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HMRC internal manual

Business Income Manual

Trade losses - restriction of relief: contrived trading losses

The astute avoider disguises tax avoidance as commercial activity. Certain allegedly commercial activities are entered into with the objective of creating artificial losses. Where there is any suspicion that such losses have been created or that the person claiming the loss is for practical purposes not suffering or is not liable to suffer the financial effect of that loss, then the case should be referred to Counter-Avoidance, preferably before detailed enquiries are made.

This instruction is not intended to apply to cases where losses arising are simply ‘uncommercial’ in the sense that the business could not sustain such losses and be said to be running on a commercial basis (for example, ‘hobby’ trades). The key concern is that there exists an element of artificiality and that the losses are, or may have been, contrived, probably in order to be relieved against profits. Possible indications of this are:

  1. A business which is distinct from the trader’s usual activities is commenced shortly before the start of a tax year (or, in the case of a company, an accounting period), and accounts for the new business disclose a substantial loss in excess of the capital contributed.
  2. In the case of a company, the loss is roughly equivalent to the profits of the accounting period from the company’s other trading activities, or is surrendered as group relief.
  3. The asset or assets used in the business may be situated in, or acquired from, a place outside the UK.
  4. There are substantial borrowings which may be from the vendor of the asset, a person connected with him, or a foreign based bank which later assigns its loan to one of these.
  5. There is evidence of non-recourse finance.
  6. There is evidence of expenditure matched by allegedly non-taxable receipts.
  7. There is evidence of the manipulation of timing differences.

This list is not exhaustive and the absence of any of the above should not be treated as precluding referral.

Legislation introduced in Finance Act 2010 denies sideways loss relief for all tax-generated losses.