Over the past few weeks I have looked at a brief history of the relatively recent attempts at limiting the use of sideways loss relief for partners. The first action was to limit relief to those actively involved in the business in which the loss was sustained. “Active” for this purpose means, broadly, 10 hours a week or more spent by the partner in active engagement in the trade of the partnership. In addition, for losses sustained by non-active partners on or after 2 March 2007 (whether in an early year of trading or in a later year) a £25,000 annual limit for sideways loss relief also applies.
The next action was aimed at preventing the use of tax-generated losses arising from relevant tax avoidance arrangements entered into on or after 21 October 2009. This restriction was introduced in the Finance Act 2010. This anti-avoidance provision means capital contributions made by a partner on or after 21 October 2009 could not qualify for sideways loss relief if the main purpose, or one of the main purposes, for the contributions to the partnership is for the partner to reduce their tax liability through sideways loss relief (ITA 2007 74ZA).
Film-related trades were excluded from this requirement restriction. So the key component in an effective “sideways loss-using” scheme would seem to be that the business was a qualifying film-related business and that the claimants were actively engaged in the business in which the claimed loss was generated for at least 10 hours per week.
Avoid the anti-avoidance provisions and there would be no limitation of sideways loss relief. Some of the most recently publicised schemes in relation to film and music attempted to use this provision.
So were the schemes successful? The next round of cases to hit the judicial system will tell us and, of course, we have the cap on relief (active members or not) and the GAAR to deal with too in the future.
HMRC continues to be unhappy with developments and continued exploitation following the 2007/8 legislation. In the February 2010 issue of Spotlight it stated:
“HM Revenue & Customs (HMRC) 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, for example reading scripts or medical journals, watching TV or DVDs etc, 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.
“For arrangements made on or after 21 October 2009 a general restriction will also apply preventing sideways loss relief for a loss arising to a person from a trade, profession or vocation where a main purpose of the arrangements is to obtain a reduction in tax liability.
“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”.
Then in June 2011 HMRC issued a consultative document, “High risk areas of the tax code, relief for income tax losses”. I will look at this next week.
Tony Wickenden is joint managing director of Technical Connection
Access full CPD, technical updates and business generation ideas through Techlink Professional. Go to www.techlink.co.uk and click theContact Us link at the top of the screen and then request your free trial from the drop down menu.