Last week I looked at the Chris Moyles sideways loss relief case. Another victory for HMRC.
Sideways loss relief has been progressively challenged by legislation as well as through the courts and tribunals.
Perhaps the most important provision is that there is no sideways loss relief for tax-generated losses. This applies to losses arising as a result of, or in connection with, “relevant tax avoidance arrangements”.
Restrictions also apply to sideways loss relief for the first tax year of trade and the three following years where a partner (including an LLP member) is “non-active” – broadly, someone who spends less than 10 hours personally engaged in the trade activities.
These activities must be pursued (a) on a commercial basis and (b) with a view to the realisation of profits as a result of those activities. Clearly then, the activities of the partners must constitute more than window-dressing to sidestep the rules.
The total sideways loss relief that a non-active partner could access is restricted to:
- The partner’s capital contribution to the partnership at the end of that tax year less
- The total sideways loss relief previously given to the partner in respect of the same trade.
In addition, for any tax year, a £25,000 overall annual limit for sideways loss relief applies for limited partners, non-active general partners and non-active LLP members.
Initially, these rules were introduced for non-active partners in partnerships. An extension for non-active sole traders came the next year.
As if all that was not enough, Schedule 3 of the Finance Act 2013 has introduced a limit to certain income tax reliefs available to reduce an individual’s adjusted total income for a tax year. The limit is set at the greater of £50,000 and 25 per cent of the adjusted total income for a tax year.
The legislation took effect from the tax year 2013/14 and applies to the following:
- Trade loss relief: available against general income for losses made by an individual carrying on a trade, profession or vocation
- Early trade loss relief: available in the first four years of the trade, profession or vocation
- Post-cessation trade relief
- Property loss relief against general income, including post-cessation property relief
- Employment loss relief for former employees’ deductions for liabilities
- Qualifying loan interest
- Share loss relief of certain qualifying shares
- Losses on deeply discounted securities.
As evidence of long-standing HMRC unhappiness with continued exploitation following the 2007/08 legislation, the February 2010 issue of Spotlight stated: “HM Revenue & Customs are aware of schemes seeking to exploit sideways loss relief by generating trade losses for individuals. Typically, a large loss is generated, either in partnership or alone, by accounting for the arrangement as a trade and either writing down the value of trading stock or claiming deductions or allowances for purported trading expenditure.
“Often these schemes are funded in part by borrowing and may include a mechanism that means repayment is guaranteed. The individuals claim the loss as sideways loss relief against their other tax liabilities. HMRC’s view is that these schemes fail to meet the commercial and other fundamental requirements for sideways loss relief so that no relief is available to the participants.
“In addition to not meeting the fundamental requirements for sideways loss relief, HMRC’s view is that individuals participating in these schemes also do not meet the requirement that at least 10 hours a week are spent personally engaged in commercial activities of the trade carried on with a view to earning profits from those activities.
HMRC’s view is that the activities which these schemes claim are sufficient to meet the test… are not undertaken on a commercial basis with a view to profit with the result that any trade loss would be subject to the sideways loss relief restrictions for non-active traders.
“Whenever arrangements have been entered into to obtain a tax reduction by way of sideways loss relief, HMRC will actively challenge these arrangements and the activities of individual participants and litigate, if necessary.
HMRC will also withhold repayments of tax resulting from claims to sideways loss relief in appropriate cases.”
HMRC seems to have been true to its word. The simple message to advisers who have schemes put to them promising tax outcomes that appear to defy economic reality is: steer well clear.
Tony Wickenden is joint managing director at Technical Connection
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