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 3 — Restrictions on trade loss relief for certain partners
49

(a)
at a time in a tax year (“the relevant tax year”) an individual carries on
a trade (“the relevant trade”) as a limited partner in a firm, and
(b)
the individual makes a loss in the relevant trade in 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.
5
(3)
The relief within this subsection is—
(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—
10
(a)
the sum of the amount of the relief given and the total amount of all
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 105).
15
(5)
“Relevant relief” means sideways relief or capital gains relief given to the
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
(b)
a loss made in the relevant trade in an early tax year during which the
20
individual carries on that trade as a non-active partner (see section 112).
(6)
“The total amount of recovered relief” means the total amount of income
treated as received by the individual under section 792 (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.
25
(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
30
(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.
105
Meaning of “contribution to the firm”
(1)
For the purposes of section 104 the individual’s contribution to the firm is the
sum of amounts A and B.
35
(2)
Amount A is the amount which the individual has contributed to the firm as
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.
40
(4)
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 is or may be entitled to draw out or receive back at any
time when the individual is carrying on a trade as a limited partner in
the firm, or
45

Income Tax Bill
Part 4 — Loss relief
Chapter 3 — Restrictions on trade loss relief for certain partners
50

(c)
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
back an amount which, because of its being drawn out or received back, is
5
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
(b)
the individual has received that share in money or money’s worth.
10
(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.
(9)
In subsections (3), (7) and (8) any reference to profits or losses are to profits or
15
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
trade, subsections (7) and (8) have effect as if references to the relevant trade
20
were references to the relevant trade or any of the other trades.
(11)
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 104).
106
Meaning of “limited partner”
25
(1)
In this Chapter “limited partner” means an individual who carries on a trade—
(a)
as a limited partner in a limited partnership registered under the
Limited Partnerships Act 1907 (c. 24),
(b)
as a partner in a firm who in substance acts as a limited partner in
relation to the trade (see subsection (2)), or
30
(c)
while the condition mentioned in subsection (3) is met in relation to the
individual.
(2)
An individual in substance acts as a limited partner in relation to a trade if the
individual—
(a)
is not entitled to take part in the management of the trade, and
35
(b)
is entitled to have any liabilities (or those beyond a certain limit) for
debts or obligations incurred for the purposes of the trade met or
reimbursed by some other person.
(3)
The condition referred to in subsection (1)(c) is that—
(a)
the individual carries on the trade jointly with other persons,
40
(b)
under the law of a territory outside the United Kingdom, the individual
is not entitled to take part in the management of the trade, and
(c)
under that law, the individual is not liable beyond a certain limit for
debts or obligations incurred for the purposes of the trade.

Income Tax Bill
Part 4 — Loss relief
Chapter 3 — Restrictions on trade loss relief for certain partners
51

(4)
In the case of an individual who is a limited partner as a result of subsection
(1)(c), references in this Chapter to the individual’s firm are to be read as
references to the relationship between the individual and the other persons
mentioned in subsection (3)(a).
Members of LLPs
5
107
Restriction on reliefs for members of LLPs
(1)
This section applies if—
(a)
an individual carries on a trade (“the relevant trade”) as a member of an
LLP at a time in a tax year, and
(b)
the individual makes a loss in the relevant trade in the tax year (“the
10
relevant tax year”).
(2)
But if the relevant tax year is an early tax year during which the individual
carries on the relevant trade as a non-active partner (see section 112)—
(a)
this section does not apply, and
(b)
section 110 applies instead.
15
(3)
There is a restriction on the amount of relief within subsection (4) which may
be given to the individual for the loss.
(4)
The relief within this subsection is—
(a)
sideways relief against the individual’s income apart from profits of the
relevant trade, and
20
(b)
capital gains relief.
(5)
The restriction is that—
(a)
the sum of the amount of the relief given and the total amount of all
other relevant relief given, less
(b)
the total amount of recovered relief,
25

must not exceed the individual’s contribution to the LLP as at the end of the
basis period for the relevant tax year (see section 108).
(6)
“Relevant relief” means sideways relief or capital gains relief given to the
individual for—
(a)
a loss made in the relevant trade in a tax year at a time during which
30
the individual carries on that trade as a member of an LLP, or
(b)
a loss made in the relevant trade in an early tax year during which the
individual carries on that trade as a non-active partner.
(7)
“The total amount of recovered relief” means the total amount of income
treated as received by the individual under section 792 (recovery of excess
35
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.
(8)
If the LLP 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—
40
(a)
apply subsection (6) in relation to each other trade as well as the
relevant trade and then add the results together, and
(b)
apply subsection (7) as if the reference to the relevant trade were a
reference to the relevant trade or any of the other trades.

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 as a member of the LLP.

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 792 (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