Clause 47 - Use of trading losses against chargeable gains
Finance Bill
4:30 pm
Ms Ruth Kelly (Economic Secretary, HM Treasury; Bolton West, Labour)
We have accepted that, under existing rules, the determination of the amount of trading losses that can be deducted from a gain is not as generous as it should be. The maximum amount is restricted to an amount equal to the gain that would be chargeable to tax after taking taper relief into account. The purpose of the provision is to correct that anomaly. It introduces a modest change that will increase the amount of trading losses that can be set against capital gains. As a result, trading losses can be deducted from a gain if they do not in total exceed it. We have been encouraged to make the change by representative groups and we would, rightly, be criticised if we allowed the anomaly to be perpetuated.
Amendment No. 12 would introduce a change that was neither simple nor appropriate. It would allow a person to elect that trading losses be set against gains up to an amount equal to their total gains before the annual exempt amount was deducted. If such an election were made, the amount of the losses set off would be restricted to the total gains after taper relief had been applied, thus negating the effect of the clause.
The amendment would also provide taxpayers with the choice of making an alternative election: to set trading losses against gains up to an amount equal to the total gains before they are tapered. If such an election were made, the total amount of losses set off would be restricted to the total gains after the annual exempt amount had been deducted. The purpose of that alternative election is to allow a claimant to elect that their trading losses be used to reduce gains only to the level of the annual exempt amount and not, as now, to nil.
We believe that it is right in principle that the amount of trading losses capable of being set against gains is not restricted by reference to the tapered gain or to the gain after the annual exempt amount has been deducted. Allowing trading losses to reduce capital gains down to the level of the annual exempt amount would also be inconsistent with the treatment of capital losses that arise in the same year as chargeable gains. The rule is that such losses are set off against gains to arrive at a net figure, without taking the annual exempt amount into account. The general principle that the amount of losses that can be deducted is not restricted by allowances applies equally to the taxation of income. Reliefs for trading losses, management expenses and so on are given by way of deduction from total income. There is no case for making an exception for setting off trading losses against capital gains.
Amendment No. 12 would have a further effect: most, if not all, claimants would have to make an election to ensure that they did not lose out as a result of the anomaly in the current rules. Therefore, the amendment would not be a simplification; instead, it would add significant complexity to the system.The elective element in clause 47 is merely transitional. If the new method of deduction is of benefit to people incurring trading losses in the tax years 2002-03 or 2003-04, they may elect for it to apply. However, from the tax year 2004-05 onwards, the new rules will apply to all relevant claims. Clause 47 makes the rules for trading loss relief operate in a simpler and fairer way.