Income Tax Bill

House of Commons

Session 2006 - 07
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Income Tax Bill

Income Tax Bill
Part 4 — Loss relief
Chapter 3 — Restrictions on trade loss relief for certain partners
52

108
Meaning of “contribution to the LLP”
(1)
For the purposes of section 107 the individual’s contribution to the LLP at any
time (“the relevant time”) is the sum of amounts A and B.
(2)
Amount A is the amount which the individual has contributed to the LLP as
capital less so much of that amount (if any) as is within subsection (5).
5
(3)
In particular, the individual’s share of any profits of the LLP is to be included
in the amount which the individual has contributed to the LLP as capital so far
as that share has been added to the LLP’s capital.
(4)
In subsection (3) the reference to profits is to profits calculated in accordance
with generally accepted accounting practice (before any adjustment required
10
or authorised by law in calculating profits for income tax purposes).
(5)
An amount of capital is within this subsection if it is an amount which—
(a)
the individual has previously drawn out or received back,
(b)
the individual draws out or receives back during the period of 5 years
beginning with the relevant time,
15
(c)
the individual is or may be entitled to draw out or receive back at any
time when the individual is a member of the LLP, or
(d)
the individual is or may be entitled to require another person to
reimburse to the individual.
(6)
In subsection (5) any reference to drawing out or receiving back an amount is
20
to doing so directly or indirectly but does not include drawing out or receiving
back an amount which, because of its being drawn out or received back, is
chargeable to income tax as profits of a trade.
(7)
Amount B is the amount of the individual’s liability on a winding up of the LLP
so far as that amount is not included in amount A.
25
(8)
For the purposes of subsection (7) the amount of the individual’s liability on a
winding up of the LLP is the amount which—
(a)
the individual is liable to contribute to the assets of the LLP in the event
of its being wound up, and
(b)
the individual remains liable to contribute for the period of at least 5
30
years beginning with the relevant time (or until the LLP is wound up,
if that happens before the end of that period).
(9)
This section needs to be read with any regulations made under section 114
(specified amounts to be excluded in calculating the individual’s contribution
to the LLP for the purposes of section 107).
35
109
Unrelieved losses brought forward
(1)
This section applies for the purpose of determining an individual’s entitlement
to sideways relief and capital gains relief if—
(a)
the individual carries on a trade as a member of an LLP at a time during
a tax year (“the current tax year”), and
40
(b)
as a result of section 107, sideways relief or capital gains relief has not
been given to the individual for amounts of loss made in the trade in
previous tax years.

Income Tax Bill
Part 4 — Loss relief
Chapter 3 — Restrictions on trade loss relief for certain partners
53

(2)
So far as they are not excluded by subsection (3), the amounts of loss
mentioned in subsection (1)(b) are treated as having been made in the current
tax year.
(3)
An amount of loss is excluded so far as—
(a)
as a result of this section, sideways relief or capital gains relief has been
5
given to the individual for the amount for years prior to the current tax
year or would have been so given had a claim been made, or
(b)
other than as a result of this section, relief under the Income Tax Acts
has been given to the individual for the amount for years prior to the
current tax year or for the current tax year.
10
Non-active members of LLPs or other partnerships (apart from limited partnerships)
110
Restriction on reliefs for non-active partners in early tax years
(1)
This section applies if—
(a)
an individual carries on a trade (“the relevant trade”) as a non-active
partner in a firm during an early tax year (see section 112), and
15
(b)
the individual makes a loss in the relevant trade in that tax year (“the
relevant tax year”).
(2)
There is a restriction on the amount of relief within subsection (3) which may
be given to the individual for the loss.
(3)
The relief within this subsection is—
20
(a)
sideways relief against the individual’s income apart from profits of the
relevant trade, and
(b)
capital gains relief.
(4)
The restriction is that—
(a)
the sum of the amount of the relief given and the total amount of all
25
other relevant relief given, less
(b)
the total amount of recovered relief,

must not exceed the individual’s contribution to the firm as at the end of the basis
period for the relevant tax year (see section 111).
(5)
“Relevant relief” means sideways relief or capital gains relief given to the
30
individual for—
(a)
a loss made in the relevant trade in a tax year at a time during which
the individual carries on that trade as a limited partner or as a member
of an LLP, or
(b)
a loss made in the relevant trade in an early tax year during which the
35
individual carries on that trade as a non-active partner.
(6)
“The total amount of recovered relief” means the total amount of income
treated as received by the individual under section 725 (recovery of excess
relief) as a result of the application of that section in relation to claims for relief
for losses made by the individual in the relevant trade.
40
(7)
If the firm is carrying on, or has carried on, other trades apart from the relevant trade,
for the purpose of determining the total amount of all other relevant relief and the total
amount of recovered relief—
(a)
apply subsection (5) in relation to each other trade as well as the relevant trade
and then add the results together, and
45

Income Tax Bill
Part 4 — Loss relief
Chapter 3 — Restrictions on trade loss relief for certain partners
54

(b)
apply subsection (6) as if the reference to the relevant trade were a reference to
the relevant trade or any of the other trades.
(8)
In this section “trade” does not include a trade which consists of the
underwriting business of a member of Lloyd’s (within the meaning of section
184 of FA 1993).
5
111
Meaning of “contribution to the firm”
(1)
For the purposes of section 110 the individual’s contribution to the firm at any
time (“the relevant time”) is the sum of amount A and amount B and, if there
is a winding up of the firm, amount C.
(2)
Amount A is the amount which the individual has contributed to the firm as
10
capital less so much of that amount (if any) as is within subsection (4).
(3)
In particular, the individual’s share of any profits of the firm is to be included
in the amount which the individual has contributed to the firm as capital so far
as that share has been added to the firm’s capital.
(4)
An amount of capital is within this subsection if it is an amount which—
15
(a)
the individual has previously drawn out or received back,
(b)
the individual draws out or receives back during the period of 5 years
beginning with the relevant time,
(c)
the individual is or may be entitled to draw out or receive back at any
time when the individual is carrying on a trade as a partner in the firm,
20
or
(d)
the individual is or may be entitled to require another person to
reimburse to the individual.
(5)
In subsection (4) any reference to drawing out or receiving back an amount is
to doing so directly or indirectly but does not include drawing out or receiving
25
back an amount which, because of its being drawn out or received back, is
chargeable to income tax as profits of a trade.
(6)
Amount B is the amount of the individual’s total share of profits within
subsection (7) except so far as—
(a)
that share has been added to the firm’s capital, or
30
(b)
the individual has received that share in money or money’s worth.
(7)
Profits are within this subsection if they are from the relevant trade.
(8)
In determining the amount of the individual’s total share of profits within
subsection (7) ignore the individual’s share of any losses from the relevant
trade which would (apart from this subsection) reduce that amount.
35
(9)
In subsections (3), (7) and (8) any reference to profits or losses are to profits or
losses calculated in accordance with generally accepted accounting practice
(before any adjustment required or authorised by law in calculating profits or
losses for income tax purposes).
(10)
If the firm is carrying on, or has carried on, other trades apart from the relevant
40
trade, subsections (7) and (8) have effect as if references to the relevant trade
were references to the relevant trade or any of the other trades.

Subsection (8) of section 110 applies for the purposes of this subsection as it
applies for the purposes of that section.

Income Tax Bill
Part 4 — Loss relief
Chapter 3 — Restrictions on trade loss relief for certain partners
55

(11)
Amount C is the amount which the individual has contributed to the assets of
the firm on its winding up so far as it is not included in amount A or B.
(12)
This section needs to be read with any regulations made under section 114
(specified amounts to be excluded in calculating the individual’s contribution
to the firm for the purposes of section 110).
5
112
Meaning of “non-active partner” and “early tax year” etc
(1)
For the purposes of this Chapter an individual carries on a trade as a non-active
partner during a tax year if the individual—
(a)
carries on the trade as a partner in a firm at a time during the year,
(b)
does not carry on the trade as a limited partner at any time during the
10
year, and
(c)
does not devote a significant amount of time to the trade in the relevant
period for the year.
(2)
For the purposes of this Chapter an individual devotes a significant amount of
time to a trade in the relevant period for a tax year if, in that period, the
15
individual spends an average of at least 10 hours a week personally engaged
in activities carried on for the purposes of the trade.
(3)
For this purpose “the relevant period” means the basis period for the tax year
(unless the basis period is shorter than 6 months).
(4)
If the basis period for the tax year is shorter than 6 months, “the relevant
20
period” means—
(a)
the period of 6 months beginning with the date on which the individual
first started to carry on the trade (if the basis period begins with that
date), or
(b)
the period of 6 months ending with the date on which the individual
25
permanently ceased to carry on the trade (if the basis period ends with
that date).
(5)
If—
(a)
any relief is given on the assumption that the individual devoted or will
devote a significant amount of time to the trade in the relevant period
30
for a tax year, but
(b)
the individual in fact failed or fails to do so,

the relief is withdrawn by the making of an assessment to income tax under
this section.
(6)
In this Chapter “early tax year” means, in relation to an individual carrying on
35
a trade—
(a)
the tax year in which the individual first started to carry on the trade, or
(b)
one of the next 3 tax years.
113
Unrelieved losses brought forward
(1)
This section applies for the purpose of determining an individual’s entitlement
40
to sideways relief and capital gains relief in relation to a trade if—
(a)
at a time during a tax year (“the current tax year”) the individual carries
on the trade as a partner in a firm or makes a contribution to the assets
of a firm within subsection (2) on the firm’s winding up, and

Income Tax Bill
Part 4 — Loss relief
Chapter 3 — Restrictions on trade loss relief for certain partners
56

(b)
as a result of section 110, sideways relief or capital gains relief has not
been given to the individual for amounts of loss made in the trade in
previous tax years.
(2)
A firm is within this subsection if the individual has carried on the trade as a
partner in the firm.
5
(3)
So far as they are not excluded by subsection (4), the amounts of loss
mentioned in subsection (1)(b) are treated as having been made in the current
tax year.
(4)
An amount of loss is excluded so far as—
(a)
as a result of this section, sideways relief or capital gains relief has been
10
given to the individual for the amount for years prior to the current tax
year or would have been so given had a claim been made, or
(b)
other than as a result of this section, relief under the Income Tax Acts
has been given to the individual for the amount for years prior to the
current tax year or for the current tax year.
15
(5)
For the purpose of applying sections 107 and 110 in relation to the amounts of
loss treated by this section as having been made in the current tax year—
(a)
the individual is treated as having carried on the trade during the
current tax year as a non-active partner in the firm, and
(b)
the current tax year is treated as if it were an early tax year in relation
20
to the individual’s carrying on of the trade.
(6)
Subsection (7) applies if the individual—
(a)
made a contribution in the current tax year to the assets of the firm on
its winding up, but
(b)
did not carry on the trade as a partner in the firm in the current tax year.
25
(7)
If this subsection applies—
(a)
the restrictions under sections 66 and 74(1) do not apply in relation to
the amounts of loss treated by this section as having been made in the
current tax year, and
(b)
in the application of this Chapter in relation to those amounts of loss,
30
section 110(4) has effect as if the words “the basis period for” were
omitted.
(8)
In subsection (1)(b) the reference to amounts of loss does not include amounts
of loss which have been treated by section 109 as having been made in any
previous tax year.
35
Regulations
114
Exclusion of amounts in calculating contribution to the firm or LLP
(1)
The Commissioners for Her Majesty’s Revenue and Customs may by
regulations provide that any amount of a specified description is to be
excluded in calculating—
40
(a)
the individual’s contribution to the firm for the purposes of section 104
or 110, or
(b)
the individual’s contribution to the LLP for the purposes of section 107.
(2)
“Specified” means specified in the regulations.

Income Tax Bill
Part 4 — Loss relief
Chapter 3 — Restrictions on trade loss relief for certain partners
57

(3)
The regulations may—
(a)
make provision having retrospective effect,
(b)
contain incidental, supplemental, consequential and transitional
provision and savings, and
(c)
make different provision for different cases or purposes.
5
(4)
The provision which may be made as a result of subsection (3)(b) includes
provision amending or repealing any provision of an Act passed before FA
2005.
(5)
No regulations may be made under this section unless a draft of them has been
laid before and approved by a resolution of the House of Commons.
10
Restrictions for film trades carried on in partnership
115
Restrictions on reliefs for firms exploiting films
(1)
This section applies if—
(a)
an individual carries on a trade as a partner in a firm at a time during a
tax year,
15
(b)
the trade consists of or includes the exploitation of films,
(c)
the individual makes a loss in the trade in the tax year (“the affected tax
year”),
(d)
the individual does not devote a significant amount of time to the trade
in the relevant period for the affected tax year (see section 112),
20
(e)
the affected tax year is the one in which the individual first started to
carry on the trade or is one of the next 3 tax years, and
(f)
a relevant agreement existed at a time during the affected tax year
which guaranteed the individual an amount of income (see subsections
(5) to (9)).
25
(2)
Sideways relief for the loss is not available to the individual, except against any
of the individual’s income which consists of profits of the trade.
(3)
Capital gains relief for the loss is not available to the individual.
(4)
But see section 116 (exclusion from restrictions for certain film expenditure).
(5)
An agreement is relevant if—
30
(a)
it is an agreement made with a view to the individual’s carrying on the
trade,
(b)
it is an agreement made in the course of the individual’s carrying it on,
or
(c)
it is related to an agreement falling within paragraph (a) or (b).
35
(6)
An agreement is relevant whether or not the individual is or may be required
under the agreement to contribute an amount to the trade.
(7)
Agreements are related to one another if they are entered into under the same
arrangement (regardless of when either agreement is entered into).
(8)
A relevant agreement guarantees the individual an amount of income if it (or
40
any part of it) is designed to secure the receipt by the individual of that amount
(or at least that amount) of income.
(9)
It does not matter when the amount of income is (or is to be) received.

Income Tax Bill
Part 4 — Loss relief
Chapter 4 — Losses from property businesses
58

(10)
In this section “film” is to be read in accordance with paragraph 1 of Schedule
1 to the Films Act 1985 (c. 21).
116
Exclusion from restrictions under section 115: certain film expenditure
(1)
The restrictions under section 115 do not apply to so much of the loss (if any)
as derives from unrestricted film expenditure.
5
(2)
Expenditure is unrestricted film expenditure if—
(a)
it is deducted under a relevant film provision for the purposes of the
calculation required by section 849 of ITTOIA 2005 (calculation of
firm’s profits or losses), or
(b)
it is incidental expenditure which (although not deducted under a
10
relevant film provision) is incurred in connection with the production
of a film, or the acquisition of the original master version of a film, in
relation to which expenditure is so deducted.
(3)
Expenditure is incidental if it is on management, administration or obtaining
finance.
15
(4)
The following are determined on a just and reasonable basis—
(a)
the amount of the loss that derives from unrestricted film expenditure,
and
(b)
the extent to which expenditure is within subsection (2)(b).
(5)
In this section—
20
“the acquisition of the original master version of a film” has the same
meaning as in Chapter 9 of Part 2 of ITTOIA 2005 (see sections 130 and
132 of that Act),
“film” is to be read in accordance with paragraph 1 of Schedule 1 to the
Films Act 1985, and
25
“a relevant film provision” means any one of sections 137 to 140 of ITTOIA
2005 (relief for certified master versions of films).
Chapter 4
Losses from property businesses
Introduction
30
117
Overview of Chapter
(1)
This Chapter—
(a)
provides for losses made in a UK property business or overseas
property business in a tax year to be carried forward for deduction
from profits in subsequent tax years (see sections 118 and 119),
35
(b)
provides in limited circumstances for relief against general income for
losses made in a UK property business or overseas property business
(see sections 120 to 124), and
(c)
provides for relief for certain post-cessation payments and events in
connection with a UK property business (see section 125).
40
(2)
This Chapter also makes provision for a UK property business which consists
of, or so far as it includes, the commercial letting of furnished holiday