This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.

Mishcon has responded to the recent HMRC consultation.
Stuart Crippin
15 September 2014

Mishcon has responded to the recent HMRC consultation.

Response to recent HM Revenue & Customs (HMRC) consultation on legislating Extra Statutory Concession D33 (D33)

Many types of compensation payments are subject to Capital Gains Tax (CGT). However, D33 enabled HMRC to reduce or waive completely the CGT liability in certain circumstances. Prior to 27 January 2014, the effect of D33 was that a compensation payment arising from a claim not linked to any underlying asset (such as compensation received because of professional negligence) was completely exempt from CGT. However, HMRC amended D33 with effect from 27 January 2014 so that a compensation payment is now only exempt from CGT if it is £500,000 or less. If the compensation payment is over £500,000, only £500,000 of the payment is automatically exempt from CGT. It is necessary to make a claim to HMRC for the amount over £500,000 to be exempt from CGT. HMRC has discretion but has indicated that it will not normally accept such a claim.

The HMRC consultation follows HMRC's amendment to D33 on 27 January 2014. It outlines a proposal to replace with legislation the sections of D33 which deal with claims not linked to any underlying asset. The proposed legislation would provide that such a compensation payment would automatically be exempt from CGT but only if the payment were £1 million or less. The amount by which the payment exceeded £1 million would be subject to CGT, with no discretion. The full consultation document can be found here.

In our view, the proposed legislation could affect a greater number and type of claims than the Government or HMRC may have anticipated and could have unfavourable or unjustified effects, especially on claimants.

We make the following points in our consultation response in relation to claims not linked to any underlying asset:-

  • we question the rationale for introducing a limit on the CGT exemption;
  • we stress that a limit of £1 million would be too low and, if there is to be a limit, we propose that it be £10 million;
  • we outline the tactical and costs implications which the proposed legislation could have for both sides to a dispute;
  • we propose legislating for a mechanism which would allow HMRC some discretion in relation to any limit introduced in legislation;
  • we emphasise the importance of ensuring that any limit on the CGT exemption affects only a tiny fraction of disputes;
  • we propose that the Government considers legislating for the terms of D33 as they were prior to 27 January 2014.

For further information, please contact Stuart Crippin.