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The clause amends the targeted anti-avoidance rules in sections 184G and 184H of the Taxation of Chargeable Gains Act 1992 on the use of capital losses to shelter income profit. A capital loss is incurred when a capital asset, investment or real estate, decreases in value. That loss is not realised until the asset is sold for a price lower than the original purchase price. The intention is to put it beyond doubt that the rule includes arrangements involving derivative contracts and other financial products.
The clause clarifies the operation of one of the chargeable gains targeted anti-avoidance rules. It confirms that the rule applies generally to the contrived use of capital losses to reduce income profits, by whatever means, and it will affect companies that use avoidance schemes that involve claims for relief for capital losses against gains arising on derivative contracts and other financial products. This is primarily seen as a technical change, but I am interested that it is not expected to have an Exchequer impact. I should have thought that some revenue to the Exchequer that is under threat, or is being lost, will now be protected. It would be helpful if the Minister explained why there is a negligible impact on the Exchequer, as evidenced by the tax information and impact note. Will he also explain what gave rise to the view that the targeted anti-avoidance rule needed clarification? Was there case law that went in the wrong direction, or is there something of which HMRC became aware through another route?
As we have heard, the clause makes changes to an anti-avoidance rule that restricts the use of capital losses by companies. The changes make it clear that the rule applies to all artificial arrangements in which a chargeable gain accrues.
In normal circumstances, companies are able to offset capital losses only against capital gains. In the past, many and varied avoidance schemes were devised to get around that principle and use capital losses in arrangements against income profits. There is therefore a targeted anti-avoidance rule specifically to counter schemes that misuse capital losses to shelter income profits. The rule applies subject to a number of express conditions. In particular, there are references to a company accruing a gain on a “disposal,” and to incurring “expenditure” or receiving a “receipt” related to the gain.
HMRC has become aware of artificial arrangements whereby it is argued that the targeted anti-avoidance rule does not apply. If that were so, the rule would not be effective in ensuring that a company’s capital losses are used only to relieve chargeable gains. The changes will amend the conditions under which the anti-avoidance rule applies. There will no longer be any reference to disposals, and it is made clear that, for the purpose of the rule, the terms “receipt” and “expenditure” have broad application. The changes will put it beyond doubt that the rule applies to all arrangements designed to offset capital losses against income profits.
On the yield and revenue protection, the existing rule has generally been effective in discouraging avoidance through such schemes. HMRC has been made aware of some potential challenges to the rule, and the changes are intended to pre-empt any attempt to implement those challenges and to make it clear that such arrangements will not get around the rule. HMRC estimates that up to £500 million of tax will be at risk in the first year should the challenges succeed. HMRC would need to rely on the general anti-abuse rule to prevent the loss of that tax, which may be successful.
We want to ensure that existing legislation is effective in achieving its purpose, and the changes do that. It is possible that the arrangements of which HMRC has become aware are sufficiently abusive for the general anti-abuse provision to apply, and there is therefore no anticipated revenue yield. Indeed, the revenue may have been protected by the general anti-abuse rule. We have made it clear, however, that the general anti-abuse rule does not replace targeted anti-avoidance rules that address avoidance in specific parts of the tax system, which is why we are making these changes. The clause is part of the Government’s determination to address avoidance, which is bearing considerable fruit. The clause will ensure that the anti-avoidance rule that restricts the use of capital losses by companies works as intended, and I hope it may stand part of the Bill.