Income Tax Act 2007 (c. 3)

(The document as of February, 2008)

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(4) Otherwise a tax year is a relevant one if--

(a) the individual is the beneficial owner of the shares allotted as mentioned above, and

(b) the company carries on the trade,

throughout the tax year.

(5) The income derived from the company may be by way of dividends on the shares or otherwise.

(6) This section applies to businesses which are not trades as it applies to trades.

87 Ring fence trades

(1) This section applies if--

(a) a person makes a loss in a tax year carrying on oil-related activities (within the meaning of section 16 of ITTOIA 2005),

(b) those activities are treated under that section as a separate trade for the tax year or a subsequent tax year,

(d) the other activities and the oil-related activities would, but for that section, together form a single trade.

(2) For the purposes of carry-forward trade loss relief for the loss, the person may treat profits from the other activities in a subsequent tax year as if they were profits of the separate trade (despite section 16 of ITTOIA 2005).

88 Carry forward of certain interest as loss

(1) This section applies if--

(a) an individual pays interest in a tax year which is eligible for relief under section 383 (as a result of section 388 or 398),

(b) the interest is an expense incurred wholly and exclusively for the purposes of a trade carried on wholly or partly in the United Kingdom, and

(c) relief under section 383 cannot be fully given in respect of the interest because there is no income or insufficient income in the tax year.

(2) For the purposes of carry-forward trade loss relief, the amount for which relief has not been given may be carried forward to subsequent tax years as if it were a loss made in the trade.

(3) This section applies to professions and vocations as it applies to trades.

Terminal trade loss relief

89 Carry back of losses on a permanent cessation of a trade

(1) A person may make a claim for terminal trade loss relief if the person--

(a) permanently ceases to carry on a trade in a tax year ("the final tax year"), and

(b) makes a terminal loss in the trade (see section 90).

(2) The claim is for the total amount of terminal losses made in the trade by the person ("the relievable loss") to be deducted in calculating the person's net income for the final tax year and the 3 previous tax years (see Step 2 of the calculation in section 23).

(3) But a deduction for that purpose is to be made only from profits of the trade.

(4) This section applies to professions and vocations as it applies to trades (and sections 90 and 91 are to be read accordingly).

(5) This section needs to be read with--

(a) section 91 (how relief works),

(b) section 92 (use of trade-related interest and dividends if trade profits insufficient),

(d) section 94 (carry back of certain interest as loss).

90 Losses that are "terminal losses"

(1) Each of the following is a terminal loss made in the trade--

(a) the loss (if any) made in the trade in the period beginning with the start of the final tax year and ending with the cessation, and

(b) the loss (if any) made in the trade in the period consisting of so much of the previous tax year as falls in the 12 months prior to the cessation.

(2) The profit or loss of a period mentioned in subsection (1)(a) or (b) (a "terminal loss period") is determined by reference to the profits or losses of periods of account of the trade (calculated for income tax purposes).

(3) If no period of account coincides with a terminal loss period, any of the following steps may be taken if they are necessary in order to arrive at the profit or loss of the terminal loss period--

(a) apportioning the profit or loss of a period of account between the part of the period that falls in the terminal loss period and the part that does not, and

(b) adding the profit or loss of a period of account (or part of a period) to profits or losses of other periods of account (or parts).

(4) Section 203(3) and (4) of ITTOIA 2005 applies for the purposes of subsection (3) as it applies for the purposes of section 203(2) of that Act.

(5) If as a result of section 205 of ITTOIA 2005 a deduction is allowed for overlap profit in calculating the profits of the trade of the final tax year, that deduction is to be made in calculating the loss (if any) mentioned in subsection (1)(a) (and is therefore irrelevant for the purposes of subsection (1)(b)).

(6) In the case of a notional trade carried on by a partner in a firm--

(a) the periods of account of the notional trade are taken to be the periods of account of the actual trade, and

(b) the references in subsections (2) and (3) to the profits or losses of periods of account of the trade are to the partner's share of the profits or losses of the actual trade determined in accordance with sections 849 and 850 of ITTOIA 2005.

91 How relief works

This section explains how the deductions are to be made.

The amount of the relievable loss to be deducted at any step is limited in accordance with section 25(4) and (5).

Step 1

Deduct the relievable loss from the profits of the trade of the final tax year.

Step 2

Deduct any part of the relievable loss not deducted at Step 1 from the profits of the trade of the previous tax year.

Step 3

Deduct any part of the relievable loss not deducted at Step 1 or 2 from the profits of the trade of the tax year before the previous one.

Step 4

Deduct any part of the relievable loss not deducted at Step 1, 2 or 3 from the profits of the trade of the tax year before that one.

Other claims

If the relievable loss has not been deducted in full at Steps 1 to 4, the person may use the part not so deducted in giving effect to any other relief under this Chapter (depending on the terms of the relief).

92 Use of trade-related interest and dividends if trade profits insufficient

(1) This section applies if terminal trade loss relief cannot be fully given in relation to the profits of a trade of a tax year because (apart from this section) there are no profits, or insufficient profits, of the trade of the tax year.

(2) For the purposes of the relief any interest or dividends for the tax year that relate to the trade are treated as profits of the trade of the tax year.

(3) Interest or dividends for the tax year relate to the trade if they--

(a) arise in the tax year, and

(b) would be brought into account in calculating the profits of the trade but for the fact that they have been subjected to tax under other provisions of the Income Tax Acts.

93 Mineral extraction trade and carry back of balancing allowances

(1) This section applies if--

(a) a person permanently ceases to carry on a mineral extraction trade, and

(b) the person makes a claim for terminal trade loss relief and a claim in respect of a balancing allowance under section 355 of CAA 2001.

(2) Terminal trade loss relief must be given before relief under section 355 of CAA 2001.

(3) In giving effect to the terminal trade loss relief, the balancing allowance is to be ignored.

(4) "Mineral extraction trade" has the same meaning as in Part 5 of CAA 2001 (see section 394 of that Act).

94 Carry back of certain interest as loss

(1) This section applies if--

(a) an individual pays interest in a tax year which is eligible for relief under section 383 (as a result of section 388 or 398),

(b) the interest is an expense incurred wholly and exclusively for the purposes of a trade carried on wholly or partly in the United Kingdom, and

(c) relief under section 383 cannot be fully given in respect of the interest because there is no income or insufficient income in the tax year.

(2) For the purposes of terminal trade loss relief, the amount for which relief has not been given may be treated as a loss made in the trade at the date of payment.

(3) This section applies to professions and vocations as it applies to trades.

Wholly foreign trades

95 Foreign trades etc: reliefs only against foreign income

(1) This section applies if a person--

(a) carries on a trade, profession or vocation wholly outside the United Kingdom, and

(b) makes a loss in the trade, profession or vocation.

(2) In that case--

(a) sideways relief for the loss is available only against the person's qualifying foreign income,

(b) trade income relief for the loss is available only against the person's qualifying foreign trade income, and

(3) "Trade income relief" means--

(a) carry-forward trade loss relief, or

(b) terminal trade loss relief.

(4) "Qualifying foreign income" means--

(a) qualifying foreign trade income, or

(b) income falling within section 23, 355, 575, 613, 615, 631 or 635 of ITEPA 2003 (foreign employment or pension income).

(5) "Qualifying foreign trade income" means the profits of any trade, profession or vocation carried on wholly outside the United Kingdom.

(6) But "qualifying foreign income" and "qualifying foreign trade income" do not include any income which is charged to income tax in accordance with section 832 of ITTOIA 2005 (relevant foreign income charged on the remittance basis).

Post-cessation trade relief

96 Post-cessation trade relief

(1) A person may make a claim for post-cessation trade relief if, after permanently ceasing to carry on a trade--

(a) the person makes a qualifying payment, or

(b) a qualifying event occurs in relation to a debt owed to the person,

and the payment is made, or the event occurs, within 7 years of that cessation.

(2) If the claim is made in respect of a payment, the claim is for the payment to be deducted in calculating the person's net income for the tax year in which the payment is made (see Step 2 of the calculation in section 23).

(3) If the claim is made in respect of an event, the claim is for the appropriate amount of the debt to be deducted in calculating the person's net income for the relevant tax year (see Step 2 of the calculation in section 23).

(4) The claim must be made on or before the first anniversary of the normal self-assessment filing date for the tax year for which the deduction is to be made.

(5) If--

(a) the person is a company within the charge to income tax under Chapter 2 of Part 2 of ITTOIA 2005 in respect of a trade, and

(b) the company ceases at any time to be within that tax charge in respect of the trade,

the company is treated for the purposes of this section as permanently ceasing to carry on the trade at that time.

(6) This section applies to professions and vocations as it applies to trades (and sections 97 and 98 are to be read accordingly).

(7) This section needs to be read with--

(a) section 97 (meaning of "qualifying payment"),

(b) section 98 (meaning of "qualifying event" etc),

(d) section 100 (prohibition against double counting).

97 Meaning of "qualifying payment"

(1) For the purposes of section 96 a person makes a "qualifying payment" after permanently ceasing to carry on a trade if the person makes a payment wholly and exclusively for any of purposes A to D.

(2) A payment is made for purpose A if it is made--

(a) in remedying defective work done, goods supplied or services provided in the course of the trade, or

(b) by way of damages (whether awarded or agreed) in respect of defective work done, goods supplied or services provided in the course of the trade.

(3) A payment is made for purpose B if it is made in meeting the expenses of legal or other professional services in connection with a claim (a "claim about defects") that--

(a) work done in the course of the trade was defective,

(b) goods supplied in the course of the trade were defective, or

(4) A payment is made for purpose C if it is made in insuring--

(a) against liabilities arising out of any claim about defects, or

(b) against the liability to meet the expenses of legal or other professional services in connection with any claim about defects.

(5) A payment is made for purpose D if it is made for the purpose of collecting a debt which was brought into account in calculating the profits of the trade.

98 Meaning of "qualifying event" etc

(1) This section explains for the purposes of section 96 what is meant by--

(a) a "qualifying event" occurring in relation to a debt owed to a person who has permanently ceased to carry on a trade, and

(b) "the appropriate amount of the debt" to be deducted in calculating a person's net income for "the relevant tax year".

(2) A qualifying event occurs in relation to a debt owed to the person if--

(a) an unpaid debt was brought into account in calculating the profits of the trade,

(b) the person is entitled to the benefit of the debt, and

(c) the debt is released (in whole or in part) as part of a statutory insolvency arrangement (within the meaning of Part 2 of ITTOIA 2005).

The event occurs when the debt is released.

(3) The appropriate amount of the debt to be deducted is--

(a) the amount released, or

(b) if the person was entitled to only part of the benefit of the debt, the corresponding part of the amount released.

(4) The relevant tax year is the tax year in which the debt is released.

(5) A qualifying event also occurs in relation to a debt owed to the person if--

(a) an unpaid debt was brought into account in calculating the profits of the trade,

(b) the person is entitled to the benefit of the debt, and

The event occurs when the debt proves to be bad.

(6) The appropriate amount of the debt to be deducted is--

(a) the amount of the debt, or

(b) if the person was entitled to only part of the benefit of the debt, the corresponding part of the amount of the debt.

(7) The relevant tax year is the tax year specified in the claim.

(8) The person making the claim may specify--

(a) the tax year in which the debt proves to be bad, or

(b) a subsequent tax year throughout which the debt remains bad (so long as the tax year begins within 7 years of the cessation),

but, if the person has previously made a claim specifying a tax year in respect of the debt, the person may not specify another tax year in respect of it.

99 Reduction of relief for unpaid trade expenses

(1) This section applies for the purposes of post-cessation trade relief in respect of a person's trade if a deduction was made in calculating the profits of the trade for an expense not actually paid (an "unpaid expense").

(2) The amount of the person's relief for a tax year is reduced (but not below nil) by--

(a) the total amount of unpaid expenses at the end of the tax year, or

(b) if the person carried on the trade as a partner in a firm, the person's share of the total amount of unpaid expenses at the end of the tax year.

(3) But any unpaid expense which is taken into account in reducing the amount of the person's relief for a tax year is left out of account in making reductions for subsequent tax years.

(4) If the person actually pays an amount in respect of an unpaid expense taken into account in reducing the amount of the person's relief, the person is treated as making a qualifying payment for the purposes of section 96.

(5) The amount of the qualifying payment is--

(a) the amount actually paid, or

(b) if less, the amount of the reduction.

(6) This section applies to professions and vocations as it applies to trades.

100 Prohibition against double counting

(1) Post-cessation trade relief is not available for an amount for which relief is given, or is available, under any other provision of the Income Tax Acts.

(2) For this purpose--

(a) relief available under section 254 of ITTOIA 2005 (allowable deductions against post-cessation receipts) is treated as given for other amounts before any amount for which post-cessation trade relief is available, and

(b) relief under that section is treated as available if it would have been available but for the fact that the post-cessation receipts (against which the deductions would have been allowed) are exempt under section 524 of this Act.

101 Treating excess post-cessation trade relief as CGT loss

A person who cannot deduct all of an amount under a claim for post-cessation trade relief may be able to treat the unused part as an allowable loss for capital gains tax purposes: see sections 261D and 261E of TCGA 1992.

Chapter 3 Restrictions on trade loss relief for certain partners

Introduction

102 Overview of Chapter

(1) This Chapter restricts the amount of relief that may be given for any loss made by an individual in a trade carried on by the individual as--

(a) a limited partner in any tax year (see sections 104 to 106 and section 114),

(b) a member of a limited liability partnership (an "LLP") in any tax year (see sections 107 to 109 and section 114), or

(2) This Chapter also restricts the amount of relief that may be given for any loss made by an individual in a trade carried on by the individual as a partner in a firm if the trade consists of or includes the exploitation of films (see sections 115 and 116).

(3) This Chapter needs to be read with sections 791 to 795 (income tax charge recovering excess relief for losses made by individuals carrying on a trade in partnership).

(4) See also--

(a) sections 796 to 803 (income tax charge in relation to individuals claiming relief for film-related trading losses), and

(b) sections 804 to 809 (income tax charge in relation to individuals carrying on a trade in partnership claiming relief for licence-related trading losses).

103 Meaning of "sideways relief", "capital gains relief" and "firm"

(1) For the purposes of this Chapter sideways relief is--

(a) trade loss relief against general income (see sections 64 to 70), or

(b) early trade losses relief (see sections 72 to 74).

(2) For the purposes of this Chapter--

(a) capital gains relief is, in relation to a loss, the treatment of the 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.

(3) References in this Chapter to a firm are to be read in the same way as references to a firm in Part 9 of ITTOIA 2005 (which contains special provision about partnerships).

Limited partners

104 Restriction on reliefs for limited partners

(1) This section applies if--

(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.

(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--

(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).

(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 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.

(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

(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.

(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.

(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

(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 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.

(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 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 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"

(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

(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

(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,

(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.

(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

107 Restriction on reliefs for members of LLPs

(1) This section applies if--

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