CG40240 | Capital loss anti-avoidance rule: General

Anti-avoidance provisions were introduced in Finance Act (FA) 2006 (called Targeted Anti-Avoidance rules, or "TAARs" for short). They included a measure to counter the contrived creation of capital losses by companies (known as TAAR1).

The legislation was announced in the Chancellor's Pre-Budget Report on 5 December 2005 and is effective from that date. See CG40241.

A statement of principles, draft guidance document and draft legislation were published at PBR. The statement of principles, on which the legislation was based, and final version of the published guidance document can be found at appendix 8.

The intent of this Targeted anti-avoidance rule (TAAR) is to apply the first of the principles set out in the HMRC statement of 5 December 2005, that relief forcapital losses should only be available where a group or company has suffered a genuine commercial loss and made a real commercial disposal. This principle is neither new nor startling. Indeed, judicial support for such an approach can be found as far back as 1978:

"The capital gains tax is of comparatively recent origin. The legislation imposing it, mainly the Finance Act 1965, is necessarily complicated, and the detailed provisions, as they affect this or any other case, must of course be looked at with care. But a guiding principle must underlie any interpretation of the Act, namely, that its purpose is to tax capital gains and to make allowance for capital losses, each of which ought to be arrived at upon normal business principles. No doubt anomalies may occur, but in straightforward situations, such as this, the courts should hesitate before accepting results which are paradoxical and contrary to business sense. To paraphrase a famous cliché, the capital gains tax is a tax upon gains: it is not a tax upon arithmetical differences." (Lord Wilberforce in Aberdeen Construction Group Ltd v CIR, 58 TC 281, 1978).

The FA 2006 amendments to section 8 of the Taxation of Chargeable Gains Act 1992 will not apply where there is a genuine commercial transaction that gives rise to a real commercial loss as a result of a real commercial disposal. In these circumstances there will be no arrangements with a main purpose of securing a tax advantage. Conversely, where there is either no genuine commercial disposal, or no real commercial loss, or no real commercial disposal or any combination of the foregoing then there are likely to be arrangements in place with a main purpose, orone of the main purposes, of securing a tax advantage so the legislation will apply.