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Where Taxpayers and Advisers Meet

S 48 TCGA 1992 claim - time limits

Brightonian
Posts: 99
Joined: Wed Aug 06, 2008 3:31 pm

S 48 TCGA 1992 claim - time limits

Postby Brightonian » Thu Feb 24, 2011 3:59 pm

My client sold his company in 2005/06 for a mixture of cash and loan notes. Clearances were obtained and only the cash was taxed in that year. there was also contingent ascertainable consideration in the form of further loan notes and shares in the new company. The loan notes were redeemed in 2009/10 and I worked the calculation using the balance of allowable expenditure left after the 2005/06 calculation. As the contingent consideration had never been received, I also wrote to HMRC with a revised 2005/06 calculation and asked them to repay the tax due. They have refused the claim on the grounds that it is out of date.

I had assumed (perhaps unwisely) that such a claim woudl be outside normal time limits. There must surely be many cases where it is not known for a number of years whether or not deferred consideration is due. I should be grateful for any advice members of the forum can give.

The revised calculation affects only the balance of allowable expenditure. When preparing the 2009/10 calculation, I could have adjusted teh amount of expenditure and given relief in this way. I rejected this course as 'not quite right' and it gave the taxpayer a better result than doing it the long way! Would it be acceptabel; to amend 2009/10 to obtain the 'right' result?

Thank you.

mullet
Posts: 3242
Joined: Fri Nov 06, 2009 9:26 am

Re: S 48 TCGA 1992 claim - time limits

Postby mullet » Thu Feb 24, 2011 10:18 pm

No, it wouldn't have been right or proper to make an adjustment to expenditure in a later year's return to achieve an arithmetically acceptable result.

I see no time limit in Section 48, and agree that there shouldn't be one since deferred consideration can happen (or not) several years later. I can't imagine that it's subject to the "5 years following 31 January following the end of the year of assessment" time limit either.

I don't know what happens with the new style SA returns, but in the past a S48 adjustment could be made by standalone claim or by putting a figure in box 18.5. http://www.hmrc.gov.uk/forms/2006/sa100.pdf for an example of an old return.

Brian Clarke
Posts: 248
Joined: Wed Aug 06, 2008 3:42 pm
Location: London / SE England

Re: S 48 TCGA 1992 claim - time limits

Postby Brian Clarke » Fri Feb 25, 2011 11:14 am

... Clearances were obtained and only the cash was taxed in that year. there was also contingent ascertainable consideration in the form of further loan notes and shares in the new company...
This sounds to me like a case where Marren v Ingles applies. If the extra consideration was contingent, that implies to me that it cannot have been wholly ascertainable at the time of disposal, and that you would have therefore done the computation in 2006 using the NPV of the best estimate of the consideration. That in turn implies that the correct approach is to report a loss in 2009/10.

In my view, the extra consideration cannot by definition be both "contingent" and "ascertainable".
Brian Clarke
www.BrianClarke.com

mullet
Posts: 3242
Joined: Fri Nov 06, 2009 9:26 am

Re: S 48 TCGA 1992 claim - time limits

Postby mullet » Fri Feb 25, 2011 12:10 pm

In my view, the extra consideration cannot by definition be both "contingent" and "ascertainable".
Consideration can be contingent and ascertainable. Contingent simply means conditional or dependent. Ascertainable is defined as capable of being calculated, either by taking a known figure or drawing up a simple account to establish such figure.

For instance, person x will receive further consideration of £500,000 if the profit in the period ending yyyy is above £zzzz. That is contingent ascertainable consideration. In that situation the full amount of consideration is brought into the CG computation. If an amount less than £500,000 is eventually received, then adjustment is made upon a claim under Section 48 TCGA 1992. The original computation/return is not disturbed; the difference in terms of tax is calculated and the amount given as a credit.

If deferred consideration is based on future events and cannot be calculated until certain events occur or dates pass and figures (typically profit) can be established, then it is unascertainable. For instance person x will receive 10% of profit in the period ending yyyy above the profit threshold of £zzzz. The right to receive such further consideration is a separate asset - Marren v Ingles. The value of that right is brought into the CG computation/return in the year of disposal. If the amount received exceeds the value of that right, then it is a further disposal in the year of receipt using the original value as base cost. If the amount received is less than the value of the right, then a Section 279A-D TCGA 1992 claim is in order, which allows the loss to be carried back to be set against the original gain and thus cause relief to be available.

Brian Clarke
Posts: 248
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Location: London / SE England

Re: S 48 TCGA 1992 claim - time limits

Postby Brian Clarke » Fri Feb 25, 2011 1:13 pm

Contingent simply means conditional or dependent.
The first point, I think, is that the OP described the loan note consideration as conditional, but did not say on what it was conditional. About 10 years ago, I had a 6-month argument with the Revenue about s48 and Marren v Ingles on a closely related matter - retirement relief - and I won the argument. The distinction is this:

If I sell my shares to you on terms that you will pay me £1m in 5 years' time, that consideration is ascertainable. In other words, I know exactly what I will get for the shares. The risk that you will renege on the debt is deliberately excluded (by s48) from consideration.

If I sell you my shares on terms that you will pay me £100,000 plus x% of the profits over a certain period, that consideration is not ascertainable, because it cannot be calculated with certainty upfront. I think we're agreed on that much, at least. However, following Marren v Ingles, a best estimate of those profits has to be made and included in the CGT calculation. This consideration is not ascertainable at the time of the original disposal, which is what I meant.

If the proceeds I receive are contingent on anything, that implies that there is a risk that the figure will be different from that originally estimated.

Hence consideration cannot be both contingent and ascertainable.

You said:
Ascertainable is defined as capable of being calculated, either by taking a known figure or drawing up a simple account to establish such figure.
Defined where? In any event, if there is uncertainty as to the amount of the consideration, then it cannot be ascertained (which implies certainty), only estimated.
Brian Clarke
www.BrianClarke.com

mullet
Posts: 3242
Joined: Fri Nov 06, 2009 9:26 am

Re: S 48 TCGA 1992 claim - time limits

Postby mullet » Fri Feb 25, 2011 6:33 pm

If I sell you my shares on terms that you will pay me £100,000 plus x% of the profits over a certain period, that consideration is not ascertainable, because it cannot be calculated with certainty upfront. I think we're agreed on that much, at least. However, following Marren v Ingles, a best estimate of those profits has to be made and included in the CGT calculation. This consideration is not ascertainable at the time of the original disposal, which is what I meant.
I disagree and so does HMRC (CG14881). £100,000 is ascertainable and not deferred, x% of profit is unascertainable and deferred. Remember that the right to receive future consideration is a separate asset and that the value of that right is part of the "original" consideration at disposal. Marren v Ingles established the principle that the right itself is to be valued. This is not the same as "a best estimate of those profits has to be made".
If the proceeds I receive are contingent on anything, that implies that there is a risk that the figure will be different from that originally estimated.
Any deferred consideration carries with it an element of risk. Such risk is dealt with by Section 48, not Marren v Ingles.
Hence consideration cannot be both contingent and ascertainable.
I still think it can, based on my previous illustration.
mullet: Ascertainable is defined as capable of being calculated, either by taking a known figure or drawing up a simple account to establish such figure. Defined where? In any event, if there is uncertainty as to the amount of the consideration, then it cannot be ascertained (which implies certainty), only estimated.
CG14881: The amounts of the future payments are ascertainable if they are known, or ascertainable by calculations, or ascertainable by making up an account AND all of the events which establish the AMOUNT have occurred by the date of the disposal. "AMOUNT" is HMRC's emphasis. Note that it is the events which establish the amount which matter, not whether or not it will be received (i.e. risk). If the contract states a specific amount of consideration such as "£100,000 to be paid if ..........." then this is ascertainable but contingent.

Brian Clarke
Posts: 248
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Location: London / SE England

Re: S 48 TCGA 1992 claim - time limits

Postby Brian Clarke » Fri Feb 25, 2011 7:23 pm

I disagree and so does HMRC (CG14881). £100,000 is ascertainable and not deferred, x% of profit is unascertainable and deferred.
In my example, the £100,000 is only part of the consideration, and I think the consideration has to be considered in total. You quoted:
CG14881: The amounts of the future payments are ascertainable if they are known, or ascertainable by calculations, or ascertainable by making up an account AND all of the events which establish the AMOUNT have occurred by the date of the disposal.
In terms of CG14881, the consideration in my "£100K + x%" example is not ascertainable, for the simple reason that not ALL of the events which establish the amount have occurred by the date of the disposal. Although the £100K is known, it forms only part of the disposal proceeds which have to be brought into account immediately.
Any deferred consideration carries with it an element of risk. Such risk is dealt with by Section 48, not Marren v Ingles.
That's effectively the same as what I said -
The risk that you will renege on the debt is deliberately excluded (by s48) from consideration.
48(1) In the computation of the gain consideration for the disposal shall be brought into account without any discount for postponement of the right to receive any part of it and, in the first instance, without regard to a risk of any part of the consideration being irrecoverable or to the right to receive any part of the consideration being contingent; and if any part of the consideration so brought into account subsequently proves to be irrecoverable, there shall be made, on a claim being made to that effect, such adjustment, whether by way of discharge or repayment of tax or otherwise, as is required in consequence.
Having said that, I think we have come full circle, back to your original point, that there seems to be no time limit on a claim under s48. This is somewhat at odds with CG14964:
Relief under TCGA92/S48 is not due as the vendor has received the ‘right’, it cannot become irrecoverable.
I can see the logic behind that. Unfortunately it means that the taxpayer has to claim a capital loss in 2009/10, and do with that whatever he can.
Brian Clarke
www.BrianClarke.com

mullet
Posts: 3242
Joined: Fri Nov 06, 2009 9:26 am

Re: S 48 TCGA 1992 claim - time limits

Postby mullet » Fri Feb 25, 2011 7:55 pm

Unfortunately it means that the taxpayer has to claim a capital loss in 2009/10, and do with that whatever he can.
Before Section 279A-D TCGA 1992 was enacted (can't establish precisely when at the mo, but FA1998 wouldn't surprise me) "whatever he can" was often "not a lot". But such a loss can now be carried back to the original gain so that loss relief is available in all appropriate qualifying cases.

AvocadoK
Posts: 1232
Joined: Wed Aug 06, 2008 3:46 pm
Location: Lancashire

Re: S 48 TCGA 1992 claim - time limits

Postby AvocadoK » Fri Feb 25, 2011 11:05 pm

m, it was FA2003 (losses arising from 10 April 2003).


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