Corporation Tax and Income Tax: Tax treatment of appropriations to trading stock
Published 8 March 2017
© Crown copyright 2017
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This publication is available at https://www.gov.uk/government/publications/corporation-tax-and-income-tax-tax-treatment-of-appropriations-to-trading-stock/corporation-tax-and-income-tax-tax-treatment-of-appropriations-to-trading-stock
Who is likely to be affected
Businesses that transfer a capital asset to trading stock.
General description of the measure
This measure removes the option for businesses to elect for capital losses that would otherwise arise where an asset is appropriated to trading stock to be treated as trading deductions which can be offset against the total trading profits of the business.
Policy objective
This measure will remove an election in the tax code that allows businesses to convert losses attributable to a period for which the asset was a capital asset into more flexible trading losses. This will address an unfairness in the current rules that can be exploited for avoidance.
Background to the measure
This measure was announced at Spring Budget 2017.
Detailed proposal
Operative date
This measure will have immediate effect by preventing the election being made for appropriations into trading stock made on or after 8 March 2017.
Current law
Current law is contained in section 161 of the Taxation of Chargeable Gains Act (TCGA) 1992.
Proposed revisions
Currently, the appropriation of a capital asset to trading stock under section 161(1) of TCGA is treated as taking place at market value, and can give rise to a chargeable gain or an allowable loss (section 161(1) of TCGA). However, an election can be made under section 161(3) of TCGA that has the effect of reducing the chargeable gain or allowable loss to zero, and rebasing the transfer value for the purpose of computing trading profits.
The changes, introduced in Finance Bill 2017, will mean that the legislation will only permit this election to be made where the appropriation into trading stock at market value would give rise to a chargeable gain and not where it gives rise to an allowable loss. This means that an allowable loss will be crystallised when the appropriation takes place, and the loss will therefore remain within the chargeable gains rules with respect to how it may be set off in the future.
A similar change will apply to an election under section 161(3ZB) of TCGA. This election can be made where the disposal of the asset gives rise to an ‘ATED-related gain’. That is, the asset was within the charge to ATED (the Annual Tax on Enveloped Dwellings). Any chargeable gain or allowable loss on such an asset is separated into an ‘ATED-related’ gain or loss and a ‘non-ATED related’ gain or loss (based on the respective time periods that the asset was or was not within the ATED charge). A ‘non-ATED related’ gain or loss can be the subject of an election that has a similar effect to section 161(3), outlined above. The same change will be made to section 161(3ZB) of TCGA as for section 161(3), so that an election can only be made where there is a ‘non-ATED related’ gain and not where there is a ‘non-ATED related’ loss. There is no change to the treatment of the ‘ATED-related’ gain or loss as that part of the gain or loss cannot be the subject of an election under the current rules.
Summary of impacts
Exchequer impact (£m)
| 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 |
|---|---|---|---|---|
| +25 | +15 | +15 | +15 | +15 |
These figures are set out in Table 2.1 of Spring Budget 2017 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Spring Budget 2017.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
The costing accounts for a behavioural effect to allow for some of those affected finding ways to mitigate the impact of the changes.
Impact on individuals, households and families
The measure is not expected to impact on individuals, households or family formation, stability or breakdown.
Equalities impacts
It is not anticipated that there will be any impacts for groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses. Businesses will continue to benefit from this election in relation to capital assets standing at a gain, but not in relation to capital assets standing at a loss. Up to 50 businesses per year will incur negligible one-off cost to familiarise themselves with the new rules. Negligible on-going costs include carrying out valuations to ascertain whether or not their assets are at a loss or a gain. There is no impact on civil society organisations.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
It is anticipated that any HMRC IT and operational impacts for this policy will be negligible.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be subject to ongoing monitoring of information collected on tax returns.
Further advice
If you have any questions about this change, please contact Rawfiah Choudry on Telephone: 03000 559565 or email: rawfiah.choudry@hmrc.gsi.gov.uk.