Tax – government ban is ‘far too late’

Paymaster general Dawn Primarolo has banned companies from bringing forward tax relief for losses before transition to international financial reporting – a decision that should have been taken far earlier, according to a senior tax partner at Deloitte.

In a written Commons statement, Primarolo (pictured) announced that a clause providing authority for the ban would be included in this year’s finance bill. However, John Cullinane, partner at Deloitte’s tax, banking and capital markets group, said he was surprised at the timing of the statement.

‘This is mostly retrospective legislation, so why say this now instead of two years ago?’

Cullinane, also a fellow of the Chartered Institute of Taxation, said last month’s pre-Budget report had thrown up more than he expected in terms of how taxation would impact on the new standards, but added that the government was addressing the issue ‘far too late’.

‘The timing will pose some difficulties and add unnecessary complexity for some, however it will be the financial institutions that will have to make the biggest adjustments in terms of their assets and valuations. In short, some assets and valuations are favourable and some are not.

‘Those affected, however, will be able to spread their profits and losses over a few years, so there shouldn’t be too much immediate hardship.’

Primarolo told MPs: ‘The legislation applies to losses arising on transactions that are designed to accelerate relief that would otherwise be deferred.’ The government has introduced the legislation, effective from 14 December last year, to prevent companies from arranging to bring forward tax relief for losses prior to the transition to IFRS.

Primarolo said: ‘The government announced a deferral of IAS transitional adjustments for tax at the preBudget report to relieve companies of a considerable degree of uncertainty following their representations.’

She added that it was very ‘disappointing’ that some companies had tried to ‘manipulate the situation to their advantage’. ‘We have acted to ensure that tax receipts are protected from this sort of arrangement, for the benefit of the vast majority of taxpayers,’ said Primarolo.

The government said that, in certain circumstances, some financial instruments were accounted for on an authorised accruals basis under UK GAAP, but will now be accounted for at fair value under IFRS and FRS26.

One example of financial instruments that will be affected in this way are gilts held by banks as part of their ‘banking book’. For pre-IFRS/FRS26 accounting periods, if the gilt is sold in the open market for less than it cost, the company would be allowed a deduction from taxable profits in the period the disposal took place.

Related reading