Finance Bill

House of Commons

Session 2003 - 04
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Finance Bill

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership
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116
“The losses claimed” and “the individual’s capital contribution to the trade”
(1)
In section 114 “the losses claimed” means the total amount of any film-related
losses sustained by the individual in the trade in any years of assessment, to the
extent that they are losses—
(a)
in respect of which the individual has (at any time) claimed relief under
5
section 380 or 381 of the Taxes Act 1988; or
(b)
that he has (at any time) claimed as allowable losses under section 72 of
the Finance Act 1991 (c. 31).
(2)
In section 114 “the individual’s capital contribution to the trade” means
(subject to section 117(1)) the amount that the individual has contributed to the
10
trade as capital, less so much of that amount (if any) as—
(a)
he has directly or indirectly drawn out or received back;
(b)
he is entitled so to draw out or receive back;
(c)
he has had directly or indirectly reimbursed to him by any person;
(d)
he is entitled to require any person so to reimburse to him.
15
(3)
In relation to a member of a limited liability partnership, the reference in
subsection (2) to the amount contributed to the trade as capital shall be read as
a reference to the amount contributed to the limited liability partnership as
capital.
(4)
In subsection (2) references to reimbursement include reimbursement effected
20
by discharging or assuming all or part of a liability of the individual.
(5)
Subsection (4) shall not be taken to limit what is to be treated for the purposes
of subsection (2) as the receipt back or reimbursement of an amount.
(6)
An amount drawn out or received back that would otherwise fall within
subsection (2)(a), or an entitlement that would otherwise fall within subsection
25
(2)(b), shall be treated as not so falling if the amount drawn out or received
back is chargeable to income tax as profits of the trade.
117
Computing the chargeable amount
(1)
Where a chargeable event occurs, anything treated for the purposes of section
114(5)(a) as consideration received by the individual for a relevant disposal
30
shall not also be deducted under section 116(2)(a) to (d) in computing the
individual’s capital contribution to the trade for the purposes of section
114(5)(b).
(2)
Where successive chargeable events occur as respects the individual and the
trade—
35
(a)
any consideration that is taken into account under section 114(5)(a) in
computing the chargeable amount on an earlier chargeable event shall
not be included again in computing the chargeable amount on a later
chargeable event; and
(b)
in computing the chargeable amount on a later chargeable event, any
40
amount found under section 114(5)(b) shall be reduced (but not below
nil) by the total of any amounts found under section 114(5)(b) (read
with this paragraph) on earlier chargeable events.
(3)
In computing the chargeable amount in any case, any consideration given to
the individual for a relevant disposal shall be treated as if it had been received
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Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership
99

free of any deduction actually made from it in consideration of any person’s
agreeing to or facilitating a relevant disposal or exit event.
118
“Film-related losses” and “non-taxable consideration”
(1)
For the purposes of sections 114 and 116 a loss is a “film-related loss” if the
computation of profits or losses that it results from is made in accordance with
5
any of the following—

sections 40A to 40C of the Finance (No. 2) Act 1992 (c. 48);

sections 41 to 43 of that Act;

section 48 of the Finance (No. 2) Act 1997 (c. 58).
(2)
References in section 114 to “non-taxable” consideration are to consideration
10
that (apart from section 114) is not chargeable to income tax; and the reference
to “taxable” consideration is to be read accordingly.
Individuals in partnership: restriction of relief
119
Restriction of relief: non-active partners
(1)
After section 118ZD of the Taxes Act 1988 there is inserted—
15
“Non-active general partners and non-active members of limited liability partnerships
118ZE Restriction on relief for non-active partners
(1)
This section applies to an amount which may be given to an individual
under section 353, 380 or 381 in respect of a loss sustained by him in a
trade, or interest paid by him in connection with the carrying on of a
20
trade, in a qualifying year of assessment.
(2)
The amount may be given otherwise than against income consisting of
profits arising from the trade only to the extent that—
(a)
the amount given, or
(b)
(as the case may be) the aggregate amount,
25

does not exceed the amount of the individual’s contribution to the trade
as at the end of that year of assessment.
(3)
A “qualifying year of assessment” means a year of assessment—
(a)
at any time during which the individual carried on the trade as
a general partner or a member of a limited liability partnership,
30
(b)
in which he did not devote a significant amount of time to the
trade (within the meaning given by section 118ZH),
(c)
which is the year of assessment in which the trade is first carried
on by him or any of the next three years of assessment,
(d)
the basis period for which ends on or after 10 February 2004,
35
and
(e)
which is not a year of assessment at any time during which he
carried on the trade as a limited partner.
(4)
In this section—
(a)
a “general partner” means any partner who is not a limited
40
partner, and
(b)
“limited partner” has the meaning given by section 117(2),

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Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership
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and in paragraph (a) “any partner” does not include a member of a
limited liability partnership.
(5)
In this section and sections 118ZF to 118ZK, “basis period” means
(subject to subsection (6)) the basis period given by sections 60 to 63 as
applied by section 111(4) and (5).
5
(6)
The basis period for a year of assessment to which section 61(1) applies
is to be taken for the purposes of this section and sections 118ZF to
118ZK to be the period beginning with the date when the individual
first carried on the trade and ending with the end of the year of
assessment.
10
(7)
In subsection (1) “a trade” does not include underwriting business
within the meaning of section 184 of the Finance Act 1993 (Lloyd’s
underwriters).
(8)
This section has effect subject to sections 118ZJ and 118ZK (transitional
provision).
15
118ZF Meaning of “the aggregate amount”
(1)
In section 118ZE(2) “the aggregate amount” means (subject to section
118ZK) the aggregate of any amounts given to the individual at any
time under section 353, 380 or 381 in respect of a loss sustained by him
in the trade, or of interest paid by him in connection with carrying it on,
20
in a year of assessment falling within subsection (2).
(2)
A year of assessment falls within this subsection if—
(a)
it is a qualifying year of assessment within the meaning of
section 118ZE, or
(b)
it is a year of assessment—
25
(i)
at any time during which the individual carried on the
trade as a member of a limited liability partnership or as
a limited partner within the meaning given by section
117(2), and
(ii)
the basis period for which ends on or after 10 February
30
2004.
118ZG “The individual’s contribution to the trade”
(1)
For the purposes of section 118ZE(2), the individual’s contribution to
the trade at any time (“the relevant time”) is the sum of—
(a)
the amount subscribed by him,
35
(b)
the amount of any profits of the trade to which he is entitled but
which he has not received in money or money’s worth, and
(c)
where there is a winding up, the amount that he has contributed
to the assets of the partnership on its winding up.
(2)
For the purposes of subsection (1)(a) the “amount subscribed” by an
40
individual is the sum of—
(a)
the total amount (if any) contributed by him to the trade as
capital on or after 10 February 2004, reduced (but not below nil)
by his withdrawn capital, and
(b)
the total amount (if any) contributed by him to the trade as
45
capital before 10 February 2004, reduced (but not below nil)
by—

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Part 3 — Income tax, corporation tax and capital gains tax
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(i)
the pre-announcement allowance (within the meaning
given by section 118ZJ),
(ii)
the aggregate of any amounts given to him at any time
under section 353, 380 or 381 in respect of a loss
sustained by him in a trade, or of interest paid by him in
5
connection with carrying it on, in a year of assessment
falling within subsection (3), and
(iii)
the amount (if any) of his withdrawn capital that has not
been used in the reduction to nil required by paragraph
(a).
10
(3)
A year of assessment falls within this subsection if—
(a)
it does not fall within section 118ZE(3)(d), and
(b)
it is either—
(i)
a year of assessment that would be a qualifying year of
assessment but for section 118ZE(3)(d), or
15
(ii)
a year of assessment at any time during which the
individual carried on the trade as a member of a limited
liability partnership or as a limited partner within the
meaning given by section 117(2).
(4)
The individual’s “withdrawn capital” is so much, if any, of the amount
20
that he has contributed to the trade as capital as—
(a)
he has previously, directly or indirectly, drawn out or received
back,
(b)
he so draws out or receives back during the period of five years
beginning with the relevant time,
25
(c)
he is or may be entitled so to draw out or receive back at any
time when he carries on the trade as a member of the
partnership, or
(d)
he is or may be entitled to require another person to reimburse
to him.
30
(5)
An amount drawn out or received back that would otherwise fall
within subsection (4)(a) or (b), or an entitlement that would otherwise
fall within subsection (4)(c), shall be treated as not so falling if the
amount drawn out or received back is chargeable to income tax as
profits of the trade.
35
(6)
In relation to a member of a limited liability partnership, references in
this section to an amount contributed to the trade as capital shall be
read as references to an amount contributed to the limited liability
partnership as capital.
118ZH
“A significant amount of time”
40
(1)
For the purposes of section 118ZE the individual shall be treated as
having “devoted a significant amount of time to the trade” in a given
year of assessment if, for the whole of the relevant period, he spent an
average of at least ten hours a week personally engaged in activities
carried on for the purposes of the trade.
45
(2)
“The relevant period” means the basis period for the year of assessment
in question, except that—

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Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership
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(a)
if the basis period is less than six months and begins with the
date when the individual first carried on the trade, “the relevant
period” means six months beginning with that date, and
(b)
if the basis period is less than six months and ends with the date
when the individual ceased to carry on the trade, “the relevant
5
period” means six months ending with that date.
(3)
Where relief has been given on the assumption that an individual will
meet the condition in subsection (1) and he fails to do so, the relief shall
be withdrawn by the making of an assessment under Case VI of
Schedule D.
10
118ZI
Carry forward of unrelieved losses of non-active partners
(1)
Where amounts relating to a trade carried on by an individual in a
qualifying year of assessment are prevented from being given by
section 118ZE as it applies otherwise than by virtue of this section or
section 118ZD, subsection (3) of this section applies as respects each
15
subsequent year of assessment in which—
(a)
the individual carries on the trade in partnership or makes a
contribution to the assets of the partnership on its winding up,
and
(b)
any of his total restricted loss remains outstanding.
20
(2)
His “total restricted loss” means the total of any amounts, relating to
any one or more qualifying years of assessment, that have been
prevented from being given by section 118ZE as it applies otherwise
than by virtue of this section or section 118ZD.
(3)
Sections 380 and 381 (and section 118ZE as it applies in relation to those
25
sections) shall have effect in the subsequent year of assessment as if—
(a)
any loss sustained by the individual in the trade in that year of
assessment were increased by an amount equal to so much of
his total restricted loss as remains outstanding in that year of
assessment, or
30
(b)
(if no loss is sustained) a loss of that amount were so sustained.
(4)
To ascertain whether any (and, if so, how much) of the individual’s
total restricted loss remains outstanding in the subsequent year of
assessment, deduct from the amount of his total restricted loss the
aggregate of—
35
(a)
any relief given (otherwise than as a result of subsection (3))
under any provision of the Tax Acts, in that or any previous
year of assessment, in respect of any of his total restricted loss,
and
(b)
any amount which was given as a result of subsection (3), in any
40
previous year of assessment, in respect of any of his total
restricted loss (or which would have been so given had a claim
been made).
(5)
For the purposes of sections 118ZE and 118ZF (and of sections 117 and
118ZB(2))—
45
(a)
any additional amount of loss deemed by subsection (3)(a) to
have been sustained in the subsequent year of assessment, and
(b)
any loss deemed by subsection (3)(b) to have been so sustained,

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shall be treated as having been sustained in a qualifying year of
assessment.
(6)
Subsection (7) applies where the subsequent year of assessment—
(a)
is one in which the trade is not carried on in partnership by the
individual, but
5
(b)
is one in which he contributes to the assets of the partnership on
its winding up.
(7)
Where this subsection applies, nothing in section 381(4) or 384
(restrictions on right of set-off) applies to—
(a)
an additional amount of loss deemed by subsection (3)(a) to
10
have been sustained in the subsequent year of assessment, or
(b)
a loss deemed by subsection (3)(b) to have been so sustained.
(8)
In this section “qualifying year of assessment” has the meaning given
by section 118ZE.
118ZJ
Commencement: the first restricted year
15
(1)
This section applies where the year of assessment referred to in section
118ZE(1) is a year of assessment the basis period for which includes 10
February 2004 (“the first restricted year”).
(2)
If this section would (but for this subsection) apply in relation to more
than one year of assessment as respects the same individual and the
20
same trade, it applies only in relation to the first of those years of
assessment and “the first restricted year” means that year of
assessment.
(3)
Where this section applies, section 118ZE(2) shall have effect as if for
the words from “only to the extent that” there were substituted “only to
25
the extent that the total amount given under section 353, 380 and 381 in
respect of losses sustained by him in the trade, and interest paid by him
in connection with carrying it on, in that year of assessment does not
exceed the sum of—
(a)
the pre-announcement allowance, and
30
(b)
the post-announcement allowance.”
(4)
The “pre-announcement allowance” is the sum of—
(a)
the loss (if any) sustained by the individual in the trade in the
period beginning with the start of the basis period for the first
restricted year and ending with 9 February 2004, and
35
(b)
any interest paid by him in that period in connection with the
carrying on of the trade.
(5)
The “post-announcement allowance” is so much of—
(a)
the loss (if any) sustained by the individual in the trade in the
period beginning with 10 February 2004 and ending with the
40
end of the basis period for the first restricted year, and
(b)
any interest paid by him in that period in connection with the
carrying on of the trade,

as does not exceed the individual’s contribution to the trade as at the
end of the year of assessment, computed in accordance with section
45
118ZG.

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Chapter 9 — Avoidance involving loss relief or partnership
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(6)
In each of subsections (4)(a) and (5)(a), the reference to the loss
sustained by the individual in the trade in the period there mentioned
is a reference to his share of any losses of the partnership arising for that
period from the trade, and—
(a)
subject to subsection (7), the losses of the partnership arising for
5
that period from the trade shall be computed in the same way
as if the period were one for which profits and losses had to be
computed for the purposes of section 111(2), and
(b)
subject to subsection (8), the individual’s share of the losses
shall be determined according to his interest in the partnership
10
during that period.
(7)
In computing for the purposes of subsection (6) the losses of the
partnership arising for the period mentioned in subsection (4)(a) or
(5)(a)—
(a)
any capital allowance treated as an expense of the trade for the
15
purposes of the computation required by section 111(2) for the
first restricted year is to be regarded as belonging to the period
mentioned in subsection (4)(a) unless the capital expenditure to
which it relates is incurred after 9 February 2004, and
(b)
any amount deducted under section 42(1) of the Finance (No. 2)
20
Act 1992 for the purposes of that computation is to be regarded
as belonging to the period mentioned in subsection (4)(a) unless
the expenditure to which it relates is incurred after 9 February
2004.
(8)
If the individual had an interest in the partnership at any time that falls
25
within—
(a)
the basis period for the first restricted year, and
(b)
the period beginning with 10 February 2004 and ending with 25
March 2004,

he shall be deemed for the purposes of subsection (6)(b) to have had the
30
interest on 9 February 2004.
118ZK
Transitional provision for years after the first restricted year
(1)
This section applies where the year of assessment referred to in section
118ZE(1) is a year of assessment later than the first restricted year.
(2)
Section 118ZE(2) shall not apply to any part of the amount mentioned
35
in section 118ZE(1) that—
(a)
derives from a capital allowance treated as an expense of the
trade where the capital expenditure to which the allowance
relates was incurred before 10 February 2004, or
(b)
derives from a deduction made under section 42(1) of the
40
Finance (No. 2) Act 1992 where the expenditure to which the
deduction relates was incurred before 10 February 2004.
(3)
In computing for the purposes of section 118ZE(2)(a) or (b) the amount
given or (as the case may be) the aggregate amount, any part of an
amount given that falls within subsection (2)(a) or (b) of this section
45
shall be left out of account.
(4)
In computing the aggregate amount for the purposes of section
118ZE(2), any amount given in respect of the pre-announcement
allowance shall be left out of account.