HMRC Enquiry - Investment Losses

Tax Disputes | Capital Gains

An individual investor faced an HMRC enquiry into capital losses claimed on their tax return.

The losses related to investments in start-up companies that had failed, resulting in a complete loss of the investor's capital. The losses were substantial and had been used to offset gains in the same and subsequent tax years.

HMRC's enquiry raised several questions:

• Whether the investments had genuinely become worthless, or whether some residual value remained.
• Whether the investor had properly established the allowable cost of the investments.
• Whether the timing of the loss claims was correct.
• Whether any of the losses should be disallowed on anti-avoidance grounds.

The investor was concerned because the documentation from the failed investments was incomplete. Several years had passed, the companies had been dissolved, and some of the paperwork had been lost or destroyed.

We were instructed to assist with the response to HMRC. Our work involved:

• Reconstruction of Records: We worked with the investor to reconstruct the investment history, gathering bank statements, correspondence, and any other available documentation. We also obtained records from Companies House showing the history of the failed companies.
• Legal Analysis: We researched the relevant provisions of TCGA 1992 concerning the crystallisation of losses, the conditions for claiming losses on shares in trading companies, and the timing rules.
• Valuation: We obtained expert advice on whether the shares could be said to have become of negligible value, and the appropriate date for making a negligible value claim.
• Response Drafting: We prepared a comprehensive response to HMRC setting out the facts, the legal analysis, and the documentary evidence supporting the loss claims.

HMRC raised follow-up questions, which we addressed in further correspondence. The key issues were the timing of the losses and the adequacy of the evidence.

After several rounds of correspondence, HMRC accepted that the losses had been correctly claimed. The enquiry was closed with no adjustment to the tax position.

Outcome

HMRC enquiry successfully resolved with all claimed losses accepted. No adjustment to the investor's tax position. Enquiry closure notice received.

This case study is based on a real client matter. All identifying details have been removed or changed to protect client confidentiality.