Chapter 2: Trade losses
240.This Chapter provides relief for trading losses.
Section 60: Overview of Chapter
241.This section provides an overview of the Chapter. It is new.
242.Subsection (1) lists the various reliefs available for trade losses and certain restrictions on the reliefs.
243.Subsection (2) provides a signpost to Schedule 1B of TMA. Schedule 1B gives rules for the mechanics where there is a claim that relief for losses of one tax year be given against income of an earlier tax year.
244.Subsection (3) provides a signpost to provisions which treat an individual as starting or permanently ceasing to carry on a trade, profession or vocation in certain circumstances. It is based on section 384(4) of ICTA.
245.Subsection (4) introduces a label (“sideways relief”) for the two reliefs that allow trading losses for a tax year to be set against other income arising in the same tax year or an earlier tax year.
Section 61: Non-partners: losses of a tax year
246.This section provides that references to losses made in a tax year means losses made in the basis period for the tax year. It is based on sections 382(3) and 385(1) of ICTA.
Section 62: Partners: losses of a tax year etc
247.This section sets out certain rules that apply if the losses are made by a person who is a partner and provides signposts to the relevant provisions in ITTOIA. It is based on sections 110(1A), 118ZE(5) and (6), 382(3), 385(1) and 389(4) of ICTA.
Section 63: Prohibition against double counting
248.This section ensures relief is only given once for a particular loss or part of a loss. It is based on sections 380(1), 381(3), 385(7), 388(2), 504A(5) of ICTA and section 72(2) of FA 1991.
249.This section does not reproduce the rule in section 382(4) of ICTA that an amount of a loss of a trade, which would otherwise be included in calculations for two successive years, is not to be included in the calculation for the second of those years. That rule is covered by section 206 of ITTOIA, to which section 61(5) provides a signpost.
Section 64: Deduction of losses from general income
250.This section provides for trade loss relief against general income. It is based on section 380(1) of ICTA.
251.“Trade loss relief against general income” is a descriptive label for the relief covered by this section; the words “general income” are not used in Chapter 3 of Part 2 (calculation of income tax liability).
252.The section makes explicit what is only implicit in section 380(1) of ICTA:
in subsection (2), that a claim may be made for both the tax year in which the allowable loss is incurred and the previous tax year;
in subsection (3), what is required in practice to establish how the claim is to apply to each year;
in subsection (4), that, in the case of a claim in respect of one year only, the claim must specify which year; and
in subsection (6), that a claim specifying one year does not prevent a further claim (in respect of an unused part of the loss) which specifies the other.
Section 65: How relief works
253.This section specifies how deductions for the loss are to be made. It is based on section 380(1) and (2) of ICTA.
254.Subsection (1) makes explicit what is only implicit in section 380(1) of ICTA, that:
the whole amount of the loss must be deducted in calculating the claimant’s net income for the specified tax year;
if a claim is made in respect of two tax years, then only so much, if any, of the amount of the loss which it has not been possible to deduct from the claimant’s income for the specified year can be deducted in calculating the claimant’s net income for the other year.
255.This section does not deal with the parts of section 380(1)(a) and (b) of ICTA that limit the amount of the deduction for any tax year to the whole of the claimant’s income for the year, where the income is less than the amount of the loss. That limit is in section 25(4) and (5). Section 25 contains rules about how the reliefs listed in section 24, which include trade loss relief, are to be deducted at Step 2 of section 23 in order to calculate the claimant’s net income.
256.Subsections (2) and (3) provide that if claims are made in respect of trade losses incurred in successive tax years and both claims specify that relief is to be given against income of the same tax year, then the claim in respect of the loss in the earlier year takes priority.
257.Subsection (4) makes it explicit that this rule also operates in relation to the interaction between claims for trade loss relief and claims for employment loss relief.
Section 66: Restriction on relief unless trade is commercial
258.This section denies trade loss relief in relation to trades which are not commercial. It is based on section 384 of ICTA.
259.Subsections (2) and (5) provide that whether the trade is commercial is determined by reference to the basis period for the tax year, rather than by reference to the tax year as in the source legislation. See Change 9 in Annex 1.
260.Subsection (4) provides for the case where the trade is carried on as part of a larger undertaking. In such a case the larger undertaking (that is the undertaking as a whole) may be carried on with a view to the realisation of profits even if the smaller trade is not.
261.In subsection (6), the reference to Act includes references to Acts of the Scottish Parliament and Northern Ireland legislation. See section 1018 and Change 152 in Annex 1.
Section 67: Restriction on relief in case of farming or market gardening
262.This section restricts, in certain cases, the use of losses arising from a trade of farming or market gardening. It is based on section 397(1), (3) to (5) and (8) of ICTA.
263.Subsection (2) sets out the circumstances in which loss relief is restricted. Broadly, this is once losses have arisen for six successive tax years. A signpost to section 70 is included since that section sets out the way in which losses are determined in previous tax years.
Section 68: Reasonable expectation of profit
264.This section sets out the “reasonable expectation of profit” test which, if met, prevents relief being restricted under section 67. It is based on section 397(3) and (5) of ICTA.
Section 69: Whether trade is the same trade
265.This section sets out a number of assumptions to make in determining whether section 67 restricts relief for losses. It is based on section 397(8) and (10) of ICTA.
Section 70: Determining losses in previous tax years
266.This section provides rules for deciding whether a trade of farming or market gardening made losses in earlier tax years. It is based on section 397(7) and (10) of ICTA.
267.Subsection (2) provides that, for earlier tax years, losses are calculated for actual tax years (6 April to following 5 April) rather than (as is normally the case) for the basis period ending in the tax year.
268.The difference in approach (which prevents any manipulation of periods of account directed at side-stepping the restriction) arises from the fact that losses used to be calculated for actual tax years, but following the move to a current year basis of assessment (in FA 1994) the calculation of losses for the main loss relief provisions was changed to mirror the calculation of profits.
269.Subsection (4) adapts rules in section 203 of ITTOIA to deal with cases where profits or losses have not actually been calculated by reference to tax years. In such cases, the calculation of profits or losses for tax years is an arithmetical exercise, involving apportioning (on a time basis) the profits or losses of periods falling partly within the tax year, and combining these with the profits or losses of any periods falling completely within the tax year.
Section 71: Treating trade losses as CGT losses
270.This section is a signpost to a capital gains tax relief. It is new.
271.Capital gains tax relief may be available for a tax year in which there is insufficient income to absorb a claim for trade loss relief against general income. Details of that relief are set out in new sections 261B and 261C of TCGA, inserted by Schedule 1 to this Act.
Section 72: Relief for individuals for losses in first 4 years of trade
272.This section provides relief for losses made in the first four tax years in which an individual carries on a trade. It is based on sections 380(1) and 381(1), (2) and (7) of ICTA.
273.An individual can make a claim for such losses to be deducted in calculating net income for the three tax years which precede the tax year in which the loss is made.
Section 73: How relief works
274.This section sets out the order in which losses, for which a claim is made under section 72, are deducted from income of the three preceding tax years. It is based on section 381(2) of ICTA.
275.The deduction for the loss is made first from income of the earliest of the three tax years referred to in subsection (2) of section 72, with any remaining loss deducted from income of the next tax year and then from income of the third of those tax years. Any remaining loss is available for a different loss relief claim.
Section 74: Restrictions on relief unless trade is commercial etc
276.This section denies early trade loss relief in relation to trades which are not commercial. It is based on section 381(4), (5) and (7) of ICTA.
277.Subsection (2) provides that whether the trade is commercial is determined by reference to the basis period for the tax year, rather than by reference to the tax year as in the source legislation. There is a similar provision in section 66. See Change 9 in Annex 1.
278.Subsection (3) provides for the case where the trade is carried on as part of a larger undertaking. In such a case the larger undertaking (that is the undertaking as a whole) may be carried on with a view to the realisation of profits even if the smaller trade is not.
Section 75: Trade leasing allowances given to individuals
279.This section denies sideways relief in relation to losses derived from trade leasing allowances if the individual carrying on the trade does not meet the time commitment test. It is based on section 384(6) and (7) of ICTA.
280.Subsection (2) defines a “trade leasing allowance”.
281.The time commitment test requires that conditions A and B are met.
282.Subsection (5) sets out condition A. Its reference to “a continuous period of at least 6 months beginning or ending in the basis period for the tax year in which the loss was made” covers cases of a commencement or a cessation of the trade. In such cases the basis period may be shorter than six months.
283.Subsection (6) sets out condition B. Its reference to “a continuous period of at least 6 months beginning or ending in the loss-making basis period” also covers cases of a commencement or a cessation of the trade. In such cases the basis period may be shorter than six months.
284.The section removes an inconsistency in the source legislation between:
the period during which substantially the whole of the individual’s time must be devoted to carrying on the trade;
the period during which the individual must carry on the trade; and
the basis period in respect of which the loss is calculated.
285.The inconsistency arose because of the change from the preceding year basis of assessment to the current year basis of assessment, made by FA 2004. This change resulted in losses being calculated by reference to basis periods ending in a tax year while the time commitment test continued to relate to the tax year itself. This section provides that the time commitment test also relates to the basis period in which the loss is made. See Change 10 in Annex 1.
Section 76: First-year allowances: introduction
286.This section denies sideways relief for any part of the loss that derives from a first-year allowance in the circumstances set out in either section 77 or section 78. It is based on section 384A(1) of ICTA.
Section 77: First-year allowances: partnerships with companies
287.This section sets out the first circumstance in which section 76 may deny sideways relief for part of a loss. It is based on section 384A(2) and (3) of ICTA.
Section 78: First-year allowances: arrangements to reduce tax liabilities
288.This section sets out the second circumstance in which section 76 may deny sideways relief for part of a loss. It is based on section 384A(4) and (5) of ICTA.
Section 79: Capital allowances restrictions: supplementary
289.This section supplements sections 76 to 78. It is based on sections 384(8) and (11) and 384A(6) and (8) of ICTA.
Section 80: Ring fence income
290.This section provides that sideways relief in respect of a trading loss cannot be given against income arising from oil extraction activities or oil rights, unless the loss also arises from such activities or rights. It is based on sections 492(2) and 502(1) of ICTA.
Section 81: Dealings in commodity futures
291.This section denies sideways relief for a loss made by a person in a trade of dealing in commodity futures, where that person carries on the trade in partnership with a company and arrangements have been made to reduce a tax liability by means of sideways relief. It is based on section 399(2), (3) and (5) of ICTA.
Section 82: Exploitation of films
292.This section provides signposts to sections in Chapter 3 of Part 4 that provide for a restriction on loss relief if an individual carries on a trade as a partner in certain types of partnership, and to a section in Chapter 5 of Part 13 (avoidance involving trading losses). It is new.
Section 83: Carry forward against subsequent trade profits
293.This section provides carry-forward relief for trade losses. It is based on section 385(1) of ICTA and section 72(8) of FA 1991.
294.A person who makes a trading loss in a tax year may claim to carry it forward, to the extent that relief has not been given for it under any other provision.
295.The carry-forward trade loss can only be deducted from profits of the trade in which the loss arose. And a carry-forward trade loss must be deducted from the trading profits of a future tax year before those profits can be reduced by way of any other loss relief.
Section 84: How relief works
296.This section sets out the way in which deductions for the carry-forward trade loss are to be made. It is based on section 385(1) of ICTA.
Section 85: Use of trade-related interest and dividends if trade profits insufficient
297.This section provides that certain interest and dividends are treated as trade profits if the profits are otherwise insufficient to use some or all of a carry-forward trade loss. It is based on section 385(4) of ICTA.
298.Interest and dividends are normally taxed separately from trade profits so, in the absence of this provision, a carry-forward trade loss could not be set against such income. But it is only interest and dividends that would otherwise be treated as receipts of the trade that can attract this treatment.
299.The source legislation refers to interest or dividends on investments arising in that year – meaning interest or dividends arising in the year from investments. But as interest and dividends can only arise from investments, the word “investments” has been dropped, just as it was when earlier legislation was consolidated in ICTA for the purposes of terminal loss relief. See the commentary on section 92.
Section 86: Trade transferred to a company
300.This section provides for certain cases in which an individual’s carry-forward trade losses may be used against income that the individual derives from a company to which the trade has been transferred and in which that individual was allotted shares. It is based on section 386(1) and (3) of ICTA.
301.Section 386(2) of ICTA has not been rewritten. See Change 11 in Annex 1.
Section 87: Ring fence trades
302.This section provides that a loss in a tax year derived from oil-related activities can be deducted from the profits of a trade in a future tax year so far as the profits are derived from activities which would be treated as part of the same trade as the oil-related activities but for the ring-fencing rules. It is based on section 492(4) of ICTA.
Section 88: Carry forward of certain interest as loss
303.This section provides for cases where interest paid by an individual in a tax year, and eligible for relief under certain provisions, may be treated as a loss qualifying for carry-forward trade loss relief. It is based on section 390 of ICTA.
304.The interest must be incurred wholly and exclusively for the purpose of a trade, profession or vocation carried on wholly or partly in the United Kingdom and there must be insufficient income for relief to be given under Chapter 1 of Part 8.
Section 89: Carry back of losses on a permanent cessation of a trade
305.This section provides for terminal trade loss relief. It is based on section 388(1) of ICTA.
306.A claim for terminal trade loss relief may be made by a person who permanently ceases to carry on a trade if the person makes a loss in the trade in the final tax year or in the previous tax year. But only that part of a loss from the previous tax year that falls within a period starting 12 months before the cessation is available for this purpose.
307.If a claim is made the full amount of the terminal losses, or as much of them as possible, must be used to reduce the trading profits of the final tax year and the three previous tax years.
308.Subsection (3) omits the concept, in section 388(1) of ICTA, of the trading profits having been “charged” to income tax. See Change 12 in Annex 1.
309.Section 388(5) of ICTA, which is concerned with the interaction between terminal loss relief and charges on income, is not rewritten. This is linked to the approach adopted by this Act to the rules in ICTA about charges on income. The Act gives relief for the payments concerned as a deduction in computing net income, and repeals section 387 of ICTA and section 51 of ITTOIA. See Change 81 in Annex 1.
Section 90: Losses that are “terminal losses”
310.This section sets out how terminal losses are to be calculated. It is based on section 388(6) of ICTA.
311.The relievable loss is calculated by adding (a) any loss in the final tax year to (b) any loss in the part of the previous tax year falling within 12 months of the date of cessation. Each of these losses is called a terminal loss. If a profit arises in either of the periods, it is ignored.
312.Subsections (2) to (4) provide that profits or losses for each of these terminal loss periods are calculated by allocating profits or losses of periods of account to them. Subsection (5) makes it explicit how any deduction allowed for overlap profit arising under section 205 of ITTOIA is taken into account. Subsection (6) makes explicit provision in relation to partnerships. See Change 12 in Annex 1.
Section 91: How relief works
313.This section sets out the way in which terminal trade loss relief is given. It is based on section 388(3) of ICTA.
Section 92: Use of trade-related interest and dividends if trade profits insufficient
314.This section provides that certain interest and dividends are treated as trade profits if the profits are otherwise insufficient to use some or all of a terminal trade loss. It is based on section 388(4) of ICTA.
315.Interest and dividends are normally taxed separately from trade profits so, in the absence of this provision, a terminal trade loss could not be set against such income. But it is only interest and dividends that would otherwise be treated as receipts of the trade that can attract this treatment.
316.The provisions on which the source legislation is based referred to interest or dividends on investments arising in that year, meaning interest or dividends arising in the year from investments. But as interest and dividends can only arise from investments, the word “investments” was dropped when earlier legislation was consolidated in ICTA.
Section 93: Mineral extraction trade and carry back of balancing allowances
317.This section provides that a terminal trade loss relief claim takes precedence over a claim for balancing allowances in circumstances in which both are claimed on the cessation of a mineral extraction trade. It is based on section 389(2) of ICTA.
Section 94: Carry back of certain interest as loss
318.This section provides that where an individual has paid interest in a tax year which is eligible for relief, but is unable to utilise the deduction in full, the amount remaining may be treated for the purposes of terminal trade loss relief as a trade loss made at the date of payment, provided the interest is incurred wholly and exclusively for the purposes of a trade carried on wholly or partly in the United Kingdom. It is based on section 390 of ICTA.
Section 95: Foreign trades etc: reliefs only against foreign income
319.This section provides that losses arising from trades carried on wholly outside the United Kingdom can only be used to reduce profits from certain categories of foreign income, depending on the type of relief being claimed. It is based on section 391 of ICTA.
320.Subsection (2)(c) makes it explicit that losses arising from trades carried on wholly outside the United Kingdom are not available for use for capital gains tax purposes. See Change 13 in Annex 1.
Section 96: Post-cessation trade relief
321.This section provides relief for certain payments made, or certain losses on debts made, after a trade has ceased (and for which relief would not otherwise be available). It is based on section 109A(1) and section 110(1A) and (1B) of ICTA.
322.A claim for post-cessation trade relief is possible if a person ceases carrying on a trade and within seven years makes a qualifying payment (see section 97) or a qualifying event occurs in relation to a debt of the trade owed to the person (see section 98).
Section 97: Meaning of “qualifying payment”
323.This section sets out the meaning of qualifying payment. It is based on section 109A(2) of ICTA.
Section 98: Meaning of “qualifying event” etc
324.This section sets out the meaning of a qualifying event occurring in relation to a debt owed to the person concerned and the amount that may be relievable in relation to such an event. It is based on section 109A(4) and (4A) of ICTA.
325.The source legislation treated the release of a debt or the occasion of a debt proving to be bad as if it were a payment which qualified as post-cessation expenditure. These sections are structured so that such deeming is not needed.
326.Subsection (2)(c) refers to a debt being released as part of a statutory insolvency arrangement. This term is defined by reference to section 259 of ITTOIA. The source legislation used the term “relevant scheme or arrangement”. See Change 14 in Annex 1.
Section 99: Reduction of relief for unpaid trade expenses
327.This section reduces post-cessation trade relief by reference to expenses claimed as a deduction in computing trading profits, but which were unpaid at the time that the trade ceased. It is based on section 109A(5) of ICTA.
328.The section provides that post-cessation trade relief is reduced by the amount of the expenses that are still unpaid at the end of the tax year in question, but that the reduction shall not include any amount taken into account as a reduction in a previous tax year. And it adds that any such expenses paid subsequently are to be treated as a qualifying payment.
Section 100: Prohibition against double counting
329.This section prevents a person from claiming post-cessation trade relief for an amount for which relief is given or available under other provisions of the Income Tax Acts. It is based on section 109A(6) of ICTA.
Section 101: Treating excess post-cessation trade relief as CGT loss
330.This section is a signpost to a capital gains tax relief that may be available where there is insufficient income to absorb an amount claimed by way of post-cessation trade relief. It is new.