Income Tax Act 2007

Individuals in partnership: recovery of excess relief

791 Charge to tax on income treated as received under section 792

(1) Income tax is charged on income treated as received by an individual under section 792.

(2) Tax is charged under this section on the amount of the income treated as received in the tax year.

(3) The person liable for any tax charged under this section is the individual treated as receiving the income.

792 Partners claiming excess sideways or capital gains relief

(1) This section applies if—

(a) an individual carrying on a trade (“the relevant trade”) as a partner in a firm makes post-1 December 2004 losses in the relevant trade for which the individual claims relief within subsection (2),

(b) any of sections 104, 107 and 110 applies in relation to the relief (whether or not any of those sections restricts the amount of the relief), and

(c) after the individual makes the claim or claims, a chargeable event occurs.

(2) The relief within this subsection is—

(a) sideways relief but only if the whole or part of the relief is claimed against income of the individual apart from profits of the relevant trade, and

(b) capital gains relief.

(3) A chargeable event occurs whenever—

(a) the amount of the individual’s contribution to the firm is reduced as a result of the application of regulations made under section 114, and

(b) that reduction in the individual’s contribution to the firm immediately results in—

(i) the total amount of trade losses claimed (less any reclaimed relief) becoming greater than the contribution, or

(ii) an increase in the amount by which the total amount of trade losses claimed (less any reclaimed relief) exceeds the contribution.

(4) The individual is treated as receiving an amount of income every time a chargeable event occurs.

The income is treated as arising otherwise than as profits of a trade.

(5) The amount of the income is calculated in accordance with section 793.

(6) If—

(a) the firm is carrying on, or has carried on, more than one trade, and

(b) subsection (1)(a) and (b) applies in relation to losses made by the individual in one or more of those trades as a partner in the firm,

the firm’s trades are taken together for the purpose of determining whether a chargeable event occurs at any time after a claim in relation to any of those losses has been made and, if one does occur, the amount of income treated as received by the individual at that time.

See section 794(6) for modifications giving effect to this.

(7) References in this section to an individual being a partner in a firm include a reference to an individual being a limited partner within the meaning of section 106 as a result of subsection (1)(c) of that section.

(8) And, accordingly, in the case of an individual who is such a limited partner, in this section and in sections 793 to 795 references to the individual’s firm are references to the relationship between the individual and the other persons mentioned in section 106(3)(a).

793 Calculating the amount of income treated as received

(1) The amount of income treated as received by the individual under section 792 when the chargeable event occurs is the lowest of amounts A to C.

(2) Amount A is the amount by which the individual’s contribution to the firm is reduced as a result of the application of regulations made under section 114.

(3) Amount B is the amount given by—

(a) taking, at the time immediately after the chargeable event occurs, the total amount of trade losses claimed that are post-1 December 2004 losses, and

(b) reducing that amount (but not below nil) by any reclaimed relief.

(4) Amount C is the amount given by—

(a) taking the amount by which, at the time immediately after the chargeable event occurs, the total amount of trade losses claimed exceeds the individual’s contribution to the firm, and

(b) reducing that amount (but not below nil) by any reclaimed relief.

794 Meaning of “the total amount of trade losses claimed” etc

(1) In sections 792 and 793 “the total amount of trade losses claimed” means the total amount of losses within subsection (2) for which the individual has claimed sideways relief or capital gains relief.

(2) The losses within this subsection are losses made by the individual in the relevant trade—

(a) in a tax year at a time during which the individual carries on the relevant trade as a limited partner or as a member of an LLP, or

(b) in an early tax year during which the individual carries on the relevant trade as a non-active partner.

Expressions used in this subsection are to be read as if contained in Chapter 3 of Part 4.

(3) In sections 792 and 793 “reclaimed relief” means the total amount of income treated as received by the individual under section 792 as a result of that section being previously applied in relation to claims for relief for losses made by the individual in the relevant trade.

(4) In sections 792 and 793 “the individual’s contribution to the firm” at any time means the individual’s contribution to the firm or the LLP (as the case may be) at that time as calculated for the purposes of the relevant restriction provision.

(5) The “relevant restriction provision” means—

(a) whichever of sections 104, 107 and 110 applied as mentioned in section 792(1)(b), or

(b) if more than one of those sections applied as mentioned in section 792(1)(b), the section which so applied to the amount of relief which could be given for the loss most recently made by the individual in the relevant trade.

(6) In a case to which section 792(6) applies, for the purpose of determining the total amount of trade losses claimed, the amount of the reclaimed relief and the relevant restriction provision—

(a) apply subsections (1) and (2) in relation to each of the trades that the firm is carrying on, or has carried on, and then add the results together, and

(b) apply subsections (3) and (5)(b) as if references to the relevant trade were references to any of the trades that the firm is carrying on, or has carried on.

But if a trade is of the kind mentioned in section 110(8), do not apply subsection (2)(b) in relation to it.

795 Meaning of “post-1 December 2004 loss”

(1) For the purposes of sections 792 and 793 a “post-1 December 2004 loss” means—

(a) any loss made by an individual in a trade in a tax year the basis period for which begins on or after 2 December 2004, or

(b) the post-1 December 2004 part of any loss made by an individual in a trade in a tax year the basis period for which includes 2 December 2004 (but begins before that date).

(2) The “post-1 December 2004 part” of any loss made by an individual in a trade means the individual’s share of any losses made by the relevant firm in the trade in the period—

(a) beginning with 2 December 2004, and

(b) ending with the end of the basis period for the tax year concerned.

(3) For this purpose “the relevant firm” means the firm in which the individual carried on the trade, and—

(a) the losses of that firm are calculated as if that period were one for which profits and losses had to be calculated for the purposes of section 849 of ITTOIA 2005 (calculation of firm’s profits or losses), and

(b) the individual’s share of the losses is determined in accordance with the individual’s interest in the firm during that period.

(4) In this section “basis period”, in relation to an individual with a notional trade, means the basis period for the notional trade (within the meaning of Part 9 of ITTOIA 2005).