Office of Public Sector Information
338.Subsections (3) and (4) provide signposts to sections in Chapter 5 of Part 13 (avoidance involving trading losses).
339.This section defines these terms. It is new.
340.The definition of “capital gains relief” refers to section 261B of TCGA, which is inserted by Schedule 1 to this Act.
341.This section restricts the use of a trade loss made in a tax year by an individual carrying on the trade as a limited partner. It is based on section 117(1) and (2) of ICTA.
342.Sideways relief or capital gains relief for the trade loss, combined with other relevant relief, must not exceed the individual’s contribution to the firm.
343.The interaction between section 72 of FA 1991 and section 117 of ICTA is made explicit. See Change 13 in Annex 1.
344.The individual’s contribution to the firm is measured at the end of the basis period for the relevant tax year, rather than at the end of the tax year as in the source legislation. See Change 15 in Annex 1.
345.There is a change from “contribution to the trade” in the source legislation to “contribution to the firm”. See the overview commentary on this Chapter and Change 16 in Annex 1.
346.This section sets out details of what is included in determining the contribution to the firm. It is based on section 117(3) and (5) of ICTA.
347.There is a change from “contribution to the trade” in the source legislation to “contribution to the firm”. See the overview commentary on this Chapter and Change 16 in Annex 1.
348.The individual’s contribution of capital to the firm is reduced by any amounts drawn out or received back. Subsection (5) provides an exception. The exception is for an amount drawn out or received back which is treated as income chargeable to income tax. This exception is similar to the one in section 111(5), based on section 118ZG(5) of ICTA. See Change 17 in Annex 1.
349.This section defines “limited partner”. It is based on section 117(2) of ICTA.
350.A limited partner of a limited partnership registered under the Limited Partnerships Act 1907 is someone who is not entitled to take part in the management of the firm’s business and is not liable for the debts or obligations of the firm beyond a certain limit. And a limited partner of any other firm is someone who is similarly not entitled to take part in management and not liable for debts or obligations in accordance with the rules applying to the firm in question.
351.Subsection (4) is introduced as part of drafting in terms of an individual’s “contribution to the firm” in place of “contribution to the trade”. See Change 16 in Annex 1.
352.This section restricts the use of a trade loss made in a tax year by an individual carrying on a trade as a member of a limited liability partnership (LLP). It is based on sections 117(1) and (2) and 118ZB(1) and (2) of ICTA.
353.Sideways relief or capital gains relief for the trade loss, combined with other relevant relief, must not exceed the individual’s “contribution to the LLP”.
354.The interaction between section 72 of FA 1991 and section 117 of ICTA is made explicit. See Change 13 in Annex 1.
355.The individual’s contribution to the LLP is measured at the end of the basis period for the relevant tax year, rather than at the end of the tax year as in the source legislation. See Change 15 in Annex 1.
356.There is a change from “contribution to the trade” in the source legislation to “contribution to the firm”. See the overview commentary on this Chapter and Change 16 in Annex 1.
357.This section sets out details of what is included in determining the contribution to the LLP. It is based on sections 118ZB(1) and 118ZC of ICTA.
358.An LLP formed under the Limited Liability Partnerships Act 2000 is an entity with separate legal personality. That Act defines what is meant by contribution to the limited liability partnership.
359.There is a change from “contribution to the trade” in the source legislation to “contribution to the firm”. See the overview commentary on this Chapter and Change 16 in Annex 1.
360.The individual’s contribution of capital to the LLP is reduced by any amounts drawn out or received back. Subsection (6) provides an exception. The exception is for an amount drawn out or received back which is treated as income chargeable to income tax. This exception is similar to the one in section 111(5), based on section 118ZG(5) of ICTA. See Change 17 in Annex 1.
361.This section specifies how the amount of any loss, which could not be relieved because of section 107, may be brought forward for use in a later tax year in which the individual continues to carry on the trade as a member of an LLP. It is based on sections 118ZD and 118ZM(8) of ICTA.
362.The section treats the unrelieved loss as a trading loss of the later tax year, unless it is an excluded loss (see subsection (3)).
363.The interaction between section 72 of FA 1991 and section 117 of ICTA is made explicit in section 107, to which this section refers. See Change 13 in Annex 1.
364.This section restricts the use of trade losses made by an individual carrying on a trade as “a non-active partner” in an “early tax year”. It is based on sections 118ZE and 118ZF of ICTA.
365.A non-active partner is an individual who does not devote a significant amount of time to the trade and is not a limited partner. See section 112.
366.Sideways relief or capital gains relief for the trade loss, combined with other relevant relief, must not exceed the individual’s “contribution to the firm”.
367.The restriction applies only to losses made in the first tax year in which the individual carries on the trade or in any of the next three tax years. See section 112(6).
368.The interaction between section 72 of FA 1991 and section 118ZE of ICTA is made explicit. See Change 13 in Annex 1.
369.The individual’s contribution to the firm is measured at the end of the basis period for the relevant tax year, rather than at the end of the tax year as in the source legislation. See Change 15 in Annex 1.
370.There is a change from “contribution to the trade” in the source legislation to “contribution to the firm”. See the overview commentary on this Chapter and Change 16 in Annex 1.
371.Subsection (8) disapplies the rules in the case of losses from a trade of underwriting at Lloyd’s. Lloyd’s underwriters are subject to a specific tax regime which reflects the nature of the business and the partners’ liabilities for the underwriting losses.
372.This section sets out details of what is included in determining the individual’s contribution to the firm. It is based on section 118ZG of ICTA.
373.There is a change from “contribution to the trade” in the source legislation to “contribution to the firm”. See the overview commentary on this Chapter and Change 16 in Annex 1.
374.The definition differs slightly from the definition of “contribution to the firm” for limited partners. The definition for a non-active partner includes a reference to any additional amount contributed on a winding-up, whereas the definition for a limited partner includes no such reference, as a limited partner is under no obligation to contribute any amounts beyond the amount originally agreed as the required contribution.
375.This section sets out details of who is carrying on a trade as a non-active partner in an early tax year. It is based on sections 118ZE, 118ZH and 118ZM of ICTA.
376.The definition excludes limited partners. So only a general partner (that is, a partner other than a limited partner) or a member of an LLP may be a non-active partner.
377.In broad terms, a non-active partner is an individual who does not devote a significant amount of time to the trade and is, therefore, unlikely to be anything more than a financial investor.
378.Subsection (2) provides that a significant amount of time is taken as being a minimum of ten hours per week, on average taken across the period.
379.Subsections (3) and (4) define the “relevant period” for the purposes of subsection (2) as the whole of the basis period for the tax year, or a continuous period of at least six months either beginning with the date of commencement or ending with the date of cessation. For example, if an individual commences a trade on 1 April 2007, the basis period for 2006-07 is 1 April 2007 to 5 April 2007. And the relevant period ends on 30 September 2007 for the purposes of this section in relation to the tax year 2006-07. So the individual must meet the “significant amount of time” test for six months rather than just for five days.
380.Subsection (5) provides that where relief is given but the activity rules prove not to be satisfied, relief is withdrawn by making an assessment under this section.
381.This section specifies how the amount of any loss, which could not be relieved because of section 110, may be brought forward for use in a later tax year in which the individual continues to carry on the trade as a partner (or contributes to the firm on its winding up). It is based on sections 118ZI and 118ZM of ICTA.
382.The section treats the unrelieved loss as a trading loss of the later tax year unless it is an excluded loss (see subsection (4)).
383.The interaction between section 72 of FA 1991 and section 118ZE of ICTA is made explicit in section 110, to which this section refers. See Change 13 in Annex 1.
384.The section reflects the contribution to the firm being measured at the end of the basis period for a tax year, rather than at the end of the tax year as in the source legislation. See Change 15 in Annex 1.
385.This section enables regulations, which can apply on a retrospective basis, to exclude certain amounts from the calculation of the contribution to the firm or LLP. It is based on section 118ZN of ICTA.
386.Regulations made under this section are subject to the affirmative resolution procedure.
387.There is a change from “contribution to the trade” in the source legislation to “contribution to the firm”. See the overview commentary on this Chapter and Change 16 in Annex 1.
388.Some regulations have been made under section 118ZN of ICTA, with effect from 22 July 2005. See the Partnerships (Restrictions on Contributions to a Trade) Regulations 2005 (SI 2005/2017). See also the commentary on Part 5 of Schedule 2 about consequential amendments made to these regulations by this Act.
389.In subsection (4), the reference to Act includes references to Acts of the Scottish Parliament and Northern Ireland legislation. See section 1018 and Change 152 in Annex 1.
390.This section extends the restriction on the use of sideways relief and capital gains relief to (effectively) non-active partners carrying on a trade that exploits films, where there is a relevant agreement that guarantees the individual an amount of income. It is based on sections 118ZL and 118ZM of ICTA.
391.The interaction between section 72 of FA 1991 and section 118ZL of ICTA is made explicit. See Change 13 in Annex 1.
392.This section specifies that the restriction under the previous section does not apply to the extent any loss qualifying for relief derives from unrestricted film expenditure. It is based on sections 118ZL and 118ZM of ICTA.
393.This Chapter provides relief for losses from property businesses.
394.This section provides an overview of the Chapter. It is new.
395.Subsection (1) lists the types of relief available for property losses and refers to the various sections where the details of the reliefs and associated miscellaneous provisions can be found.
396.Subsection (2) highlights the fact that a UK property business, so far as it consists of the commercial letting of furnished holiday accommodation, is treated as a trade for loss relief purposes.
397.This section provides relief for property losses against property business income of later years. It is based on sections 379A and 379B of ICTA.
398.Section 272 of ITTOIA specifies that the same rules apply in calculating profits and losses of a property business as apply for calculating profits and losses of a trade. So rewriting section 379A(7) of ICTA is unnecessary. See the reference to section 272 of ITTOIA in section 59.
399.This section explains how the deductions are made. It is based on sections 379A(1) and 379B of ICTA.
400.This section provides relief for property losses against general income, if the loss has a capital allowances or relevant agricultural connection. It is based on sections 379A and 379B of ICTA.
401.This section explains how the deductions are made. It is based on sections 379A and 379 B of ICTA.
402.This section defines “the applicable amount of the loss”, with the effect that a claim by a person for property loss relief against general income is restricted to the lesser of the loss itself and the amount arising from the relevant connection. It is based on sections 379A(4) and 379B of ICTA.
403.This section defines the meaning of “the loss has a capital allowances connection” and “the business has a relevant agricultural connection”. It is based on section 379A and 379B.
404.This section provides the time limit for making a claim under section 120 and supplementary matters if a claim is made. It is based on sections 379A(3) and 379B of ICTA.
405.This section provides relief for payments of certain expenses etc after a property business has ceased (and for which relief would not otherwise be available). It is based on section 109A and section 110 of ICTA.
406.A claim for post-cessation property relief is possible if a person ceases carrying on a UK property business and within seven years makes a qualifying payment (see section 97) or a qualifying event occurs in relation to a debt of the business (see section 98).
407.This section is a signpost to a capital gains tax relief that may be available where there is insufficient income to absorb an amount claimed by way of post-cessation property relief. It is new.
408.This section provides, subject to modifications, the same range of reliefs for a loss from a UK furnished holiday lettings business as is available for a trade loss. It is based on section 504A of ICTA.
409.Subsection (4) applies Chapter 2 (trade losses) with the omission of the section restricting the availability of trade leasing allowances, as an individual letting furnished holiday accommodation cannot lease out equipment as part of that business.
410.Subsections (5) and (6) deny early trade loss relief to an individual in respect of a tax year if any of the accommodation was first let by the individual as furnished accommodation more than three years before the start of the tax year.
411.This Chapter provides relief for losses in an employment or office.
412.This section provides relief for a person’s losses in an employment or office. It is based on section 380(1) of ICTA.
413.The reference to “office” is new, but reflects the long-standing HMRC practice of allowing the holder of an office to set off losses against general income. See Change 18 in Annex 1.
414.Section 384A of ICTA restricts relief under section 380 of ICTA in relation to avoidance schemes entered into by individuals carrying on a leasing trade, or another qualifying activity, and involving first-year allowances. See section 76.
415.As section 380 of ICTA provides relief for losses in an employment (as well as in a trade) the restriction in section 384A of ICTA is, in principle, applicable to an employment loss.
416.In view of the remote possibility of section 384A of ICTA ever applying to employment losses, this section is not subject to a restriction equivalent to that in section 76. See Change 19 in Annex 1.
417.This section explains how deductions are made. It is based on section 380(1) and (2) of ICTA.
418.Subsections (2) and (3) provide that, if claims are made in respect of employment losses incurred in successive tax years and both claims specify that the relief is to be given against income of the same tax year, the claim in respect of the loss in the earlier year takes priority.
419.Subsection (4) makes it explicit that this rule also operates in relation to the interaction between claims for employment losses and those for trade losses.
420.This section is a signpost to a capital gains tax relief that may be available where there is insufficient income to absorb an amount claimed by way of employment loss relief. It is new.
421.This Chapter is based on sections 305A and 574 of ICTA and, to the extent that they supplement section 574 of that Act, sections 575 and 576 of that Act. So far as sections 575 and 576 of ICTA supplement section 573 of that Act (share loss relief for companies), they continue in force, together with new sections 576A to 576L of ICTA (see Schedule 1 to this Act and the commentary on those new sections of ICTA).
422.Section 574 of ICTA provides for relief against income tax for allowable losses for capital gains tax purposes incurred on the disposal of ordinary shares in qualifying trading companies for which an individual has subscribed.
423.Section 305A of ICTA provides that section 574 of that Act also applies, with minor modifications, on the disposal by an individual of shares to which enterprise investment scheme income tax relief is attributable under Chapter 3 of Part 7 of ICTA. The provisions of section 305A of ICTA are included as an integral part of this Chapter and a signpost to this Chapter is included in section 161 in Part 5 (Enterprise investment scheme).
424.Section 125A of TCGA introduced by Schedule 1 to this Act is based on section 576(2) and (3) of ICTA, which have effect only for the purposes of capital gains tax or corporation tax on chargeable gains, and on sections 573(4) and 574(1) of ICTA which have effect only for the purposes of corporation tax on chargeable gains and capital gains tax respectively. See the commentary on section 125A of TCGA in Schedule 1.
425.This Chapter contains 21 sections structured as follows:
three setting out the basic conditions for share loss relief, the entitlement of the individual to make a claim and how the relief works;
thirteen applying only to shares to which EIS relief is not attributable and setting out requirements to be satisfied if relief is to be available on the disposal of such shares;
three applying generally and dealing with limits on relief and the identification of shares disposed of; and
two containing miscellaneous and supplementary provisions.
426.This section deals with eligibility for share loss relief and the requirements relating to the kinds of disposal and to the type of shares disposed of. It is based on sections 305A(1), 574(1) and 575(1) and (3) of ICTA.
427.Subsection (1)(b) provides that the disposal must be of “qualifying shares”. Subsection (2) provides that shares are qualifying shares if either EIS relief is attributable to them or they are shares in a qualifying trading company for which the individual has subscribed. EIS relief is defined in section 151(1) and includes not only relief under Part 5 of this Act attributable to shares issued on or after 6 April 2007 (see section 201) but also relief under Chapter 3 of Part 7 of ICTA attributable to shares issued after 31 December 1993 and before 6 April 2007 (see section 289B of that Act).
428.Subsection (3)(a) is based on section 575(1)(a) of ICTA which specifies as one of the kinds of disposal:
a disposal by way of a bargain made at arm’s length for full consideration.
Subsection (3)(a) omits the words “for full consideration” on the basis that they add nothing. See Change 20 in Annex 1.
429.This section deals with the making of a claim for share loss relief. It is based on section 574(1) of ICTA.
430.This section makes explicit what is only implicit in section 574(1) of ICTA:
in subsection (1), that a claim may be made for both the tax year in which the allowable loss is incurred and the previous tax year;
in subsection (2), what is required in practice to establish how the claim is to apply to each year; and
in subsection (3), that, in the case of a claim in respect of one year only, the claim must specify which year.
431.This section explains how deductions for the loss are to be made. It is based on section 574(1) and (2) of ICTA.
432.Subsection (1) states explicitly what is implicit in section 574(1) of ICTA, that:
the whole amount of the loss must be deducted in calculating the claimant’s net income for the specified tax year; and
if a claim is made in respect of two tax years, then only so much, if any, of the amount of the loss which it has not been possible to deduct from the claimant’s income for the specified year can be deducted in calculating the claimant’s net income for the other year.
433.This section does not include the words in section 574(1)(a) and (b) of ICTA which limit the amount of the deduction for any tax year to the whole of the claimant’s income for the year, where the income is less than the amount of the loss. That limit is included in section 25(5) and (6). Section 25 explains how the reliefs listed in section 24, which include share loss relief, are to be deducted at Step 2 of section 23 in order to calculate the claimant’s net income.
434.Subsection (5) is new. It makes explicit that the balance of any allowable loss for which share loss relief is not obtained continues to be capable of being claimed as a deduction under TCGA.
435.This section is the first of 13 sections which apply only to shares to which EIS relief is not attributable. It is based on section 576(4) of ICTA. It defines what is a qualifying trading company. Shares, other than shares to which EIS relief is attributable, must form part of the ordinary share capital of a qualifying trading company if they are to be qualifying shares (see section 131(2)(b) and the definition of “shares” in section 151(1) and (3) to (6)).
436.Section 576(4) of ICTA defines a “qualifying trading company” in terms of its being an “eligible trading company” and having been such for a specified continuous period. Section 576(4A) of ICTA defines an “eligible trading company” by applying the requirements of section 293 and other provisions of Chapter 3 of Part 7 of ICTA (Enterprise investment scheme) with modifications.
437.This section avoids the double layer of definition in section 576(4) of ICTA and omits the concept of an “eligible trading company”.
438.Subsection (2), therefore, directly introduces the four requirements of section 293 of ICTA (as modified and applied by section 576(4A) and (4B) of that Act) which must be met on a continuing basis (see also subsection (3)).
439.Subsections (2)(b) and (3)(b) omit the words “that is not an eligible trading company” which qualify “trading company” in section 576(4)(a)(ii) and (b)(ii) of ICTA on which those paragraphs are based. Those words are otiose.
440.Subsection (4) directly introduces the two requirements of section 293 of ICTA (as modified and applied by section 576(4A) and (4B) of that Act) which are to be met only when the shares in respect of which share loss relief is claimed are issued.
441.This direct application of these two requirements resolves the apparent inconsistency between sections 293 and 576(4) of ICTA. Section 293 of ICTA requires them to be met only at the time of issue of the shares. But section 576(4) of that Act requires the company to be an eligible trading company at a subsequent time and during a continuous period. Section 576(4) of ICTA thus appears to require the company to meet these requirements also at that subsequent time and during that period.
442.This section sets out the requirements relating to the subscription for shares in a qualifying trading company. It is based on section 574(3) of ICTA and includes a new provision relating to “corresponding bonus shares”.
443.Subsection (2) provides that shares are subscribed for by the individual if they have been issued to the individual in consideration of money or money’s worth. See also subsection (4).
444.Subsection (3) is based on section 574(3)(b) of ICTA, which provides that:
an individual shall be treated as having subscribed for shares if his spouse or civil partner did so and transferred them to him by a transaction inter vivos.
445.Subsection (3)(a) is extended to cover not only the case where A is the actual subscriber but also cases where A is treated as having subscribed under the provisions relating to the issue of “corresponding bonus shares” (see subsection (4)) or under an earlier application of this subsection. See Change 21 in Annex 1.
446.Subsection (3)(c), read with the definitions of “civil partner” and “spouse” in section 151(1), makes explicit that the relevant time at which A and B must be spouses or civil partners living together is the time of the transfer. See Change 22 in Annex 1.
447.Subsection (4) is new and treats “corresponding bonus shares” issued in respect of shares which have been subscribed for as themselves having been subscribed for. See Change 23 in Annex 1.
448.This section applies to the disposal of qualifying shares (other than shares to which EIS relief is attributable) which are identified by virtue of section 127 of TCGA with shares previously held by the individual. The section denies or restricts share loss relief unless certain conditions are met. It is based on section 575(2) of ICTA.
449.The cross-reference to section 145(3) at the end of subsection (2) makes clear that this section does not apply to an exchange of shares to which section 145(1) applies. See the commentary on section 145 and Change 24 in Annex 1.
450.This section is the first of ten new sections relating to the requirements for a company to be a qualifying trading company. These sections replace the provisions of section 576(4A) and (4B) of ICTA which apply section 293 and certain associated provisions of Chapter 3 of Part 7 of that Act, with modifications and omissions.
451.All these sections correspond to sections in Part 5 of this Act (Enterprise investment scheme). So far as possible cross-references to sections of Part 5 have been minimised. Cross-references have, however, been retained where the material referred to is lengthy, for example the definition of “excluded activities” in sections 192 to 199.
452.This section corresponds to section 181 with modifications. Section 181 is based on section 293(2) and (3A) to (3F) of ICTA. Section 134(2) and (3) provide that this requirement must be met over a continuous period, which is the effect of the modification of section 293(2) of ICTA made by section 576(4A)(d) of that Act.
453.Subsection (2) corresponds to section 181(3) and subsection (6) corresponds to section 181(7). For the reason for the introduction of subsections (3) and (7) of section 181, see Change 42 in Annex 1 and the commentary on section 181.
454.Subsection (5) corresponds to section 181(6), including the change made in section 181(6)(d) by Change 41 in Annex 1.
455.In the definition of “incidental purposes” in subsection (7) the words “capable of”, which appear in the definition in section 293(2) of ICTA on which it is based, have been omitted. This mirrors the definition of “incidental purposes” in section 181(8), which is also based on the definition in section 293(2) of ICTA. See the commentary on section 181.
456.The definition of “non-qualifying activities” in subsection (7) includes the change affecting the definition of that term for the purposes of section 181(8) made by Change 43 in Annex 1.
457.This section corresponds to section 182 with two changes. Section 182 is based on section 293(4A) to (6) and (8A) of ICTA.
458.The first change modifies section 182(3) by substituting for the reference to “the end of period B” a reference to “the time that is relevant for the purposes of section 134(2)”. This is the substitution required by section 576(4A)(d) of ICTA to section 293(5) of that Act, on which section 182(3) is based.
459.The second change modifies section 182(4) by omitting the reference to dissolution and adding the condition that the company continues, during the winding up, to be a trading company. These are the modifications required by section 576(4A)(b) of ICTA to section 293(6) of that Act, on which section 182(4) is based.
Income Tax Act 2007