CG14805 | Contingent liabilities: the effect of TCGA92 S49

TCGA92/S49

TCGA92/S49 provides that, in the first instance, no account is taken of the contingent liability in computing the capital gain. But if the contingent liability becomes enforceable and is enforced, the vendor can make a claim under S49(2) for such adjustment, whether by way of discharge or repayment of tax or otherwise, as is required in consequence.

For purposes of establishing the adjustment required, the customer can recompute their gain or loss as if the consideration was reduced by the payment made under the contingent liability. See CG14807 if the payment exceeds the original consideration received.

For example, an individual sells their shares in a private company for £100,000 and agrees to make a payment to the purchaser of up to £70,000 if a particular product proves to be defective. The warranty becomes enforceable and the inviduals pays the purchaser £70,000. The shares cost £40,000.

The original computation would be

Disposal proceeds £100,000

Minus Cost £40,000

Chargeable Gain £60,000

After the warranty payment the computation becomes

Disposal proceeds £100,000-£70,000 £30,000

Minus Cost £40,000

Allowable loss £10,000

The tax due or paid on the original assessment should be discharged or repaid. The individual may also be entitled to a discharge or repayment of tax if the loss can be utilised against other chargeable gains in the same tax year or subsequent tax years.

The test whether a claim can be made under S49(2) is a factual one. If a contingent liability within S49(1)

• becomes enforceable, and

• is being, or has been enforced

a claim may be made for the adjustment required. The time limit in TMA70/S43 applies from the date when all of the conditions for making a claim are satisfied.

For example, a contract for the sale and purchase of shares is formed on 15/03/2019. The contract includes a warranty. After the purchaser has gone through the accounts, they identify an overstatement of sales. The purchaser makes a claim to the vendor under the warranty on 20/11/2019. The vendor disputes the warranty claim resulting in litigation. The claim and associated litigation is settled by the vendor and purchaser on 05/05/2023. The four year time limit for the vendor to make a claim under S49(2) runs from 05/05/2023 when all of the conditions for making the claim have been satisfied.