ESC D33 “relief” for gains where there is no underlying chargeable asset capped at £500,000

Wed 05 Feb 2014

Without any prior consultation on 27 January 2014 HMRC announced the immediate restriction on the scope of extra-statutory concession (ESC) D33 where compensation is received that does not relate to a CGT (or corporation tax on gains) chargeable asset.

Extra Statutory Concession D33 (ESC D33) was published in December 1988 in order to alleviate certain unintended results following the decision in Zim Properties Ltd v Proctor.

It applies only in situations where a capital sum has been derived from a right of action. It does not apply where a capital sum has been derived from any other type of asset including statutory rights or contractual rights. A legal action involving a breach of contract (whether or not in relation to a personal or private matter) will not be within the terms of the concession if the capital sum was derived from a contractual right or from an asset that was the subject of the contract.

The part of D33 which is changing is Para 11, which deals with the situation where there is no underlying asset.  This used to hold that if there was no underlying asset, the receipt of compensation could not give rise to a chargeable gain. Now, Para.11 relief is restricted to gains of up to £500k in respect of each claim. It appears that claims will not be required unless compensation exceeds £500k. If the compensation is more than £500k it will have to be included on the personal tax self-assessment or CT600 return. HMRC will consider claims for relief greater than £500k but give no guidance as to the circumstances in which they might accept such a claim.  HMRC will also consider claims made outside of a tax return, so that certainty can be obtained at an earlier date.

The example HMRC quote (CGM13020) as falling within Para. 11 is of financial compensation, such as for losses suffered due to defective tax advice. So if an adviser were found liable to pay a client £1m compensation because a tax claim time limit had been missed, £500k of that compensation would constitute a chargeable gain.

Revised Text of ESC D33 from 27 January 2014:

The new text is underlined

‘11. No underlying asset

A right of action may be acquired by a claimant in connection with some matter which does not involve a form of property which is an asset for capital gains tax purposes. This may be the case where professional advisers are said to have given misleading advice in a tax or other financial matter, or to have failed to claim a tax relief within proper time. Actions may be brought in relation to private or domestic matters. Where the action does not concern loss of or damage to or loss in connection with a form of property which is an asset for capital gains tax purposes, the approach in paragraph 9 above of treating the compensation as deriving from the asset itself is not appropriate. In these circumstances any gain accruing on the disposal of the right of action will be exempt from capital gains tax up to a limit of £500,000 for any compensation awarded in a single set of legal proceedings.

Any awards of compensation above this threshold will need to be reviewed on a case-by-case basis to ensure that they remain within the Commissioners’ collection and management powers. Therefore such claims will need to be notified to HM Revenue and Customs in writing.’

Read the full text of ESC D33 (PDF 208K)

Effects of the change

Amounts of compensation awarded may increase in accordance with the Gourley principle whereby damages may be grossed up to cover tax liabilities that the claimant recovers. That would increase the cost of settlement of claims.

Non-dom claimants may prefer to sue in an offshore jurisdiction to obtain the benefit of remittance basis on their damages.