss relief provision (CTA 2010 s 78(5)) does not appear to be within the Commission’s sights. One can only assume that this is due to ignorance on the EC’s part (and HMRC may not thank the writer for mentioning it), but its omission does make one wonder why the income tax version and the loan to traders relief were picked on in the first place. Neither has been amended recently, which is one way they may come into the spotlight; nor are they particularly high profile provisions. Could there really be a team holed up in a room in Brussels somewhere, poring over the UK tax legislation, desperately searching for anything they can start proceedings against before Brexit?

If so, their clock is ticking too!

Andrew Parkes, Tax Director

This article was published in Tax Journal

Posted in Uncategorized

September 6, 2018

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