Dot gone
Our client invested in a dot-com type company in 1998-99 under the enterprise investment scheme and received the 20 per cent income tax relief. Unfortunately, the company went into administrative receivership during 2000-01.
Dot gone
Our client invested in a dot-com type company in 1998-99 under the enterprise investment scheme and received the 20 per cent income tax relief. Unfortunately, the company went into administrative receivership during 2000-01.
We are claiming income tax loss relief for our clients under section 574, Taxes Act 1988, after making a negligible value claim under section 24(2), Taxation of Chargeable Gains Act 1992. We assumed that the claim would be based on the net cost of 80 per cent to our client, that is, after the income tax relief of 20 per cent giving him an additional relief of 32 per cent (being 80 per cent x 40 per cent), a total relief of 52 per cent. However, the tax department from the receivers has said that 40 per cent relief is available under section 574, giving a total of 60 per cent relief.
Can readers help to decide who is correct?
(Query T16,163) - ICE.
Although business expansion scheme relief was abolished as from 1 January 1994 and replaced by the enterprise investment scheme, the Revenue's Interpretation RI14, 'Winding up of business expansion scheme companies', gives its opinion as to the method in claiming the relief in this case:
'… Where shareholders cease to be entitled to relief in these circumstances, they may be able to make claims under section 24(2), Taxation of Chargeable Gains Act 1992 on the basis that their shares have become of negligible value. It may then be possible for them to claim relief from income tax under section 574, Taxes Act 1988 - relief for losses on unquoted shares - in respect of the resulting capital loss'.
Regarding the 20 per cent income tax relief, section 150A, Taxation of Chargeable Gains Act 1992 (enterprise investment schemes) says:
'(1) For the purpose of determining the gain or loss on any disposal of ... shares by an individual where:
(a) an amount of relief is attributable to the shares; and
(b) apart from this subsection there would be a loss;
the consideration given by him for the shares shall be treated as reduced by the amount of the relief.'
To put the above into figures, Simon's Direct Tax Service at C3.1007, 'Losses on disposal of shares', gives the required answer under Example 2:
'Miss T subscribed £100,000 for ordinary shares in W Ltd and received £20,000 enterprise investment scheme relief. The company was liquidated two years later and Miss T received nothing. Miss T would not lose her income tax relief and further relief would be available as follows:
£ £
Proceeds Nil
Deduct: Acquisition cost 100,000
Less: enterprise investment
scheme relief 20,000 80,000
Allowable loss £80,000
'If Miss T's marginal income tax rate is 40 per cent, she would have a further tax saving of £32,000.
'If the income tax relief is fully withdrawn at or before the first disposal, the shares are no longer enterprise investment scheme shares. Nevertheless, if a loss is suffered, relief for losses on unquoted shares in trading companies may be available if the conditions for that relief are met.
'Where the early disposal of enterprise investment scheme shares is not a bargain made at arm's length, all the income tax relief attributable to the shares is withdrawn. Furthermore, as it is a condition that the disposal must be at arm's length, income tax relief for the loss is not available.'
Therefore £52,000 relief has been received in respect of the £100,000 invested, or as 'ICE' states, 52 per cent.
Also the Revenue's Capital Gains Tax Manual states at paragraph CG62817: '... an investor can claim a loss on the disposal of enterprise investment scheme shares even if the income tax relief is not withdrawn. Where such a loss arises, it must be reduced by the amount of any income tax relief which remains attributable to the shares sold ...'. This is also covered in Revenue booklet IR137 on the scheme at paragraphs 104 to 106. Paragraph 106 'Can I make a claim for only part of the loss to be set against income?' confirms the deduction:
'No, relief must be claimed for the full amount of the loss (less any income tax relief attributable to the shares)'.
The receiver's tax department therefore needs to be advised of the restriction in the acquisition cost for section 574 purposes. Perhaps they are thinking along the lines that the income tax relief has been withdrawn. - Goldstone.
It seems to me that the tax department from the receivers is wrong in this instance. The tax treatment of losses on enterprise investment scheme shares is dealt with in section 150A(1), Taxation of Chargeable Gains Act 1992 which states clearly that 'for the purpose of determining the gain or loss on any disposal of shares by an individual where:
(a) an amount of relief is attributable to the shares; and
(b) apart from this subsection there would be a loss;
the consideration given by him for the shares shall be treated as reduced by the amount of the relief.'
Therefore, if the shares which are now worthless were acquired for £10,000 and income tax relief was £2,000, then the allowable loss will be £8,000.
Section 574, of the Taxes Act 1988 allows capital losses arising from the disposal of unquoted shares to be set against income in the year of the loss or the preceding year and it states 'Where an individual who has subscribed for shares in a qualifying trading company incurs an allowable loss (for capital gains tax purposes) on the disposal of the shares …'.
The allowable loss for capital gains tax purposes (using the figures above) must therefore be £8,000 and so £8,000 (and not £10,000) will be the amount which can be set against other income. This would reduce the tax due by £3,200 for a 40 per cent taxpayer, so the total tax relief will be £5,200 (which equates to 52 per cent).
It is worth enquiring whether the company is still carrying on a qualifying trade, because where a company ceases to carry on a qualifying trade within the relevant period then, generally speaking, the income tax relief will be withdrawn. However, relief will not be withdrawn if the trade ceases because the company goes into liquidation for bona fide commercial reasons - though there is a condition that any assets are distributed to members within three years of the winding up. Therefore if the company is wound up, then make sure this is done reasonably quickly to prevent the income tax relief being clawed back. - Hutch.
