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
42

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).
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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)).

Income Tax Bill
Part 4 — Loss relief
Chapter 2 — Trade losses
43

(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.
Step 2
Deduct any part of the relievable loss not deducted at Step 1 from the profits of
15
the trade of the previous tax year.
Step 3
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
20
Deduct any part of the relievable loss not deducted at Step 1, 2 or 3 from the
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
25
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.
30
(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
35
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—
(a)
a person permanently ceases to carry on a mineral extraction trade, and
40

Income Tax Bill
Part 4 — Loss relief
Chapter 2 — Trade losses
44

(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.
(3)
In giving effect to the terminal trade loss relief, the balancing allowance is to be
5
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
(1)
This section applies if—
10
(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,
and
15
(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
payment.
20
(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—
(a)
carries on a trade, profession or vocation wholly outside the United
25
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
qualifying foreign income,
30
(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.
(3)
“Trade income relief” means—
35
(a)
carry-forward trade loss relief, or
(b)
terminal trade loss relief.
(4)
“Qualifying foreign income” means—
(a)
qualifying foreign trade income, or
(b)
income falling within section 23, 355, 575, 613, 615, 631 or 635 of ITEPA
40
2003 (foreign employment or pension income).

Income Tax Bill
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

Income Tax Bill
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.

Income Tax Bill
Part 4 — Loss relief
Chapter 2 — Trade losses
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(8)
The person making the claim may specify—
(a)
the tax year in which the debt proves to be bad, or
(b)
a subsequent tax year throughout which the debt remains bad (so long
as the tax year begins within 7 years of the cessation),

but, if the person has previously made a claim specifying a tax year in respect
5
of the debt, the person may not specify another tax year in respect of it.
99
Reduction of relief for unpaid trade expenses
(1)
This section applies for the purposes of post-cessation trade relief in respect of
a person’s trade if a deduction was made in calculating the profits of the trade
for an expense not actually paid (an “unpaid expense”).
10
(2)
The amount of the person’s relief for a tax year is reduced (but not below nil)
by—
(a)
the total amount of unpaid expenses at the end of the tax year, or
(b)
if the person carried on the trade as a partner in a firm, the person’s
share of the total amount of unpaid expenses at the end of the tax year.
15
(3)
But any unpaid expense which is taken into account in reducing the amount of
the person’s relief for a tax year is left out of account in making reductions for
subsequent tax years.
(4)
If the person actually pays an amount in respect of an unpaid expense taken
into account in reducing the amount of the person’s relief, the person is treated
20
as making a qualifying payment for the purposes of section 96.
(5)
The amount of the qualifying payment is—
(a)
the amount actually paid, or
(b)
if less, the amount of the reduction.
(6)
This section applies to professions and vocations as it applies to trades.
25
100
Prohibition against double counting
(1)
Post-cessation trade relief is not available for an amount for which relief is
given, or is available, under any other provision of the Income Tax Acts.
(2)
For this purpose—
(a)
relief available under section 254 of ITTOIA 2005 (allowable deductions
30
against post-cessation receipts) is treated as given for other amounts
before any amount for which post-cessation trade relief is available,
and
(b)
relief under that section is treated as available if it would have been
available but for the fact that the post-cessation receipts (against which
35
the deductions would have been allowed) are exempt under section 524
of this Act.
101
Treating excess post-cessation trade relief as CGT loss
A person who cannot deduct all of an amount under a claim for post-cessation
trade relief may be able to treat the unused part as an allowable loss for capital
40
gains tax purposes: see sections 261D and 261E of TCGA 1992.

Income Tax Bill
Part 4 — Loss relief
Chapter 3 — Restrictions on trade loss relief for certain partners
48

Chapter 3
Restrictions on trade loss relief for certain partners
Introduction
102
Overview of Chapter
(1)
This Chapter restricts the amount of relief that may be given for any loss made
5
by an individual in a trade carried on by the individual as—
(a)
a limited partner in any tax year (see sections 104 to 106 and section
114),
(b)
a member of a limited liability partnership (an “LLP”) in any tax year
(see sections 107 to 109 and section 114), or
10
(c)
a non-active partner in an early tax year (see sections 110 to 114).
(2)
This Chapter also restricts the amount of relief that may be given for any loss
made by an individual in a trade carried on by the individual as a partner in a
firm if the trade consists of or includes the exploitation of films (see sections 115
and 116).
15
(3)
This Chapter needs to be read with sections 791 to 795 (income tax charge
recovering excess relief for losses made by individuals carrying on a trade in
partnership).
(4)
See also—
(a)
sections 796 to 803 (income tax charge in relation to individuals
20
claiming relief for film-related trading losses), and
(b)
sections 804 to 809 (income tax charge in relation to individuals
carrying on a trade in partnership claiming relief for licence-related
trading losses).
103
Meaning of “sideways relief”, “capital gains relief” and “firm”
25
(1)
For the purposes of this Chapter sideways relief is—
(a)
trade loss relief against general income (see sections 64 to 70), or
(b)
early trade losses relief (see sections 72 to 74).
(2)
For the purposes of this Chapter—
(a)
capital gains relief is, in relation to a loss, the treatment of the loss as an
30
allowable loss by virtue of section 261B of TCGA 1992 (use of trading
loss as a CGT loss), and
(b)
capital gains relief is given for a loss when it is so treated.
(3)
References in this Chapter to a firm are to be read in the same way as references
to a firm in Part 9 of ITTOIA 2005 (which contains special provision about
35
partnerships).
Limited partners
104
Restriction on reliefs for limited partners
(1)
This section applies if—