Finance Bill

House of Commons

Session 2002 - 03
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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
103

120
“Disposal of a right of the individual to profits arising from the trade”
(1)
The reference in section 119(1)(b) to a disposal of a right of the individual to
profits arising from the trade includes, in particular—
(a)
the disposal, giving up or loss by the individual, or by a partnership of
which he is a member, of any right to any income (or any part of any
5
income) where the right arises from the trade;
(b)
any default in the payment of income to which the individual, or a
partnership of which he is a member, has a right arising from the trade;
(c)
a change in the individual’s entitlement to any profits arising from the
trade such that his share of the profits is reduced or extinguished;
10
(d)
a change in the individual’s entitlement to any losses arising from the
trade such that he becomes entitled to a share, or a greater share, of the
losses without becoming entitled to a corresponding share of profits;
(e)
the disposal, giving up or loss of the individual’s interest in a
partnership that carries on the trade, including the dissolution of the
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partnership.
(2)
It is immaterial for the purposes of subsection (1)(a) whether the right is
disposed of alone or as part of a larger disposal (and the references here to
disposal include giving up or loss).
(3)
If there is an agreement under which the individual is entitled—
20
(a)
to a particular share of any profits or losses arising from the trade in a
period, and
(b)
to a different share of any profits or losses arising from the trade in a
succeeding period (“the later period”),
his entitlement to the profits or losses arising in the later period shall be treated
25
for the purposes of subsection (1)(c) and (d) as changing at the beginning of the
later period; and in paragraphs (a) and (b) of this subsection a “share” of profits
or losses includes a nil share.
121
“The losses claimed” and “the individual’s capital contribution to the trade”
(1)
In section 119 “the losses claimed” means the total amount of any film-related
30
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
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
35
the Finance Act 1991 (c. 31).
(2)
In section 119 “the individual’s capital contribution to the trade” means
(subject to section 122(1)) the amount that the individual has contributed to the
trade as capital, less so much of that amount (if any) as—
(a)
he has directly or indirectly drawn out or received back;
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(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.
(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
45
a reference to the amount contributed to the limited liability partnership as
capital.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership
104

(4)
In subsection (2) references to reimbursement include reimbursement effected
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
5
subsection (2)(a), or an entitlement that would otherwise fall within subsection
(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.
122
Computing the chargeable amount
(1)
Where a chargeable event occurs, anything treated for the purposes of section
10
119(5)(a) as consideration received by the individual for a relevant disposal
shall not also be deducted under section 121(2)(a) to (d) in computing the
individual’s capital contribution to the trade for the purposes of section
119(5)(b).
(2)
Where successive chargeable events occur as respects the individual and the
15
trade—
(a)
any consideration that is taken into account under section 119(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
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(b)
in computing the chargeable amount on a later chargeable event, any
amount found under section 119(5)(b) shall be reduced (but not below
nil) by the total of any amounts found under section 119(5)(b) (read
with this paragraph) on earlier chargeable events.
(3)
In computing the chargeable amount in any case, any consideration given to
25
the individual for a relevant disposal shall be treated as if it had been received
free of any deduction actually made from it in consideration of any person’s
agreeing to or facilitating a relevant disposal or exit event.
123
“Film-related losses” and “non-taxable consideration”
(1)
For the purposes of sections 119 and 121 a loss is a “film-related loss” if the
30
computation of profits or losses that it results from is made in accordance with
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).
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(2)
References in section 119 to “non-taxable” consideration are to consideration
that (apart from section 119) is not chargeable to income tax; and the reference
to “taxable” consideration is to be read accordingly.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership
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Individuals in partnership: restriction of relief
124
Restriction of relief: non-active partners
(1)
After section 118ZD of the Taxes Act 1988 there is inserted—
“Non-active general partners and non-active members of limited liability partnerships
118ZE Restriction on relief for non-active partners
5
(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
trade, in a qualifying year of assessment.
(2)
The amount may be given otherwise than against income consisting of
10
profits arising from the trade only to the extent that—
(a)
the amount given, or
(b)
(as the case may be) the aggregate amount,

does not exceed the amount of the individual’s contribution to the trade
as at the end of that year of assessment.
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(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,
(b)
in which he did not devote a significant amount of time to the
trade (within the meaning given by section 118ZH),
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(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,
and
(e)
which is not a year of assessment at any time during which he
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carried on the trade as a limited partner.
(4)
In this section—
(a)
a “general partner” means any partner who is not a limited
partner, and
(b)
“limited partner” has the meaning given by section 117(2),
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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).
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(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.
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(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).

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership
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(8)
This section has effect subject to sections 118ZJ and 118ZK (transitional
provision).
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
5
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,
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
10
section 118ZE, or
(b)
it is a year of assessment—
(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
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117(2), and
(ii)
the basis period for which ends on or after 10 February
2004.
118ZG “The individual’s contribution to the trade”
(1)
For the purposes of section 118ZE(2), the individual’s contribution to
20
the trade at any time (“the relevant time”) is the sum of—
(a)
the amount subscribed by him,
(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
25
to the assets of the partnership on its winding up.
(2)
For the purposes of subsection (1)(a) the “amount subscribed” by an
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)
30
by his withdrawn capital, and
(b)
the total amount (if any) contributed by him to the trade as
capital before 10 February 2004, reduced (but not below nil)
by—
(i)
the pre-announcement allowance (within the meaning
35
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
connection with carrying it on, in a year of assessment
40
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).
(3)
A year of assessment falls within this subsection if—
45
(a)
it does not fall within section 118ZE(3)(d), and
(b)
it is either—

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership
107

(i)
a year of assessment that would be a qualifying year of
assessment but for section 118ZE(3)(d), or
(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
5
meaning given by section 117(2).
(4)
The individual’s “withdrawn capital” is so much, if any, of the amount
that he has contributed to the trade as capital as—
(a)
he has previously, directly or indirectly, drawn out or received
back,
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(b)
he so draws out or receives back during the period of five years
beginning with the relevant time,
(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
15
(d)
he is or may be entitled to require another person to reimburse
to him.
(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
20
amount drawn out or received back is chargeable to income tax as
profits of the trade.
(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
25
partnership as capital.
118ZH
“A significant amount of time”
(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
30
average of at least ten hours a week personally engaged in activities
carried on for the purposes of the trade.
(2)
“The relevant period” means the basis period for the year of assessment
in question, except that—
(a)
if the basis period is less than six months and begins with the
35
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
period” means six months ending with that date.
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(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.
118ZI
Carry forward of unrelieved losses of non-active partners
45
(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

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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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section 118ZD, subsection (3) of this section applies as respects each
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
5
(b)
any of his total restricted loss remains outstanding.
(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.
10
(3)
Sections 380 and 381 (and section 118ZE as it applies in relation to those
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
15
assessment, or
(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
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aggregate of—
(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
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(b)
any amount which was given as a result of subsection (3), in any
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
30
118ZB(2))—
(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,

shall be treated as having been sustained in a qualifying year of
35
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
(b)
is one in which he contributes to the assets of the partnership on
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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
have been sustained in the subsequent year of assessment, or
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(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.