TaxCorporate TaxChancellor to target tax breaks from purchase of failing companies

Chancellor to target tax breaks from purchase of failing companies

Pre-Budget report to unveil latest weapon in tax avoidance armoury

HM Revenue & Customs is expected to clamp down on the purchase of
loss-making companies for tax purposes as part of its latest anti-avoidance
drive.

In advance of Gordon Brown’s pre-Budget report, tax advisers are concerned
that HMRC could close down the practice of buying companies with tax losses.
This would prevent HMRC losing millions in unpaid tax each year.

The practice is a common strategy and involves buying companies for a nominal
fee, in some cases just a few pence, purely in order to utilise the losses.

Currently, there are rules that prevent the loss of a newly-purchased
subsidiary being used to offset the group’s capital gains over a defined period.
But such rules may not are not seen as sufficiently tight, allowing more
esoteric schemes to slip through the net.

‘I wouldn’t be surprised if it is in the PBR because the numbers are so
large. HMRC has introduced similar rules in the Finance Act, so it’s obviously
on the their radar screen,’ said Ross Wilkinson, a director in corporate tax at
Chiltern.

The practice of buying capital losses and offsetting them against tax is
frequently used by property developers. Since capital gains from development
projects are often years away, buying the loss early means that the tax can
still be avoided, sidestepping the rules in the current regime.

Wilkinson believes that HMRC is interested in tightening the rules for a
specific purpose. Such action will prevent companies with losses from being
bought up unless there is a clear commercial purpose to the transaction – in
line with HMRC’s latest thinking on such topics.

Rules on stamp duty, introduced in the second Finance Act earlier this year,
used a similar phrasing to clamp down on avoidance there.

The amount of money at stake for HMRC could be substantial. Ruth Dooley, a
tax partner at Grant Thornton, said that tax loss purchases commonly involved at
least £20m to £30m in lost tax to make it viable.

However, she added that ‘the market is one with a finite life’, implying that
new rules would prevent much of the avoidance in due course, meaning many were
rushing through loss purchases now.

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