This saga continues. Someone really ought to tell HMRC to stop digging.
Where shares were acquired on the exercise of an option on 10 April 2003, the employee was treated as having acquired the shares at market value for capital gains tax purposes. However, as a result of the decision in Mansworth v Jelley, his base cost was enhanced by the amount upon which he paid income tax. In most cases this effectively doubled the amount of the base cost of the shares for capital gains tax purposes. HMRC issued a detailed statement in January 2003 explaining how these bizarre consequences operated and although it was all reversed in the Finance Act 2003, there were a lot of people who banked huge losses on the basis of the HMRC guidance on the matter.
Earlier this year (see the May 2009 UK Tax Bulletin) HMRC decided that they were wrong after all. They now say that the base cost should not be augmented by the amount chargeable to income tax on the exercise of the option. HMRC will apply their new understanding of the law to cases where there is an open enquiry or appeal and that those affected by the change may need to make or amend their self assessment returns.
It is no surprise that this has given rise to a number of problems and HMRC have now issued a Brief 60/09 setting out answers to various questions. For the most part, the answers are entirely fair and reasonable – but it is a mystery why we should be bothered with all this at all. Whatever the merits of the original statement, at least it was based on a judicial decision, however unwelcome. If they did not want to live with the consequences, why did they not appeal the judgment. Bad call perhaps, but issuing a statement, and then five years later issuing a contradictory statement is bound to cause trouble – for HMRC too. The point was dealt with by the Finance Act 2003 so the sensible course was surely to leave well enough alone.
Anyway, the new statement explains pretty clearly that before 1996/97 it was not possible for losses to be determined – they have to be considered when they come to be used. Accordingly if there are any losses arising in respect of a disposal prior to 1996/97 which had been enhanced by the application of the 2003 Revenue statement, that enhancement will be lost. However, that must be extremely rare.
For losses which arose in the era of self assessment in 1996/97 and onwards, the enhanced losses will continue to be available providing the enquiry window has closed. Those losses are available for carry-forward even against gains arising in the current year despite HMRC’s new view. But where the tax return is under enquiry and the enquiry window has not closed, the enhancement will no longer be available and the losses brought forward will be accordingly reduced.
It is interesting that HMRC does not accept that its published guidance on 8 January 2003 necessarily created a legitimate expectation for the taxpayer. It is really difficult to understand why not. It would perhaps be fair enough to say that despite the legitimate expectation there may be no loss by the taxpayer because if the losses had not been used, the taxpayer has not suffered any detriment as a result (mere disappointment or upset not being enough). That would not deny the existence of legitimate expectation; it would merely remove any remedy. It would be up to the taxpayer to demonstrate their loss. However, that might prove to be a problem because if there had been opportunities to utilise those gains, no doubt they would have been taken.