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Clause 65: How relief works 253. This clause specifies how deductions for the loss are to be made. It is based on section 380(1) and (2) of ICTA. 254. Subsection (1) makes explicit what is only implicit in section 380(1) of ICTA, that:
255. This clause does not deal with the parts of section 380(1)(a) and (b) of ICTA that limit the amount of the deduction for any tax year to the whole of the claimant's income for the year, where the income is less than the amount of the loss. That limit is in clause 25(4) and (5). Clause 25 contains rules about how the reliefs listed in clause 24, which include trade loss relief, are to be deducted at Step 2 of clause 23 in order to calculate the claimant's net income. 256. Subsections (2) and (3) provide that if claims are made in respect of trade losses incurred in successive tax years and both claims specify that relief is to be given against income of the same tax year, then the claim in respect of the loss in the earlier year takes priority. 257. Subsection (4) makes it explicit that this rule also operates in relation to the interaction between claims for trade loss relief and claims for employment loss relief. Clause 66: Restriction on relief unless trade is commercial 258. This clause denies trade loss relief in relation to trades which are not commercial. It is based on section 384 of ICTA. 259. Subsections (2) and (5) provide that whether the trade is commercial is determined by reference to the basis period for the tax year, rather than by reference to the tax year as in the source legislation. See Change 9 in Annex 1. 260. Subsection (4) provides for the case where the trade is carried on as part of a larger undertaking. In such a case the larger undertaking (that is the undertaking as a whole) may be carried on with a view to the realisation of profits even if the "smaller trade" is not. 261. In subsection (6), the reference to Act includes references to Acts of the Scottish Parliament and Northern Ireland legislation. See clause 952 and Change 145 in Annex 1. Clause 67: Restriction on relief in case of farming or market gardening 262. This clause restricts, in certain cases, the use of losses arising from a trade of farming or market gardening. It is based on section 397(1), (3) to (5) and (8) of ICTA. 263. Subsection (2) sets out the circumstances in which loss relief is restricted. Broadly, this is once losses have arisen for six successive tax years. A signpost to clause 70 is included since that clause sets out the way in which losses are determined in previous tax years. Clause 68: Reasonable expectation of profit 264. This clause sets out the "reasonable expectation of profit" test which, if met, prevents relief being restricted under clause 67. It is based on section 397(3) and (5) of ICTA. Clause 69: Whether trade is the same trade 265. This clause sets out a number of assumptions to make in determining whether clause 67restricts relief for losses. It is based on section 397(8) and (10) of ICTA. Clause 70: Determining losses in previous tax years 266. This clause provides rules for deciding whether the trade of farming or market gardening made losses in earlier tax years. It is based on section 397(7) and (10) of ICTA. 267. Subsection (2) provides that, for earlier tax years, losses are calculated for actual tax years (6 April to following 5 April) rather than (as is normally the case) for the basis period ending in the tax year. 268. The difference in approach (which prevents any manipulation of periods of account directed at side-stepping the restriction) arises from the fact that losses used to be calculated for actual tax years, but following the move to a current year basis of assessment (in FA 1994) the calculation of losses for the main loss relief provisions was changed to mirror the calculation of profits. 269. Subsection (4) adapts rules in section 203 of ITTOIA to deal with cases where profits or losses have not actually been calculated by reference to tax years. In such cases, the calculation of profits or losses for tax years is an arithmetical exercise, involving apportioning (on a time basis) the profits or losses of periods falling partly within the tax year, and combining these with the profits or losses of any periods falling completely within the tax year. Clause 71: Treating trade losses as CGT losses 270. This clause is a signpost to a capital gains tax relief. It is new. 271. Capital gains tax relief may be available for a tax year in which there is insufficient income to absorb a claim for trade loss relief against general income. Details of that relief are set out in new sections 261B and 261C of TCGA, inserted by Schedule 1 to this Bill. Clause 72: Relief for individuals for losses in first 4 years of trade 272. This clause provides relief for losses made in the first four tax years in which an individual carries on a trade. It is based on sections 380(1) and 381(1), (2) and (7) of ICTA. 273. An individual can make a claim for such losses to be deducted in calculating net income for the three tax years which precede the tax year in which the loss is made. Clause 73: How relief works 274. This clause sets out the order in which losses, for which a claim is made under clause 72, are deducted from income of the three preceding tax years. It is based on section 381(2) of ICTA. 275. The deduction for the loss is made first from income of the earliest of the three tax years referred to in subsection (2) of clause 72, with any remaining loss deducted from income of the next tax year and then from income of the third of those tax years. Any remaining loss is available for a different loss relief claim. Clause 74: Restrictions on relief unless trade is commercial etc 276. This clause denies early trade loss relief in relation to trades which are not commercial. It is based on section 381(4), (5) and (7) of ICTA. 277. Subsection (2) provides that whether the trade is commercial is determined by reference to the basis period for the tax year, rather than by reference to the tax year as in the source legislation. There is a similar provision in clause 66. See Change 9 in Annex 1. 278. Subsection (3) provides for the case where the trade is carried on as part of a larger undertaking. In such a case the larger undertaking (that is the undertaking as a whole) may be carried on with a view to the realisation of profits even if the "smaller trade" is not. Clause 75: Trade leasing allowances given to individuals 279. This clause denies sideways relief in relation to losses derived from trade leasing allowances if the individual carrying on the trade does not meet the time commitment test. It is based on section 384(6) and (7) of ICTA. 280. Subsection (2) defines a "trade leasing allowance". 281. The time commitment test requires that conditions A and B are met. 282. Subsection (5) sets out condition A. Its reference to "a continuous period of at least 6 months beginning or ending in the basis period for the tax year in which the loss was made" covers cases of a commencement or a cessation of the trade. In such cases the basis period may be shorter than six months. 283. Subsection (6) sets out condition B. Its reference to "a continuous period of at least 6 months beginning or ending in the loss-making basis period" also covers cases of a commencement or a cessation of the trade. In such cases the basis period may be shorter than six months. 284. The clause removes an inconsistency in the source legislation between:
285. The inconsistency arose because of the change from the preceding year basis of assessment to the current year basis of assessment, made by FA 2004. This change resulted in losses being calculated by reference to basis periods ending in a tax year while the time commitment test continued to relate to the tax year itself. This clause provides that the time commitment test also relates to the basis period in which the loss is made. See Change 10 in Annex 1. Clause 76: First-year allowances: introduction 286. This clause denies sideways relief for any part of the loss that derives from a "first-year allowance" in the circumstances set out in either clause 77 or clause 78. It is based on section 384A(1) of ICTA. Clause 77: First-year allowances: partnerships with companies 287. This clause sets out the first circumstance in which clause 76 may deny sideways relief for part of a loss. It is based on section 384A(2) and (3) of ICTA. Clause 78: First-year allowances: arrangements to reduce tax liabilities 288. This clause sets out the second circumstance in which clause 76 may deny sideways relief for part of a loss. It is based on section 384A(4) and (5) of ICTA. Clause 79: Capital allowances restrictions: supplementary 289. This clause supplements clauses 76 to 78. It is based on sections 384(8) and (11) and 384A(6) and (8) of ICTA. Clause 80: Ring fence income 290. This clause provides that sideways relief in respect of a trading loss cannot be given against income arising from oil extraction activities or oil rights, unless the loss also arises from such activities or rights. It is based on sections 492(2) and 502(1) of ICTA. Clause 81: Dealings in commodity futures 291. This clause denies sideways relief for a loss made by a person in a trade of dealing in commodity futures, where that person carries on the trade in partnership with a company and arrangements have been made to reduce a tax liability by means of sideways relief. It is based on section 399(2), (3) and (5) of ICTA. Clause 82: Exploitation of films 292. This clause provides signposts to clauses in Chapter 3 of Part 4 that provide for a restriction on loss relief if an individual carries on a trade as a partner in certain types of partnership, and to a clause in Chapter 5 of Part 12 (avoidance involving trading losses). It is new. Clause 83: Carry forward against subsequent trade profits 293. This clause provides carry-forward relief for trade losses. It is based on section 385(1) of ICTA and section 72(8) of FA 1991. 294. A person who makes a trading loss in a tax year may claim to carry it forward, to the extent that relief has not been given for it under any other provision. 295. The carry-forward trade loss can only be deducted from profits of the trade in which the loss arose. And a carry-forward trade loss must be deducted from the trading profits of a future tax year before those profits can be reduced by way of any other loss relief. Clause 84: How relief works 296. This clause sets out the way in which deductions for the carry-forward trade loss are to be made. It is based on section 385(1) of ICTA. Clause 85: Use of trade-related interest and dividends if trade profits insufficient 297. This clause provides that certain interest and dividends are treated as trade profits if the profits are otherwise insufficient to use some or all of a carry-forward trade loss. It is based on section 385(4) of ICTA. 298. Interest and dividends are normally taxed separately from trade profits so, in the absence of this provision, a carry-forward trade loss could not be set against such income. But it is only interest and dividends that would otherwise be treated as receipts of the trade that can attract this treatment. 299. The source legislation refers to interest or dividends on investments arising in that year - meaning interest or dividends arising in the year from investments. But as interest and dividends can only arise from investments, the word "investments" has been dropped, just as it was when earlier legislation was consolidated in ICTA for the purposes of terminal loss relief. See the commentary on clause 92. Clause 86: Trade transferred to a company 300. This clause provides for certain cases in which an individual's carry-forward trade losses may be used against income that the individual derives from a company to which the trade has been transferred and in which that individual was allotted shares. It is based on section 386(1) and (3) of ICTA. 301. Section 386(2) of ICTA has not been rewritten. See Change 11 in Annex 1. Clause 87: Ring fence trades 302. This clause provides that a loss in a tax year derived from oil-related activities can be deducted from the profits of a trade in a future tax year so far as the profits are derived from activities which would be treated as part of the same trade as the oil-related activities but for the "ring-fencing rules". It is based on section 492(4) of ICTA. Clause 88: Carry forward of certain interest as loss 303. This clause provides for cases where interest paid by an individual in a tax year, and eligible for relief under certain provisions, may be treated as a loss qualifying for carry-forward trade loss relief. It is based on section 390 of ICTA. 304. The interest must be incurred wholly and exclusively for the purpose of a trade, profession or vocation carried on wholly or partly in the United Kingdom and there must be insufficient income for relief to be given under Chapter 1 of Part 8. Clause 89: Carry back of losses on a permanent cessation of a trade 305. This clause provides for terminal trade loss relief. It is based on section 388(1) of ICTA. 306. A claim for terminal trade loss relief may be made by a person who permanently ceases to carry on a trade if the person makes a loss in the trade in the final tax year or in the previous tax year. But only that part of a loss from the previous tax year that falls within a period starting 12 months before the cessation is available for this purpose. 307. If a claim is made the full amount of the terminal losses, or as much of them as possible, must be used to reduce the trading profits of the final tax year and the three previous tax years. 308. Subsection (3) omits the concept, in section 388(1) of ICTA, of the trading profits having been "charged" to income tax. See Change 12 in Annex 1. 309. Section 388(5) of ICTA, which is concerned with the interaction between terminal loss relief and charges on income, is not rewritten. This is linked to the approach adopted by this Bill to the rules in ICTA about charges on income. The Bill gives relief for the payments concerned as a deduction in computing net income, and repeals section 387 of ICTA and section 51 of ITTOIA. See Change 81 in Annex 1. Clause 90: Losses that are "terminal losses" 310. This clause sets out how terminal losses are to be calculated. It is based on section 388(6) of ICTA. 311. The relievable loss is calculated by adding (a) any loss in the final tax year to (b) any loss in the part of the previous tax year falling within 12 months of the date of cessation. Each of these losses is called a terminal loss. If a profit arises in either of the periods, it is ignored. 312. Subsections (2) to (4) provide that profits or losses for each of these terminal loss periods are calculated by allocating profits or losses of periods of account to them. Subsection (5) makes it explicit how any deduction allowed for overlap profit arising under section 205 of ITTOIA is taken into account. Subsection (6) makes explicit provision in relation to partnerships. See Change 12 in Annex 1. Clause 91: How relief works 313. This clause sets out the way in which terminal trade loss relief is given. It is based on section 388(3) of ICTA. Clause 92: Use of trade-related interest and dividends if trade profits insufficient 314. This clause provides that certain interest and dividends are treated as trade profits if the profits are otherwise insufficient to use some or all of a terminal trade loss. It is based on section 388(4) of ICTA. 315. Interest and dividends are normally taxed separately from trade profits so, in the absence of this provision, a terminal trade loss could not be set against such income. But it is only interest and dividends that would otherwise be treated as receipts of the trade that can attract this treatment. 316. The provisions on which the source legislation is based referred to interest or dividends on investments arising in that year, meaning interest or dividends arising in the year from investments. But as interest and dividends can only arise from investments, the word "investments" was dropped when earlier legislation was consolidated in ICTA. Clause 93: Mineral extraction trade and carry back of balancing allowances 317. This clause provides that a terminal trade loss relief claim takes precedence over a claim for balancing allowances in circumstances in which both are claimed on the cessation of a mineral extraction trade. It is based on section 389(2) of ICTA. Clause 94: Carry back of certain interest as loss 318. This clause provides that where an individual has paid interest in a tax year which is eligible for relief, but is unable to utilise the deduction in full, the amount remaining may be treated for the purposes of terminal trade loss relief as a trade loss made at the date of payment, provided the interest is incurred wholly and exclusively for the purposes of a trade carried on wholly or partly in the United Kingdom. It is based on section 390 of ICTA. Clause 95: Foreign trades etc: reliefs only against foreign income 319. This clause provides that losses arising from trades carried on wholly outside the United Kingdom can only be used to reduce profits from certain categories of foreign income, depending on the type of relief being claimed. It is based on section 391 of ICTA. 320. Subsection (2)(c) makes it explicit that losses arising from trades carried on wholly outside the United Kingdom are not available for use for capital gains tax purposes. See Change 13 in Annex 1. Clause 96: Post-cessation trade relief 321. This clause provides relief for certain payments made, or certain losses on debts made, after a trade has ceased (and for which relief would not otherwise be available). It is based on section 109A(1) and section 110(1A) and (1B) of ICTA. 322. A claim for post-cessation trade relief is possible if a person ceases carrying on a trade and within seven years makes a qualifying payment (see clause 97) or a qualifying event occurs in relation to a debt of the trade owed to the person (see clause 98). Clause 97: Meaning of "qualifying payment" 323. This clause sets out the meaning of qualifying payment. It is based on section 109A(2) of ICTA. Clause 98: Meaning of "qualifying event" etc 324. This clause sets out the meaning of a qualifying event occurring in relation to a debt owed to the person concerned and the amount that may be relievable in relation to such an event. It is based on section 109A(4) and (4A) of ICTA. 325. The source legislation treated the release of a debt or the occasion of a debt proving to be bad as if it were a payment which qualified as post-cessation expenditure. These clauses are structured so that such deeming is not needed. 326. Subsection (2)(c) refers to a debt being released as part of a statutory insolvency arrangement. This term is defined by reference to section 259 of ITTOIA. The source legislation used the term "relevant scheme or arrangement". See Change 14 in Annex 1. Clause 99: Reduction of relief for unpaid trade expenses 327. This clause reduces post-cessation trade relief by reference to expenses claimed as a deduction in computing trading profits, but which were unpaid at the time that the trade ceased. It is based on section 109A(5) of ICTA. 328. The clause provides that post-cessation trade relief is reduced by the amount of the expenses that are still unpaid at the end of the tax year in question, but that the reduction shall not include any amount taken into account as a reduction in a previous tax year. And it adds that any such expenses paid subsequently are to be treated as a qualifying payment. Clause 100: Prohibition against double counting 329. This clause prevents a person from claiming post-cessation trade relief for an amount for which relief is given or available under other provisions of the Income Tax Acts. It is based on section 109A(6) of ICTA. Clause 101: Treating excess post-cessation trade relief as CGT loss 330. This clause is a signpost to a capital gains tax relief that may be available where there is insufficient income to absorb an amount claimed by way of post-cessation trade relief. It is new. Chapter 3: Restrictions on trade loss relief for certain partners Overview 331. This Chapter sets out restrictions on trade loss relief that apply in certain cases where an individual carries on a trade as a member of a partnership. The restrictions do not apply to persons other than individuals, or in relation to professions. 332. The main restrictions are on deducting trading losses from income (other than income from the trade) or capital gains. Broadly, the amount of such deductions must not exceed the amount that the individual stands to lose commercially. 333. In various places, source legislation expresses the amount that a partner stands to lose commercially by reference to the partner's contribution to the trade that a partnership carries on (the "contribution to the trade"). But, in such cases, the amount that a partner stands to lose commercially is more likely to be reflected in the partner's contribution to the partnership that carries on the trade. 334. So this Chapter, and Chapter 5 of Part 12 (avoidance involving trading losses), makes a change by expressing the amount that a partner stands to lose commercially in terms of the partner's contribution to the partnership (the "contribution to the firm"). The change to "contribution to the firm" requires that the possibility of there being partnerships with more than one trade is addressed by the change. And for consistency with other partnerships, the possibility of a limited liability partnership carrying on more than one trade is also addressed. This change affects many clauses in this Chapter and it also makes a number of other clarifications as to what is included in a partner's contribution. See Change 16 in Annex 1. Clause 102: Overview of Chapter 335. This clause introduces the Chapter. It is new. 336. Subsection (1) is a signpost to the main restrictions, which apply in certain cases where the individual is a limited partner, a member of a limited liability partnership or a non-active partner. 337. Subsection (2) is a signpost to a further restriction applying where the trade consists of or includes the exploitation of films. 338. Subsections (3) and (4) provide signposts to clauses in Chapter 5 of Part 12 (avoidance involving trading losses). |
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