Finance Bill

House of Commons

Session 2007 - 08
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Finance Bill

Finance Bill
Schedule 20 — Leases of plant or machinery
270

      (2)
Section 502B of ICTA or section 148A of ITTOIA 2005 (rental earnings) does
not apply in relation to a period of account within sub-paragraph (3).
      (3)
A period of account is within this sub-paragraph if—
(a)
it begins on or after the relevant date, and
(b)
no rentals which were due under lease B before the relevant date are
5
(wholly or in part) in respect of any part of the period of account.
      (4)
For the purpose of calculating the profits of the lessor under lease B for a
period of account ending on or after the relevant date that is not within sub-
paragraph (3), treat the lessor as receiving for that period of account income
attributable to lease B of an amount equal to the relevant amount.
10
      (5)
The “relevant amount” is an amount equal to so much of the rentals that—
(a)
become due on or after the relevant date, and
(b)
are wholly or partly in respect of the period of account,

as would not reasonably be regarded as reflected in the rental earnings for
that period of account.
15

“Rental earnings” here has the same meaning as in section 502B of ICTA or
section 148A of ITTOIA 2005.
      (6)
If any rental is paid for a period (“the rental period”) which begins before the
relevant date or is not wholly within the period of account, for the purposes
of sub-paragraph (5) treat the amount of that rent as equal to the amount
20
apportioned (on a time basis) in respect of so much of the rental period as
falls on or after the relevant date and within the period of account.
      (7)
The income treated as received by virtue of sub-paragraph (4) is in addition
to any amount brought into account under section 502B(2) of ICTA or
section 148A(2) of ITTOIA 2005.
25
      (8)
Section 502C of ICTA or section 148B of ITTOIA 2005 (exceptional items)
does not apply in relation to any profit or loss arising on or after the relevant
date.
      (9)
If section 502D of ICTA or section 148C of ITTOIA 2005 (lessor making
termination payment) applies in respect of the termination of lease B on or
30
after the relevant date, a deduction is allowed (in calculating the profits of
the lessor) in respect of the sum paid to the lessee.
     (10)
The amount of that deduction is (if it would otherwise exceed that amount)
limited to the total amount brought into account in respect of the lease by
virtue of sub-paragraph (2) or (4).
35
     (11)
If lease A becomes a long funding lease by virtue of section 70H of CAA 2001
(and does not cease to be such a lease), treat this paragraph as never having
applied in relation to lease B.
     (12)
Chapter 6A of Part 2 of CAA 2001 (interpretation of provisions about long
funding leases) applies in relation to this paragraph.
40
Plant and machinery allowances: anti-avoidance
12    (1)
Chapter 17 of Part 2 of CAA 2001 (plant and machinery allowances: anti-
avoidance) is amended as follows.

Finance Bill
Schedule 20 — Leases of plant or machinery
271

      (2)
For section 228A substitute—
“228A
Application of sections 228B and 228C
(1)
Sections 228B and 228C apply where plant or machinery is the
subject of a lease and finance leaseback.
(2)
Plant or machinery is the subject of a lease and finance leaseback if—
5
(a)
a person (“S”) leases the plant or machinery to another (“B”),
(b)
after the date of that transaction, the use of the plant or
machinery falls within sub-paragraph (i), (ii) or (iii) of section
221(1)(b), and
(c)
it is directly as a consequence of having been leased under a
10
finance lease that the plant or machinery is available to be so
used after that date.
(3)
For the purposes of subsection (2), S leases the plant or machinery to
B only if—
(a)
S grants B rights over the plant or machinery,
15
(b)
consideration is given for that grant, and
(c)
S is not required to bring all of that consideration into account
under this Part.”
      (3)
In section 228B (lessee’s income or profits: deductions)—
(a)
in subsection (1), for “the lessee’s” substitute “S’s”,
20
(b)
in subsection (2), for the words from “the total” to the end substitute
“the amount of the finance charges shown in the accounts.”,
(c)
in subsection (4), in the definition of “Original Consideration”, for
“entering into the relevant transaction” substitute “granting B rights
over the plant or machinery”, and
25
(d)
the heading accordingly becomes “S’s income or profits:
deductions”.
      (4)
In section 228C (lessee’s income or profits: termination of leaseback)—
(a)
in subsection (2), for “the lessee” substitute “S”,
(b)
in subsection (3), in the formula, for “Net” substitute “Original” and
30
for the definition of “Net Consideration” substitute—
““Original Consideration” means the consideration
payable to S for granting B rights over the plant or
machinery,”,
(c)
in subsection (6), for “the lessee’s” substitute “S’s” and for “the
35
lessor” substitute “B (or, where appropriate, an assignee of B)”, and
(d)
the heading accordingly becomes “S’s income or profits:
termination of leaseback”.
      (5)
Omit—
(a)
section 228D (lessor’s income or profits),
40
(b)
section 228E (lessor’s income or profits: termination of leaseback),
and
(c)
section 228F (lease and finance leaseback).
      (6)
In section 228G (leaseback not accounted for as finance lease in accounts of
lessee)—
45
(a)
in subsection (1), for “the lessee” substitute “S”,

Finance Bill
Schedule 20 — Leases of plant or machinery
272

(b)
in subsection (2), for “the lessee” (in both places) substitute “S”,
(c)
in subsection (3), for “the lessee’s” substitute “S’s”,
(d)
in subsection (4), for “the lessee” substitute “S”,
(e)
in subsection (6), for “the lessee” substitute “S” and for the words
from “increased by—” to the end substitute “increased by the
5
consideration payable to S for granting B rights over the plant or
machinery.”, and
(f)
the heading accordingly becomes “Leaseback not accounted for as
finance lease in S’s accounts”.
      (7)
Section 228H (sections 228A to 228G: supplementary) is amended as follows.
10
      (8)
In subsection (1)—
(a)
insert (as the first defined term)—
““consideration” does not include rentals;”,
(b)
omit the definition of “lessee”,
(c)
in the definition of “net book value”, for “the lessee’s” substitute
15
“S’s”,
(d)
omit the definition of “restricted disposal value”,
(e)
before the definition of “termination” insert—
““S” does not include an assignee of S;”, and
(f)
in the definition of “termination”, omit “(except in section 228E)”, for
20
“the lessee’s” (in both places) substitute “S’s” and for “the lessee”
substitute “S”.
      (9)
After that subsection insert—
“(1A)
For the purposes of sections 228A to 228G, references to
consideration given (or payable to S) for the grant to B of rights over
25
the plant or machinery do not include—
(a)
rentals payable under that grant, or
(b)
any relevant capital payment (within the meaning of section
785B of ICTA or section 809ZA of ITA 2007) to which either
of those sections applies.
30
(1B)
In relation to a case where some but not all of the consideration
mentioned in subsection (1A) falls within paragraph (b) of that
subsection, sections 228B to 228G or section 228J have effect subject
to such modifications as are just and reasonable.”
     (10)
In section 228J(8) (plant or machinery subject to further operating lease), in
35
the definition of “lease and finance leaseback”, for “section 228F” substitute
“section 228A”.
     (11)
In section 774E(5)(b) of ICTA (structured finance arrangements: exceptions),
omit “with the modifications contained in section 228F of that Act”.
     (12)
The amendments made by this paragraph have effect in relation to
40
transactions referred to in section 228A(2)(a) of CAA 2001 (as substituted by
this paragraph) entered into on or after 9 October 2007.
13    (1)
Section 228B of CAA 2001 (S’s income or profits: deductions) is amended as
follows.

Finance Bill
Schedule 21 — Restriction on loss relief for non-active traders
273

      (2)
After subsection (4) insert—
“(5)
If the use mentioned in section 228A(2)(b) includes use by a person
(other than B) who is connected with S, this section applies in relation
to that person as it applies in relation to S.
      (3)
Accordingly, in the heading, after “profits” insert “etc”.
5
      (4)
The amendments made by this paragraph have effect in relation to
transactions referred to in section 228A(2)(a) of CAA 2001 entered into on or
after 12 March 2008.
Schedule 21
Section 57

Restriction on loss relief for non-active traders
10
Introduction
1
ITA 2007 is amended as follows.
Main provisions
2
After section 74 insert—
General restrictions on sideways relief and capital gains relief
15
74A
Reliefs in any tax year not to exceed cap for tax year
(1)
This section applies if—
(a)
during a tax year an individual carries on one or more trades,
otherwise than as a partner in a firm, in a non-active capacity
(see section 74C), and
20
(b)
the individual makes a loss in any of those trades (an
“affected loss”) in that tax year.
(2)
There is a restriction on the amount of sideways relief and capital
gains relief which (after applying the restrictions under the other
provisions of this Chapter) may be given to the individual for any
25
affected loss (but see subsections (7) and (8)).
(3)
The restriction is that the total amount of the sideways relief and
capital gains relief given to the individual for all the affected losses
must not exceed the cap for that tax year.
(4)
The cap for any tax year is £25,000.
30
(5)
The Treasury may by order amend the sum for the time being
specified in subsection (4).
(6)
If—
(a)
in a tax year an individual makes a loss to which the
restriction under section 103C (losses in trade carried on by
35
non-active or limited partner) applies, and
(b)
sideways relief or capital gains relief is given to the
individual for that loss,

Finance Bill
Schedule 21 — Restriction on loss relief for non-active traders
274


the amount of the cap under this section for the tax year in the case
of the individual is reduced by the amount of that loss.
(7)
The restriction under this section does not apply to so much of any
affected loss as derives from qualifying film expenditure (see section
74D).
5
(8)
The restriction under this section does not affect the giving of
sideways relief for a loss made in a trade against the profits of that
trade.
(9)
In this section “trade” does not include a trade which consists of the
underwriting business of a member of Lloyd’s (within the meaning
10
of section 184 of FA 1993).
(10)
For the purposes of this section—
(a)
capital gains relief is, in relation to a loss, the treatment of a
loss as an allowable loss by virtue of section 261B of TCGA
1992 (use of trading loss as a CGT loss), and
15
(b)
capital gains relief is given for a loss when it is so treated.
74B
No relief for tax-generated losses
(1)
This section applies if—
(a)
during a tax year an individual carries on a trade, otherwise
than as a partner in a firm, in a non-active capacity (see
20
section 74C),
(b)
the individual makes a loss in the trade in that tax year, and
(c)
the loss arises directly or indirectly in consequence of, or
otherwise in connection with, relevant tax avoidance
arrangements.
25
(2)
No sideways relief or capital gains relief may be given to the
individual for the loss (but subject to subsection (5)).
(3)
In subsection (1) “relevant tax avoidance arrangements” means
arrangements made by the individual the main purpose, or one of
the main purposes, of which is the obtaining of a reduction in tax
30
liability by means of sideways relief or capital gains relief.
(4)
In subsection (3) “arrangements” includes any agreement,
understanding, scheme, transaction or series of transactions
(whether or not legally enforceable).
(5)
This section has no effect in relation to any loss that derives wholly
35
from qualifying film expenditure (see section 74D).
(6)
Subsection (10) of section 74A (capital gains relief) applies for the
purposes of this section.
74C
Meaning of “non-active capacity” for purposes of sections 74A and
74B etc
40
(1)
For the purposes of sections 74A and 74B an individual carries on a
trade in a non-active capacity during a tax year if the individual—
(a)
carries on the trade at a time during the year, and
(b)
does not devote a significant amount of time to the trade in
the relevant period for the tax year.
45

Finance Bill
Schedule 21 — Restriction on loss relief for non-active traders
275

(2)
For the purposes of this section an individual devotes a significant
amount of time to a trade in the relevant period for a tax year if, in
the relevant period, the individual spends an average of at least 10
hours a week personally engaged in activities of the trade and those
activities are carried on—
5
(a)
on a commercial basis, and
(b)
with a view to the realisation of profits as a result of the
activities.
(3)
For this purpose “the relevant period” means the basis period for the
tax year (unless the basis period is shorter than 6 months).
10
(4)
If the basis period for the tax year is shorter than 6 months, “the
relevant 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
15
(b)
the period of 6 months ending with the date on which the
individual 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
20
devoted or will devote a significant amount of time to the
trade in the relevant period 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.
25
74D
Meaning of “qualifying film expenditure” for purposes of sections
74A and 74B
(1)
For the purposes of sections 74A and 74B expenditure is qualifying
film expenditure if—
(a)
it is deducted under a relevant film provision for the
30
purposes of calculating the profits of a trade, or
(b)
it is incidental expenditure which (although not deducted
under a 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
35
so deducted.
(2)
Expenditure is incidental if it is on management, administration or
obtaining finance.
(3)
The extent to which expenditure is within subsection (1)(b) is
determined on a just and reasonable basis.
40
(4)
For the purposes of sections 74A and 74B the amount of any loss that
derives from qualifying film expenditure is determined on a just and
reasonable basis.
(5)
In this section—
“the acquisition of the original master version of a film” has the
45
same meaning as in Chapter 9 of Part 2 of ITTOIA 2005 (see
sections 130 and 132 of that Act),

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Schedule 21 — Restriction on loss relief for non-active traders
276

“film” is to be read in accordance with paragraph 1 of Schedule
1 to the Films Act 1985, and
“a relevant film provision” means any one of sections 137 to 140
of ITTOIA 2005 (relief for certified master versions of films).”
Other amendments
5
3
In section 32 (liability not dealt with in the calculation), before the entry
relating to section 79(1) insert—
“under section 74C(5) (non-active traders: withdrawal of
relief),”.
4
In section 64(8) (deduction of trade losses from general income), after
10
paragraph (b) insert—
“(ba)
sections 74A to 74D (general restrictions on relief),”.
5
In section 72(5) (early trade loss relief)—
(a)
in paragraph (b), after “relief” insert “unless trade is commercial etc”,
and
15
(b)
after that paragraph insert—
“(ba)
sections 74A to 74D (general restrictions on relief),”.
Commencement
6     (1)
Section 74A of ITA, and the other provisions inserted into that Act by this
Schedule so far as relating to that section, have effect in relation to any loss
20
made by an individual in the tax year 2007-08 or any subsequent tax year.
      (2)
But those provisions do not have effect in relation to a loss made by an
individual in a tax year the basis period for which ended before 12 March
2008.
      (3)
If the basis period for the tax year in which a loss is made by an individual
25
begins before 12 March 2008 and ends on or after that date (a “straddling
basis period”), the amount of that loss for the purposes of section 74A of ITA
2007 is—
(a)
the amount of sideways relief and capital gains relief which (after
applying the restrictions under the other provisions of Chapter 2 of
30
Part 4 of that Act) may be given to the individual for that loss, less
(b)
the amount (if any) of the pre-announcement loss.
      (4)
“The pre-announcement loss” is determined as follows.
      (5)
Calculate the profits or losses of the straddling basis period, but without
regard to capital allowances and qualifying film expenditure (within the
35
meaning of section 74D of ITA 2007).
      (6)
If that calculation produces a loss, apportion the loss produced by that
calculation to the part of the straddling basis period which falls before 12
March 2008 in proportion to the number of days in that part.
      (7)
Calculate so much of the loss of the straddling basis period as derives from
40
relevant pre-announcement capital expenditure.
      (8)
The pre-announcement loss is the sum of—
(a)
the amount of the loss apportioned under sub-paragraph (6) (if any),
and