HM Revenue & Customs guidance on how new anti-avoidance rules for individuals and trustees will apply is "questionable" says Grant Thornton.
The business and financial advisory firm says while the rules which aim to prevent the “artificial” creation and use of capital losses to guarantee a tax advantage are being debated as part of the Finance Bill 2007, the guidance supplied by HMRC is not subject to the same level of scrutiny.
It says the Revenue’s interpretation of the law will not receive the same formal examination and warns this guidance has already raised a number of queries about how the rules will be applied and suggests how it can be regulated is "questionable".
Ian Luder, tax partner at Grant Thornton, says: “Grey areas do not embed confidence in the general public and are even a good scare tactic for those using legislation in a smart but legal way.”
Anti-avoidance rules have been in place for companies since December 2005, however these will be replaced by the new rules - which will include individuals and trustees - as soon as the Finance Bill 2007 has been passed, and will apply to all disposals made on or after 6 December 2006.
Initial guidance published by HMRC at the time of the Pre-Budget Report in December 2006 focused on capital losses where there is no genuine commercial loss or genuine commercial disposal, and used an example relating to “bed-and-spousing”.
According to HMRC’s example this is where a wife sells an asset for a gain while the husband holds an asset which is standing at a loss. The husband then transfers half the loss-making asset to his wife on a nil gain/nil loss basis, and they jointly sell the asset to a third party for a loss, which the wife then uses to offset the gain made on her asset.
However, HMRC stated this example of “bed-and-spousing” would not fall under the anti-avoidance legislation as despite the inter-spouse transfer the sale of the joint asset had recognised a real, commercial loss.
But in new guidance published by HMRC at the same time as the March Budget, it uses two different examples where the rules would and would not apply.
It states if a wife sells shares at a loss and then her husband purchases them without knowing they had previously belonged to his wife the legislation would not apply. But, if the husband and wife had made arrangements among themselves to sell the shares and then repurchase them then the transaction would fall under the anti-avoidance rules.
However, Luder argues: “This is a ridiculously tricky concept. Judging whether spouses or civil partners have discussed their individual and joint finances, and to what depth, could prove extremely challenging and ambiguous.”
And he points out the legal status of the Revenue’s guidance has been the subject of much debate recently, in particular following the case of Robert Gaines-Cooper which involved the issues of residence and domicile where advisers and taxpayers have been relying on HMRC guidance for a number of years.
Luder adds: “It would be better if the legislation itself is drafted clearly so that guidance explaining its application did not need to be relied upon.”
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