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
35

Use of trading loss as CGT loss
71
Treating trade losses as CGT losses
A person who cannot deduct all of a loss under a claim for trade loss relief
against general income may be able to treat the unused part as an allowable
loss for capital gains tax purposes: see sections 261B and 261C of TCGA 1992.
5
Early trade losses relief
72
Relief for individuals for losses in first 4 years of trade
(1)
An individual may make a claim for early trade losses relief if the individual
makes a loss in a trade—
(a)
in the tax year in which the trade is first carried on by the individual, or
10
(b)
in any of the next 3 tax years.
(2)
The claim is for the loss to be deducted in calculating the individual’s net
income for the 3 tax years before the one in which the loss is made (see Step 2
of the calculation in section 23).
(3)
The claim must be made on or before the first anniversary of the normal self-
15
assessment filing date for the tax year in which the loss is made.
(4)
This section applies to professions and vocations as it applies to trades.
(5)
This section needs to be read with—
(a)
section 73 (how relief works),
(b)
section 74 (restrictions on the relief),
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(c)
sections 75 to 79 (restrictions on the relief and trade loss relief against
general income 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
25
(f)
section 734 of ICTA (restrictions on those reliefs in relation to bond-
washing).
73
How relief works
This section explains how the deductions are made for the 3 tax years
mentioned in section 72(2).
30
The amount of the loss to be deducted at any step is limited in accordance with
section 25(4) and (5).
Step 1
Deduct the loss in calculating the individual’s net income for the earliest of the
3 tax years.
35
Step 2
Deduct any part of the loss not deducted at Step 1 in calculating the
individual’s net income for the next tax year.

Income Tax Bill
Part 4 — Loss relief
Chapter 2 — Trade losses
36

Step 3
Deduct any part of the loss not deducted at Step 1 or 2 in calculating the
individual’s net income for the latest of the 3 tax years.
Other claims
If the loss has not been deducted in full at Steps 1 to 3, the individual may use
5
the part not so deducted in giving effect to any other relief under this Chapter
(depending on the terms of the relief).
74
Restrictions on relief unless trade is commercial etc
(1)
Early trade losses relief for a loss made by an individual in a trade in a tax year
is not available unless the trade is commercial.
10
(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)
in such a way that profits of the trade could reasonably be expected to
be made in the basis period or within a reasonable time afterwards.
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(3)
If the trade forms part of a larger undertaking, the reference to profits of the
trade is to be read as a reference to profits of the undertaking as a whole.
(4)
Early trade losses relief for a loss made by an individual is not available if—
(a)
the individual first carries on the trade at a time when the individual
has a spouse or civil partner and is living with the spouse or civil
20
partner,
(b)
the spouse or civil partner previously carried on the trade, and
(c)
the loss is made in a tax year falling after the relevant 4 year period.
(5)
The relevant 4 year period comprises—
(a)
the tax year in which the spouse or civil partner first carried on the
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trade, and
(b)
the next 3 tax years.
(6)
This section applies to professions and vocations as it applies to trades.
Restrictions on sideways relief for certain capital allowances
75
Trade leasing allowances given to individuals
30
(1)
Sideways relief is not available to an individual for so much of a loss as derives
from a trade leasing allowance unless the individual meets the time
commitment test.
(2)
A trade leasing allowance is an allowance made under Part 2 of CAA 2001 in
respect of—
35
(a)
expenditure incurred on the provision of plant or machinery for leasing
in the course of a trade, or
(b)
expenditure incurred on the provision for the purposes of a trade of an
asset which is not to be leased but which is fee-producing.
(3)
An asset is fee-producing if payments in the nature of—
40
(a)
royalties, or

Income Tax Bill
Part 4 — Loss relief
Chapter 2 — Trade losses
37

(b)
licence fees,

are to arise from rights granted by the individual in connection with the asset.
(4)
To meet the time commitment test conditions A and B must be met.
(5)
Condition A is that the individual must carry on the trade for a continuous
period of at least 6 months beginning or ending in the basis period for the tax
5
year in which the loss was made (“the loss-making basis period”).
(6)
Condition B is that substantially the whole of the individual’s time must be
given to carrying on the trade—
(a)
for a continuous period of at least 6 months beginning or ending in the
loss-making basis period (if the individual starts or permanently ceases
10
to carry on the trade in the tax year (or does both)), or
(b)
throughout the loss-making basis period (in any other case).
76
First-year allowances: introduction
Sideways relief is not available to an individual for so much of a loss as derives
from a first-year allowance under Part 2 of CAA 2001 if either section 77 or 78
15
applies.
77
First-year allowances: partnerships with companies
(1)
This section applies if—
(a)
the first-year allowance is in respect of expenditure incurred at any
time on the provision of plant or machinery for leasing in the course of
20
a qualifying activity, and
(b)
either the qualifying activity was at that time carried on by the
individual in partnership with a company or arrangements have been
made with a view to the activity being so carried on.
(2)
It does not matter—
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(a)
if the firm includes other partners, or
(b)
when the arrangements were made.
(3)
For the purposes of this section—
(a)
letting a ship on charter is treated as leasing the ship, and
(b)
references to making arrangements include effecting schemes.
30
78
First-year allowances: arrangements to reduce tax liabilities
(1)
This section applies if—
(a)
the first-year allowance is made in connection with a relevant
qualifying activity or a relevant asset (see subsections (2) and (3)), and
(b)
arrangements within subsection (4) have been made.
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(2)
A qualifying activity is a relevant one if—
(a)
at the time when the expenditure was incurred, the activity was carried
on by the individual as a partner in a firm, or
(b)
at a later time, it has been carried on by the individual as a partner in a
firm or transferred to a person connected with the individual.
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(3)
An asset is a relevant one if, after the time when the expenditure was incurred,
the asset was transferred by the individual—

Income Tax Bill
Part 4 — Loss relief
Chapter 2 — Trade losses
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(a)
to a person connected with the individual, or
(b)
to a person at a price lower than its market value.
(4)
Arrangements are within this subsection if as a result of them—
(a)
the sole benefit, or
(b)
the main benefit,
5

that might be expected to arise to the individual from the transaction under
which the expenditure was incurred is the obtaining of a reduction in tax
liability by means of sideways relief.
(5)
It does not matter when the arrangements were made.
(6)
References to making arrangements include effecting schemes.
10
79
Capital allowances restrictions: supplementary
(1)
If relief is given in a case to which section 75 or 76 applies, the relief is
withdrawn by the making of an assessment to income tax under this section.
(2)
Expressions which are used—
(a)
in any of sections 75 to 78, and
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(b)
in Part 2 of CAA 2001,

have the same meaning in those sections as in that Part.
Restriction on sideways relief for specific trades
80
Ring fence income
(1)
This section applies if—
20
(a)
a person has income arising from oil extraction activities or oil rights
(“ring fence income”), and
(b)
the person makes a loss in any trade.
(2)
Sideways relief for the loss is not to be given against the person’s ring fence
income except so far as the loss arises from oil extraction activities or oil rights.
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(3)
“Oil extraction activities” and “oil rights” have the same meaning as in Chapter
5 of Part 12 of ICTA (see section 502 of that Act).
81
Dealings in commodity futures
(1)
This section applies if—
(a)
a person makes a loss in a trade of dealing in commodity futures,
30
(b)
the person carried on the trade as a partner in a firm,
(c)
the person or one or more of the other partners in the firm was a
company, and
(d)
arrangements within subsection (3) have been made.
(2)
Sideways relief is not available for the loss.
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(3)
Arrangements are within this subsection if as a result of them—
(a)
the sole benefit, or
(b)
the main benefit,

Income Tax Bill
Part 4 — Loss relief
Chapter 2 — Trade losses
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that might be expected to arise to the person from the person’s interest in the
firm is the obtaining of a reduction in tax liability by means of sideways relief.
(4)
It does not matter whether the arrangements were made in the partnership
agreement or in any other way.
(5)
References to making arrangements include effecting schemes.
5
(6)
If relief is given in a case to which this section applies, the relief is withdrawn
by the making of an assessment to income tax under this section.
(7)
“Commodity futures” means commodity futures that are for the time being
dealt in on a recognised futures exchange (within the meaning of ITTOIA 2005,
see section 558(3) of that Act).
10
82
Exploitation of films
In the case of a trade carried on by an individual which consists of or includes
the exploitation of films—
(a)
see sections 115 and 116 for a restriction on sideways relief if the trade
was carried on by the individual as a partner in a firm, and
15
(b)
see section 796 for a charge to income tax if the individual made a loss
in the trade (whether carried on alone or as a partner in a firm) for
which sideways relief is claimed.
Carry-forward trade loss relief
83
Carry forward against subsequent trade profits
20
(1)
A person may make a claim for carry-forward trade loss relief if—
(a)
the person has made a loss in a trade in a tax year, and
(b)
relief for the loss has not been fully given under this Chapter or any
other provision of the Income Tax Acts or under section 261B of TCGA
1992 (use of trading loss as a CGT loss).
25
(2)
The claim is for the part of the loss for which relief has not been given under
any such provision (“the unrelieved loss”) to be deducted in calculating the
person’s net income for subsequent tax years (see Step 2 of the calculation in
section 23).
(3)
But a deduction for that purpose is to be made only from profits of the trade.
30
(4)
In calculating a person’s net income for a tax year, deductions under this
section from the profits of a trade are to be made before deductions of any other
reliefs from those profits.
(5)
This section applies to professions and vocations as it applies to trades (and
section 84 is to be read accordingly).
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(6)
This section needs to be read with—
(a)
section 84 (how relief works),
(b)
section 85 (use of trade-related interest and dividends if trade profits
insufficient),
(c)
section 86 (trade transferred to a company),
40
(d)
section 87 (ring fence trades),
(e)
section 88 (carry forward of certain interest as loss), and

Income Tax Bill
Part 4 — Loss relief
Chapter 2 — Trade losses
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(f)
sections 17(3) and 852(7) of ITTOIA 2005 (effect of becoming or ceasing
to be UK resident).
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
5
accordance with section 25(4) and (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.
85
Use of trade-related interest and dividends if trade profits insufficient
15
(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
relate to the trade are treated as profits of the trade of the tax year.
20
(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
of the Income Tax Acts.
25
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,
(b)
the trade is transferred to a company,
30
(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
relevant tax year includes income derived by the individual from the
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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,
or
40
(b)
if the trade was carried on by the individual in partnership, profits of
the individual’s notional trade of the relevant tax year.

Income Tax Bill
Part 4 — Loss relief
Chapter 2 — Trade losses
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(3)
The tax year in which the transfer is made 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 period beginning with the date of the transfer and ending with
5
the next 5 April.
(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,
10

throughout the tax year.
(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
15
(1)
This section applies if—
(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,
20
(c)
the person makes profits in a subsequent tax year from other activities,
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
25
treat profits from the other activities in a subsequent tax year as if they were
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
30
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,
and
(c)
relief under section 383 cannot be fully given in respect of the interest
35
because there is no income or insufficient income in the tax year.
(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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