The Partnerships (Restrictions on Contributions to a Trade) Regulations 2006

Explanatory Note

(This note is not part of the Regulations)

Sections 117, 118ZB and 118ZE of the Income and Corporation Taxes Act 1988 contain restrictions on the extent to which limited partners, members of a limited liability partnership and non-active partners can set off their share of a partnership’s trading losses against their other income or gains (commonly called “sideways loss relief”). Section 79 of the Finance Act 2005 supplements these provisions by giving the Commissioners for Her Majesty’s Revenue and Customs a regulatory power to exclude amounts of any description specified in the regulations when computing the individual’s capital contribution to the trade, in respect of a film-related loss.

These Regulations exclude amounts where, on or after 20 December 2005:

• a relevant partner has disposed of his rights which arise from the trade of the partnership (see Regulation 3(a));

• the rights of the relevant partner to share in the subsequent profits of the partnership are reduced or extinguished, or his share of the losses arising from the trade is increased (see Regulation 3(b));

• a new partner is admitted into the partnership (see Regulation 3(c)); and

• the new partner contributes capital to the partnership (see Regulation 3(d)).

Where these conditions are met:

Regulation 4(a) apportions the capital contributed by the new partner between the relevant partners who were in the partnership immediately before the new partner was admitted to the partnership, according to the profit-sharing arrangements which were in place at that time;

Regulation 4(b) excludes the amount apportioned to the relevant partner under Regulation 4(a) when computing their contribution to the trade (but not to the extent that this gives rise to a contribution which is less than nil) at the time when the latest of the events referred to in Regulation 3 occurs; and

Regulation 4(c) provides for the recalculation of the relevant partner’s contribution to the trade for determining, at the time of that event, whether it is an exit event within the meaning of section 119(2)(b) or (c) of the Finance Act 2004 and the amount chargeable for the purposes of section 119(5) of that Act.

Regulation 1 provides for citation, commencement and effect. The powers to make the retrospective provision made by Regulation 1(2) are conferred by section 122A(3)(a) of the Finance Act 2004.

Regulation 2 provides for interpretation.

Regulation 3 provides for the scope of the Regulations.

Regulation 4 provides for restrictions on computing the amount of an individual’s contribution to the trade where the conditions in Regulation 3 are met.

A Regulatory Impact Assessment has not been produced for these Regulations as they are part of anti-avoidance rules which simply ensure that existing legislation is applied in the way that was intended by Parliament and it is not anticipated that they will affect individuals who are not seeking to exit film partnerships in order to avoid income tax.