Income Tax Bill

House of Commons

Session 2006 - 07
Internet Publications
Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 4 — Loss relief
Chapter 2 — Trade losses
40

84
How relief works
This section explains how the deductions are to be made.
The amount of the unrelieved loss to be deducted at any step is limited in
accordance with section 25(4) and (5).

5
Step 1
Deduct the unrelieved loss from the profits of the trade of the next tax year.

Step 2
Deduct from the profits of the trade of the following tax year the amount of the
10
unrelieved loss not previously deducted.

Step 3
Continue to apply Step 2 in relation to the profits of the trade of subsequent tax
years until all the unrelieved loss is deducted.
15
85
Use of trade-related interest and dividends if trade profits insufficient
(1)
This section applies if carry-forward trade loss relief cannot be fully given in
relation to the profits of a trade of a tax year because (apart from this section)
there are no profits, or insufficient profits, of the trade of the tax year.
(2)
For the purposes of the relief any interest or dividends for the tax year that
20
relate to the trade are treated as profits of the trade of the tax year.
(3)
Interest or dividends for the tax year relate to the trade if they—
(a)
arise in the tax year, and
(b)
would be brought into account in calculating the profits of the trade but
for the fact that they have been subjected to tax under other provisions
25
of the Income Tax Acts.
86
Trade transferred to a company
(1)
This section applies if—
(a)
a trade is carried on by an individual otherwise than as a partner in a
firm or by individuals in partnership,
30
(b)
the trade is transferred to a company,
(c)
the consideration for the transfer is wholly or mainly the allotment of
shares to the individual or individuals, and
(d)
in the case of any individual to whom, or to whose nominee or
nominees, shares are so allotted, the individual’s total income for a
35
relevant tax year includes income derived by the individual from the
company.
(2)
For the purposes of carry-forward trade loss relief, the income so derived is
treated as—
(a)
profits of the trade of the relevant tax year carried on by the individual,
40
or
(b)
if the trade was carried on by the individual in partnership, profits of
the individual’s notional trade of the relevant tax year.
(3)
The tax year in which the transfer is made is a relevant one if—

Income Tax Bill
Part 4 — Loss relief
Chapter 2 — Trade losses
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(a)
the individual is the beneficial owner of the shares allotted as
mentioned above, and
(b)
the company carries on the trade,

throughout the period beginning with the date of the transfer and ending with
the next 5 April.
5
(4)
Otherwise a tax year is a relevant one if—
(a)
the individual is the beneficial owner of the shares allotted as
mentioned above, and
(b)
the company carries on the trade,

throughout the tax year.
10
(5)
The income derived from the company may be by way of dividends on the
shares or otherwise.
(6)
This section applies to businesses which are not trades as it applies to trades.
87
Ring fence trades
(1)
This section applies if—
15
(a)
a person makes a loss in a tax year carrying on oil-related activities
(within the meaning of section 16 of ITTOIA 2005),
(b)
those activities are treated under that section as a separate trade for the
tax year or a subsequent tax year,
(c)
the person makes profits in a subsequent tax year from other activities,
20
and
(d)
the other activities and the oil-related activities would, but for that
section, together form a single trade.
(2)
For the purposes of carry-forward trade loss relief for the loss, the person may
treat profits from the other activities in a subsequent tax year as if they were
25
profits of the separate trade (despite section 16 of ITTOIA 2005).
88
Carry forward of certain interest as loss
(1)
This section applies if—
(a)
an individual pays interest in a tax year which is eligible for relief under
section 383 (as a result of section 388 or 398),
30
(b)
the interest is an expense incurred wholly and exclusively for the
purposes of a trade carried on wholly or partly in the United Kingdom,
and
(c)
relief under section 383 cannot be fully given in respect of the interest
because there is no income or insufficient income in the tax year.
35
(2)
For the purposes of carry-forward trade loss relief, the amount for which relief
has not been given may be carried forward to subsequent tax years as if it were
a loss made in the trade.
(3)
This section applies to professions and vocations as it applies to trades.

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Part 4 — Loss relief
Chapter 2 — Trade losses
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Terminal trade loss relief
89
Carry back of losses on a permanent cessation of a trade
(1)
A person may make a claim for terminal trade loss relief if the person—
(a)
permanently ceases to carry on a trade in a tax year (“the final tax
year”), and
5
(b)
makes a terminal loss in the trade (see section 90).
(2)
The claim is for the total amount of terminal losses made in the trade by the
person (“the relievable loss”) to be deducted in calculating the person’s net
income for the final tax year and the 3 previous tax years (see Step 2 of the
calculation in section 23).
10
(3)
But a deduction for that purpose is to be made only from profits of the trade.
(4)
This section applies to professions and vocations as it applies to trades (and
sections 90 and 91 are to be read accordingly).
(5)
This section needs to be read with—
(a)
section 91 (how relief works),
15
(b)
section 92 (use of trade-related interest and dividends if trade profits
insufficient),
(c)
section 93 (mineral extraction trade and carry back of balancing
allowances), and
(d)
section 94 (carry back of certain interest as loss).
20
90
Losses that are “terminal losses”
(1)
Each of the following is a terminal loss made in the trade—
(a)
the loss (if any) made in the trade in the period beginning with the start
of the final tax year and ending with the cessation, and
(b)
the loss (if any) made in the trade in the period consisting of so much of
25
the previous tax year as falls in the 12 months prior to the cessation.
(2)
The profit or loss of a period mentioned in subsection (1)(a) or (b) (a “terminal
loss period”) is determined by reference to the profits or losses of periods of
account of the trade (calculated for income tax purposes).
(3)
If no period of account coincides with a terminal loss period, any of the
30
following steps may be taken if they are necessary in order to arrive at the
profit or loss of the terminal loss period—
(a)
apportioning the profit or loss of a period of account between the part
of the period that falls in the terminal loss period and the part that does
not, and
35
(b)
adding the profit or loss of a period of account (or part of a period) to
profits or losses of other periods of account (or parts).
(4)
Section 203(3) and (4) of ITTOIA 2005 applies for the purposes of subsection (3)
as it applies for the purposes of section 203(2) of that Act.
(5)
If as a result of section 205 of ITTOIA 2005 a deduction is allowed for overlap
40
profit in calculating the profits of the trade of the final tax year, that deduction
is to be made in calculating the loss (if any) mentioned in subsection (1)(a) (and
is therefore irrelevant for the purposes of subsection (1)(b)).

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Part 4 — Loss relief
Chapter 2 — Trade losses
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(6)
In the case of a notional trade carried on by a partner in a firm—
(a)
the periods of account of the notional trade are taken to be the periods
of account of the actual trade, and
(b)
the references in subsections (2) and (3) to the profits or losses of
periods of account of the trade are to the partner’s share of the profits
5
or losses of the actual trade determined in accordance with sections 849
and 850 of ITTOIA 2005.
91
How relief works
This section explains how the deductions are to be made.
The amount of the relievable loss to be deducted at any step is limited in
10
accordance with section 25(4) and (5).

Step 1
Deduct the relievable loss from the profits of the trade of the final tax year.

15
Step 2
Deduct any part of the relievable loss not deducted at Step 1 from the profits of
the trade of the previous tax year.

Step 3
20
Deduct any part of the relievable loss not deducted at Step 1 or 2 from the
profits of the trade of the tax year before the previous one.

Step 4
Deduct any part of the relievable loss not deducted at Step 1, 2 or 3 from the
25
profits of the trade of the tax year before that one.

Other claims
If the relievable loss has not been deducted in full at Steps 1 to 4, the person
may use the part not so deducted in giving effect to any other relief under this
30
Chapter (depending on the terms of the relief).
92
Use of trade-related interest and dividends if trade profits insufficient
(1)
This section applies if terminal trade loss relief cannot be fully given in relation
to the profits of a trade of a tax year because (apart from this section) there are
no profits, or insufficient profits, of the trade of the tax year.
35
(2)
For the purposes of the relief any interest or dividends for the tax year that
relate to the trade are treated as profits of the trade of the tax year.
(3)
Interest or dividends for the tax year relate to the trade if they—
(a)
arise in the tax year, and
(b)
would be brought into account in calculating the profits of the trade but
40
for the fact that they have been subjected to tax under other provisions
of the Income Tax Acts.
93
Mineral extraction trade and carry back of balancing allowances
(1)
This section applies if—

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Part 4 — Loss relief
Chapter 2 — Trade losses
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(a)
a person permanently ceases to carry on a mineral extraction trade, and
(b)
the person makes a claim for terminal trade loss relief and a claim in
respect of a balancing allowance under section 355 of CAA 2001.
(2)
Terminal trade loss relief must be given before relief under section 355 of CAA
2001.
5
(3)
In giving effect to the terminal trade loss relief, the balancing allowance is to be
ignored.
(4)
“Mineral extraction trade” has the same meaning as in Part 5 of CAA 2001 (see
section 394 of that Act).
94
Carry back of certain interest as loss
10
(1)
This section applies if—
(a)
an individual pays interest in a tax year which is eligible for relief under
section 383 (as a result of section 388 or 398),
(b)
the interest is an expense incurred wholly and exclusively for the
purposes of a trade carried on wholly or partly in the United Kingdom,
15
and
(c)
relief under section 383 cannot be fully given in respect of the interest
because there is no income or insufficient income in the tax year.
(2)
For the purposes of terminal trade loss relief, the amount for which relief has
not been given may be treated as a loss made in the trade at the date of
20
payment.
(3)
This section applies to professions and vocations as it applies to trades.
Wholly foreign trades
95
Foreign trades etc: reliefs only against foreign income
(1)
This section applies if a person—
25
(a)
carries on a trade, profession or vocation wholly outside the United
Kingdom, and
(b)
makes a loss in the trade, profession or vocation.
(2)
In that case—
(a)
sideways relief for the loss is available only against the person’s
30
qualifying foreign income,
(b)
trade income relief for the loss is available only against the person’s
qualifying foreign trade income, and
(c)
section 261B of TCGA 1992 (use of trading loss as a CGT loss) does not
apply in relation to the loss.
35
(3)
“Trade income relief” means—
(a)
carry-forward trade loss relief, or
(b)
terminal trade loss relief.
(4)
“Qualifying foreign income” means—
(a)
qualifying foreign trade income, or
40
(b)
income falling within section 23, 355, 575, 613, 615, 631 or 635 of ITEPA
2003 (foreign employment or pension income).

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Part 4 — Loss relief
Chapter 2 — Trade losses
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(5)
“Qualifying foreign trade income” means the profits of any trade, profession or
vocation carried on wholly outside the United Kingdom.
(6)
But “qualifying foreign income” and “qualifying foreign trade income” do not
include any income which is charged to income tax in accordance with section
832 of ITTOIA 2005 (relevant foreign income charged on the remittance basis).
5
Post-cessation trade relief
96
Post-cessation trade relief
(1)
A person may make a claim for post-cessation trade relief if, after permanently
ceasing to carry on a trade—
(a)
the person makes a qualifying payment, or
10
(b)
a qualifying event occurs in relation to a debt owed to the person,

and the payment is made, or the event occurs, within 7 years of that cessation.
(2)
If the claim is made in respect of a payment, the claim is for the payment to be
deducted in calculating the person’s net income for the tax year in which the
payment is made (see Step 2 of the calculation in section 23).
15
(3)
If the claim is made in respect of an event, the claim is for the appropriate
amount of the debt to be deducted in calculating the person’s net income for
the relevant tax year (see Step 2 of the calculation in section 23).
(4)
The claim must be made on or before the first anniversary of the normal self-
assessment filing date for the tax year for which the deduction is to be made.
20
(5)
If—
(a)
the person is a company within the charge to income tax under Chapter
2 of Part 2 of ITTOIA 2005 in respect of a trade, and
(b)
the company ceases at any time to be within that tax charge in respect
of the trade,
25

the company is treated for the purposes of this section as permanently ceasing
to carry on the trade at that time.
(6)
This section applies to professions and vocations as it applies to trades (and
sections 97 and 98 are to be read accordingly).
(7)
This section needs to be read with—
30
(a)
section 97 (meaning of “qualifying payment”),
(b)
section 98 (meaning of “qualifying event” etc),
(c)
section 99 (reduction of relief for unpaid trade expenses), and
(d)
section 100 (prohibition against double counting).
97
Meaning of “qualifying payment”
35
(1)
For the purposes of section 96 a person makes a “qualifying payment” after
permanently ceasing to carry on a trade if the person makes a payment wholly
and exclusively for any of purposes A to D.
(2)
A payment is made for purpose A if it is made—
(a)
in remedying defective work done, goods supplied or services
40
provided in the course of the trade, or

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Part 4 — Loss relief
Chapter 2 — Trade losses
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(b)
by way of damages (whether awarded or agreed) in respect of defective
work done, goods supplied or services provided in the course of the
trade.
(3)
A payment is made for purpose B if it is made in meeting the expenses of legal
or other professional services in connection with a claim (a “claim about
5
defects”) that—
(a)
work done in the course of the trade was defective,
(b)
goods supplied in the course of the trade were defective, or
(c)
services provided in the course of the trade were defective.
(4)
A payment is made for purpose C if it is made in insuring—
10
(a)
against liabilities arising out of any claim about defects, or
(b)
against the liability to meet the expenses of legal or other professional
services in connection with any claim about defects.
(5)
A payment is made for purpose D if it is made for the purpose of collecting a
debt which was brought into account in calculating the profits of the trade.
15
98
Meaning of “qualifying event” etc
(1)
This section explains for the purposes of section 96 what is meant by—
(a)
a “qualifying event” occurring in relation to a debt owed to a person
who has permanently ceased to carry on a trade, and
(b)
“the appropriate amount of the debt” to be deducted in calculating a
20
person’s net income for “the relevant tax year”.
(2)
A qualifying event occurs in relation to a debt owed to the person if—
(a)
an unpaid debt was brought into account in calculating the profits of
the trade,
(b)
the person is entitled to the benefit of the debt, and
25
(c)
the debt is released (in whole or in part) as part of a statutory
insolvency arrangement (within the meaning of Part 2 of ITTOIA 2005).

The event occurs when the debt is released.
(3)
The appropriate amount of the debt to be deducted is—
(a)
the amount released, or
30
(b)
if the person was entitled to only part of the benefit of the debt, the
corresponding part of the amount released.
(4)
The relevant tax year is the tax year in which the debt is released.
(5)
A qualifying event also occurs in relation to a debt owed to the person if—
(a)
an unpaid debt was brought into account in calculating the profits of
35
the trade,
(b)
the person is entitled to the benefit of the debt, and
(c)
the debt proves to be bad.

The event occurs when the debt proves to be bad.
(6)
The appropriate amount of the debt to be deducted is—
40
(a)
the amount of the debt, or
(b)
if the person was entitled to only part of the benefit of the debt, the
corresponding part of the amount of the debt.
(7)
The relevant tax year is the tax year specified in the claim.