Finance Bill

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Session 2007 - 08
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Finance Bill

Finance Bill (Volume II)
Schedule 21 — Restriction on loss relief for non-active traders
298

     (10)
In section 228J(8) (plant or machinery subject to further operating lease), in
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
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.
      (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”.
      (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 58

Restriction on loss relief for non-active traders
Introduction
1
ITA 2007 is amended as follows.
Main provisions
2
After section 74 insert—
General restrictions on sideways relief and capital gains relief
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
(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
affected loss (but see subsections (7) and (8)).

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Schedule 21 — Restriction on loss relief for non-active traders
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(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.
(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
non-active or limited partner) applies, and
(b)
sideways relief or capital gains relief is given to the
individual for that loss,

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).
(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
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
(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
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.
(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
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).

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Schedule 21 — Restriction on loss relief for non-active traders
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(5)
This section has no effect in relation to any loss that derives wholly
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
(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.
(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—
(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).
(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
(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
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.
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
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
so deducted.

Finance Bill (Volume II)
Schedule 21 — Restriction on loss relief for non-active traders
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(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.
(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
same meaning as in Chapter 9 of Part 2 of ITTOIA 2005 (see
sections 130 and 132 of that Act),
“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
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
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
(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
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
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
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.

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Schedule 22 — Avoidance involving financial arrangements
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      (5)
Calculate the profits or losses of the straddling basis period, but without
regard to capital allowances and qualifying film expenditure (within the
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
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
(b)
so much of the loss of the straddling period (if any) as derives from
relevant pre-announcement capital expenditure.
      (9)
For the purposes of this paragraph the amount of the loss of the straddling
basis period that derives from relevant pre-announcement capital
expenditure is determined on a just and reasonable basis.
     (10)
In this paragraph “relevant pre-announcement capital expenditure”
means—
(a)
any capital allowance in respect of expenditure paid before 12 March
2008, and
(b)
any capital allowance in respect of expenditure paid on or after that
date pursuant to an unconditional obligation in a contract made
before that date;

and for this purpose “an unconditional obligation” means an obligation
which may not be varied or extinguished by the exercise of any right
conferred on the individual in question (whether or not under the contract).
7     (1)
Section 74B 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 a loss
arising directly or indirectly in consequence of, or otherwise in connection
with, relevant tax avoidance arrangements made on or after 12 March 2008.
      (2)
But those provisions do not have effect if the arrangements were made
pursuant to an unconditional obligation in a contract made before that date;
and for this purpose “an unconditional obligation” means an obligation
which may not be varied or extinguished by the exercise of any right
conferred on the individual in question (whether or not under the contract).
Schedule 22
Section 60

Avoidance involving financial arrangements
Rent factoring of leases of plant or machinery
1     (1)
Section 785A of ICTA (rent factoring of leases of plant or machinery) is
amended as follows.
      (2)
In subsection (1), omit paragraph (d).
      (3)
In subsection (2)—

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Schedule 22 — Avoidance involving financial arrangements
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(a)
for “relevant portion of the consideration” substitute “market value
of the rights transferred”, and
(b)
for “in a period of account to the extent that it is receivable in that
period of account” substitute “at the time of the transfer”.
      (4)
After that subsection insert—
“(2A)
But subsection (2) does not apply if and to the extent that any of the
market value of the rights transferred is (apart from this section)
brought into account—
(a)
as income, or
(b)
as a capital allowances disposal receipt.”
      (5)
After subsection (5) insert—
“(5ZA)
The references in subsections (1)(c) and (3) to another person include
any person in which P has an interest, including any partnership of
which P is a member and the trustees of any trust of which P is a
beneficiary.”
      (6)
The amendments made by this paragraph have effect in relation to
arrangements for transfers of rights entered into on or after 12 March 2008.
Credit allowable in relation to interest
2     (1)
In section 807A of ICTA (disposals and acquisitions of company loan
relationships with or without interest), omit subsection (3) (credit allowable
as if amount of foreign tax had been paid).
      (2)
Accordingly, omit—
(a)
in section 807A of ICTA, subsections (5) and (6) and, in subsection
(7), the definitions of “related transaction” and “trading credit”, and
(b)
section 91(4) of FA 1997.
      (3)
The repeals made by this paragraph have effect in relation to related
transactions on or after 12 March 2008.
Distributions arising from tax arrangements
3     (1)
In paragraph 1 of Schedule 9 to FA 1996 (loan relationships: distributions),
after sub-paragraph (1) insert—
   “(1A)
Credits relating to any amount which falls, when paid, to be
treated as a distribution in respect of a loan relationship are to be
brought into account for the purposes of this Chapter if the
amount arises in consequence of, or otherwise in connection with,
arrangements the purpose, or one of the main purposes, of which
is securing for any person a tax advantage; and for this purpose—
(a)
“arrangements” includes any agreement, understanding,
scheme, transaction or series of transactions, and
(b)
“tax advantage” has the meaning given by section 840ZA
of the Taxes Act 1988.”
      (2)
The amendment made by sub-paragraph (1) has effect in relation to
accounting periods ending on or after 12 March 2008 but, in the case of an
accounting period beginning before that date, only if the credits relate to any
time on or after that date.

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Schedule 22 — Avoidance involving financial arrangements
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Disposals for consideration not recognised by accounting practice
4     (1)
In Schedule 9 to FA 1996 (loan relationships: special computational
provisions), after paragraph 11A insert—
“Disposals for consideration not fully recognised by accounting practice
11B   (1)
This paragraph applies where in any accounting period (“the
relevant accounting period”) a company, with the relevant
avoidance intention, disposes of rights under a creditor
relationship (in whole or in part) for consideration which—
(a)
is not wholly in the form of money or a debt that falls to be
settled by the payment of money, and
(b)
is not fully recognised.
      (2)
The relevant avoidance intention is the intention of eliminating or
reducing the credits to be brought into account for the purposes of
this Chapter.
      (3)
Consideration is not fully recognised if, as a result of the
application of generally accepted accounting practice, the full
amount or value of the consideration is not recognised in
determining the company’s profit or loss for the relevant
accounting period or any other accounting period.
      (4)
In determining the credits to be brought into account by the
company for the period for the purposes of this Chapter, it is to be
assumed that the whole of the consideration is recognised in
determining the company’s profit or loss for the relevant
accounting period.
      (5)
But this paragraph does not apply if paragraph 1(2) of Schedule
28AA to the Taxes Act 1988 (provision not at arm’s length)
operates in relation to the disposal so as to increase the tax liability
of the company.”
      (2)
In Schedule 26 to FA 2002 (derivative contracts), after paragraph 27 insert—
“Disposals for consideration not fully recognised by accounting practice
27A   (1)
This paragraph applies where in any accounting period (“the
relevant accounting period”) a company, with the relevant
avoidance intention, disposes of rights or liabilities under a
derivative contract (in whole or in part) for consideration which—
(a)
is not wholly in the form of money or a debt that falls to be
settled by the payment of money, and
(b)
is not fully recognised.
      (2)
The relevant avoidance intention is the intention of eliminating or
reducing the credits to be brought into account for the purposes of
this Schedule.
      (3)
Consideration is not fully recognised if, as a result of the
application of generally accepted accounting practice, the full
amount or value of the consideration is not recognised in
determining the company’s profit or loss for the relevant
accounting period or any other accounting period.