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The European Commission issues UK with formal notice against two tax reliefs

 

Posted on 3 August 2018

The European Commission (EC) who is responsible for moulding the EU’s strategy, proposing and implementing EU laws and policies, and upholding EU agreements, has issued a letter of formal notice to the UK government regarding two types of tax reliefs.

Within the letter, they request information on Share Loss relief and Capital Gains Tax relief for irrecoverable loans to traders. By issuing the letter, the Commission is taking the first steps in its infringements procedure, offering the UK the opportunity to present its views regarding a potential breach.

But why has the Commission issued a notice in the first place?

The EC believe both reliefs breach long established EU laws regarding the movement of capital. If the UK government fails to provide adequate information per the Commission’s request, we may be forced to comply with EU law, or even be referred to the Court of Justice.

Individuals can claim income tax relief on losses incurred in respect of shares in unlisted trading companies provided certain qualifying conditions are met. However, relief only applies to shares in companies which carry out their business activities completely or mainly in the United Kingdom. This puts taxpayers who invest in shares in companies who operate outside of the UK, but still within an EU member state, at a disadvantage.

Similarly, capital gains tax relief is currently available where a ‘qualifying loan’ has become irrecoverable, enabling the lender to reduce their gains liable to CGT or their chargeable gains liable to corporation tax.

However, there are discrepancies between loans granted to UK residents and those granted to non-UK resident borrowers, putting the latter at a disadvantage.

So where does this leave the UK?

Depending on the information provided, and the EC’s verdict, it potentially allows the UK to expand their legislation on Share Loss relief and Capital Gains Tax relief to all EU member states. Alternatively, it could mean the reliefs are scrapped altogether, although it is not yet known how this is likely to be affected by Brexit.

If you have any questions relating to either tax relief, or have any other tax related queries, please get in touch with one of our tax experts.

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