An unfortunate effect of the recession has been an apparently increasing number of capital losses on assets. A negligible value claim (under TCGA 1992, s 24) is a useful mechanism to realise an allowable capital loss. In cases involving qualifying shares, the loss can be converted to an income tax loss and offset against general income (ITA 2007, ss 131-151).
The effect of a negligible value claim is broadly that the taxpayer is treated as if he or she had disposed of the asset and immediately reacquired it for the amount specified in the claim. For the purposes of a claim, the deemed disposal and reacquisition takes place when the claim is made. Alternatively, the claim can specify an earlier date up to two years before the start of the tax year in which the claim is made (or for corporation tax purposes, from the first day of the earliest accounting period ending not more than two years before the time of the claim), provided that the asset was owned and had become of negligible value at that earlier time.
The owner of the asset may claim relief in two circumstances. The first is that the asset has become of negligible value during the taxpayer’s period of ownership (the second circumstance deals with earlier no gain, no loss disposals, and is outside the scope of this article).
It can be difficult to prove that an asset has ‘become’ of negligible value. In David Harper v CRC  UKFTT 382, the taxpayer made a negligible value claim and income tax loss relief claim in his 2003-04 tax return. The shares were of negligible value at the time of the claim (5 April 2004). However, the dispute was about their value when the taxpayer acquired them in June 2002 and December 2003. HMRC had refused to allow the negligible value and loss relief claims, contending that they were of negligible value at those times, and so did not ‘become’ of negligible value. Both sides in the case made submissions about the value of the company as at June 2002 and December 2003.
The tribunal pointed out that the burden of showing entitlement to tax relief lies with the taxpayer. Having considered the valuation evidence, the tribunal concluded that the calculations submitted on behalf of the taxpayer were “…based more on hope than experience”, and that the shares did not ‘become’ of negligible value because they were always of negligible value. The taxpayer’s appeal was therefore dismissed.
A feature of the above case was the apparent lack of evidence in support of the taxpayer’s claim that the shares had become of negligible value. For example, the tribunal Judge pointed out that no evidence had been submitted about the company’s turnover or profitability in December 2003. He held: “There is no reliable evidence from which we could properly conclude that the company had a positive value, reflected in its shares, at either of those dates, still less evidence from which we might come to a conclusion about what that value might have been.”
The moral of the case is therefore to retain evidence of an asset’s value at the time of acquisition, to demonstrate that the amount is not negligible. Valuation evidence is also required at the time of the claim, or at any earlier time specified in the claim, to demonstrate that the shares have become of negligible value. It may be possible to agree valuations with HMRC using the CG34 procedure (i.e. following or at the same time as a negligible value claim), if the self-assessment return for the relevant tax year has not yet been filed.
The above article is reproduced from ‘Practice Update’ (March/April 2010), a tax Newsletter produced by Mark McLaughlin Associates Ltd. To download current and past, see the Newsletters section.