Held incompatible with EU law- UK relief for share losses and irrecoverable debts to traders

Thu 23 Aug 2018

The European Commission (EC) has issued two infringement notices to the UK on share loss relief and CGT relief on irrecoverable loans to traders.

Comment

The infringement notices concern the principle of freedom of movement of capital. If the infringement notices are upheld, this may lead to a claim of illegal state aid.  The UK may then be required to recover any illegal aid.  The UK may also decide to amend the law to provide relief for losses on qualifying shares undertaking activity without restriction to that activity being wholly or mainly within the UK, and for CGT relief on loans to traders without restriction to the borrower being UK resident.

For a discussion of the tax implications of these developments please get in touch with a member of the Mazars personal tax team.

Infringement notice re share loss relief

The Commission decided today [19 July 2018] to send a letter of formal notice to the United Kingdom asking it to align its rules with EU law on income tax relief for losses on disposals of shares [shares within ITA 2007 s131(2)(b), which must meet the condition in s134(5)]. Currently, only shares in companies which carry out their business activities wholly or mainly in the United Kingdom can qualify for the relief. This rule puts taxpayers who invest in qualifying shares of companies which carry out their business in other EU Member States than the United Kingdom at a disadvantage. It also imposes a restriction on the free movement of capital (Article 63 TFEU). If the United Kingdom does not act within the next two months, the Commission may send a reasoned opinion to the authorities of the United Kingdom.

Infringement notice re CGT relief on loans to traders

The Commission decided today [19 July 2018] to send a letter of formal notice to the United Kingdom concerning its national law on tax relief for loans to traders [TCGA 1992 s253 which requires a UK resident borrower per s253(1)(b)]. UK legislation currently provides for a specific relief where a “qualifying loan” has become irrecoverable. In this case, the lender is entitled to make a claim that the amount of the loan should be deductible against his liability to capital gains tax or to corporation tax on chargeable gains. However, the rules differentiate between the tax treatment of ‘irrecoverable loans’ granted to UK residents and those granted to non-UK resident borrowers. This imposes an unjustified restriction on the free movement of capital (Article 63 TFEU). If the United Kingdom does not act within the next two months, the Commission may send a reasoned opinion to the authorities of the United Kingdom.