HMRC challenge sideways loss relief tax avoidance

The latest form of tax avoidance to come under HMRC's 'spotlight' concerns investments made with the intention of obtaining trade loss reliefs ('sideways loss relief').

HMRC say that they are aware of schemes seeking to exploit sideways loss relief by generating trade losses for individuals. Such schemes are often funded in part by borrowing and may include a mechanism that means returns are all but guaranteed. The promoters will have Counsel's opinion that everything 'should' work and that tax relief should be available. Such opinions are invariably hedged with caveats, partly to anticipate the prospect of HMRC taking a more aggressively defensive stance.

This is what now seems to have occurred. HMRC say that in many cases they consider that no relief is due as these schemes fail to meet the basic commercial requirements test. In addition the investors rarely satisfy the 'the ten hours' test. This is the requirement that at least ten hours a week are spent personally engaged in commercial activities of the trade carried on with a view to earning profits from those activities.

HMRC point out specifically that they do not accept that reading scripts or medical journals, watching TV or DVDs etc are qualifying activities. As a result any trade loss that did arise in such cases would be subject to the sideways loss relief restrictions for non-active traders.

Finally HMRC point out that:

Whenever arrangements have been entered into to obtain a tax reduction by way of sideways loss relief we will actively challenge these arrangements and the activities of individual participants and litigate, if necessary. We will also withhold repayments of tax resulting from claims to sideways loss relief in appropriate cases.

It is fair to say that HMRC's view of the law is NOT always upheld by the Tribunal and the Courts. It is also a fact that in the last year the Tribunal has frequently found in favour of HMRC when faced with cases involving alleged tax avoidance.

Anyone making an 'investment' to secure sideways loss relief in future would be well advised to assume that it will be some time before the success or otherwise of the scheme is known for sure. It is equally important to note that receipt of the tax relief itself is no guarantee that HMRC are happy with the scheme. It's simply a natural consequence of the self assessment system.

Previous relevant posts:

• HMRC confuse tax avoidance and tax evasion again
• Beware of HMRC spotlights - EBTs now included
• Were you wasting time advocating this tax scheme?
• The beginning of the end for structured tax avoidance schemes?
• Bending vs breaking tax rules