Income Tax Bill

House of Commons

Session 2006 - 07
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Income Tax Bill

Income Tax Bill
Part 4 — Loss relief
Chapter 2 — Trade losses
31

63
Prohibition against double counting
If relief is given under any provision of this Chapter for a loss or part of a loss,
relief is not to be given for—
(a)
the same loss, or
(b)
the same part of the loss,
5
under any other provision of this Chapter or of the Income Tax Acts.
Trade loss relief against general income
64
Deduction of losses from general income
(1)
A person may make a claim for trade loss relief against general income if the
person—
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(a)
carries on a trade in a tax year, and
(b)
makes a loss in the trade in the tax year (“the loss-making year”).
(2)
The claim is for the loss to be deducted in calculating the person’s net income—
(a)
for the loss-making year,
(b)
for the previous tax year, or
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(c)
for both tax years.

(See Step 2 of the calculation in section 23.)
(3)
If the claim is made in relation to both tax years, the claim must specify the tax
year for which a deduction is to be made first.
(4)
Otherwise the claim must specify either the loss-making year or the previous
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tax year.
(5)
The claim must be made on or before the first anniversary of the normal self-
assessment filing date for the loss-making year.
(6)
Nothing in this section prevents a person who makes a claim specifying a
particular tax year in respect of a loss from making a further claim specifying
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the other tax year in respect of the unused part of the loss.
(7)
This section applies to professions and vocations as it applies to trades.
(8)
This section needs to be read with—
(a)
section 65 (how relief works),
(b)
sections 66 to 70 (restrictions on the relief),
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(c)
sections 75 to 79 (restrictions on the relief and early trade losses relief in
relation to capital allowances),
(d)
section 80 (restrictions on those reliefs in relation to ring fence income),
(e)
section 81 (restrictions on those reliefs in relation to dealings in
commodity futures), and
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(f)
section 734 of ICTA (restrictions on those reliefs in relation to bond-
washing).
65
How relief works
(1)
This subsection explains how the deductions are to be made.

The amount of the loss to be deducted at any step is limited in accordance with
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section 25(4) and (5).

Income Tax Bill
Part 4 — Loss relief
Chapter 2 — Trade losses
32



Step 1

Deduct the loss in calculating the person’s net income for the specified tax year.


Step 2
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This step applies only if the claim is made in relation to both tax years.

Deduct the part of the loss not deducted at Step 1 in calculating the person’s
net income for the other tax year.


Other claims
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If the loss has not been deducted in full at Steps 1 and 2, the person may use the
part not so deducted in giving effect to any other relief under this Chapter
(depending on the terms of the relief).
(2)
There is a priority rule if a person—
(a)
makes a claim for trade loss relief against general income (“the first
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claim”) in relation to the loss-making year, and
(b)
makes a separate claim in respect of a loss made in the following tax
year in relation to the same tax year as the first claim.
(3)
The rule is that priority is given to making deductions under the first claim.
(4)
For this purpose a “separate claim” means—
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(a)
a claim for trade loss relief against general income, or
(b)
a claim for employment loss relief against general income under section
128.
Restriction on relief for uncommercial trades
66
Restriction on relief unless trade is commercial
25
(1)
Trade loss relief against general income for a loss made in a trade in a tax year
is not available unless the trade is commercial.
(2)
The trade is commercial if it is carried on throughout the basis period for the tax year—
(a)
on a commercial basis, and
(b)
with a view to the realisation of profits of the trade.
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(3)
If at any time a trade is carried on so as to afford a reasonable expectation of
profit, it is treated as carried on at that time with a view to the realisation of
profits.
(4)
If the trade forms part of a larger undertaking, references to profits of the trade
are to be read as references to profits of the undertaking as a whole.
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(5)
If there is a change in the basis period in the way in which the trade is carried on, the
trade is treated as carried on throughout the basis period in the way in which it is
carried on by the end of the basis period.
(6)
The restriction imposed by this section does not apply to a loss made in the
exercise of functions conferred by or under an Act.
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(7)
This section applies to professions and vocations as it applies to trades.

Income Tax Bill
Part 4 — Loss relief
Chapter 2 — Trade losses
33

Restriction on relief for "hobby" farming or market gardening
67
Restriction on relief in case of farming or market gardening
(1)
This section applies if a loss is made in a trade of farming or market gardening
in a tax year (“the current tax year”).
(2)
Trade loss relief against general income is not available for the loss if a loss,
5
calculated without regard to capital allowances, was made in the trade in each
of the previous 5 tax years (see section 70).
(3)
This section does not prevent relief for the loss from being given if—
(a)
the carrying on of the trade forms part of, and is ancillary to, a larger
trading undertaking,
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(b)
the farming or market gardening activities meet the reasonable
expectation of profit test (see section 68), or
(c)
the trade was started, or treated as started, at any time within the 5 tax
years before the current tax year (see section 69 below, as well as section
17 of ITTOIA 2005).
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68
Reasonable expectation of profit
(1)
This section explains how the farming or market gardening activities (“the
activities”) meet the reasonable expectation of profit test for the purposes of
section 67.
(2)
The test is decided by reference to the expectations of a competent farmer or
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market gardener (a “competent person”) carrying on the activities.
(3)
The test is met if—
(a)
a competent person carrying on the activities in the current tax year
would reasonably expect future profits (see subsection (4)), but
(b)
a competent person carrying on the activities at the beginning of the
25
prior period of loss (see subsection (5)) could not reasonably have
expected the activities to become profitable until after the end of the
current tax year.
(4)
In determining whether a competent person carrying on the activities in the
current tax year would reasonably expect future profits regard must be had
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to—
(a)
the nature of the whole of the activities, and
(b)
the way in which the whole of the activities were carried on in the
current tax year.
(5)
“The prior period of loss” means—
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(a)
the 5 tax years before the current tax year, or
(b)
if losses in the trade, calculated without regard to capital allowances,
were also made in successive tax years before those 5 tax years (see
section 70), the period comprising both the successive tax years and the
5 tax years.
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69
Whether trade is the same trade
(1)
This section applies for the purposes of sections 67 and 68.

Income Tax Bill
Part 4 — Loss relief
Chapter 2 — Trade losses
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(2)
If there is a change in the persons carrying on a trade which involves all of the
persons carrying it on before the change permanently ceasing to carry it on—
(a)
the trade is treated as permanently ceasing to be carried on, and
(b)
a new trade is treated as starting to be carried on,

at the date of the change (but see subsections (3) to (6)).
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(3)
A husband and wife are treated as the same person.
(4)
Persons who are civil partners of each other are treated as the same person.
(5)
A husband or wife is treated as the same person as—
(a)
a company of which either one of them has control, or
(b)
a company of which both have control.
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(6)
A person’s civil partner is treated as the same person as—
(a)
a company of which either of the civil partners has control, or
(b)
a company of which both have control.
(7)
“Control” has the same meaning as in Part 11 of ICTA (see section 416 of that
Act).
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70
Determining losses in previous tax years
(1)
This section applies for the purposes of sections 67(2) and 68(5) in determining
whether a loss, calculated without regard to capital allowances, is made in the
trade in any tax year before the current tax year.
(2)
The loss made in a tax year before the current tax year is not taken to be the loss
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(if any) made in the basis period for the tax year, but is instead the loss made
in the tax year itself.
(3)
This loss is determined by reference to—
(a)
the profits or losses of periods of account of the trade (calculated for
income tax purposes, but without regard to capital allowances), or
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(b)
if (as a result of section 69) a person claiming the relief is treated as the
same person as a company within the charge to corporation tax, the
profits or losses of the company’s accounting periods (calculated for
corporation tax purposes, but without regard to capital allowances),

or by reference to both.
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(4)
If—
(a)
a period of account does not coincide with a tax year, or
(b)
an accounting period does not coincide with a tax year,

any of the steps in section 203(2) of ITTOIA 2005 may be taken to arrive at the
profits or losses made in a tax year.
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For this purpose references in section 203(2) of that Act to basis periods are
read as references to tax years and references to periods of account are read as
including accounting periods.
(5)
The steps must be taken in accordance with section 203(3) or (4) of ITTOIA
2005.
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(6)
A loss in a trade is calculated without regard to capital allowances by
ignoring—
(a)
the allowances treated as expenses of the trade under CAA 2001, and
(b)
the charges treated as receipts of the trade under that Act.