Section 24 Schedule 3: Sideways Relief Etc
Summary
1.Section 24 and Schedule 3 provide changes to the rules for “sideways loss relief” claimable by a person who makes a loss in a trade, profession or vocation. These rules are designed to prevent tax-generated losses from being offset against the person’s other taxable income or capital gains. These changes were announced on 21 October 2009 and will apply on and after that date.
Details of the Schedule
2.Paragraph 2 adds a reference to “capital gains relief” in section 60(1)(c) of the Income Tax Act 2007 (ITA) in the overview of Chapter 2.
3.Paragraphs 3 and 4 make consequential amendments in sections 64(8) and 72(5) of ITA respectively relating to the introduction of new section 74ZA of ITA and the repeal of section 81 of ITA.
4.Paragraph 5 inserts new section 74ZA (No relief for tax-generated losses).
5.New section 74ZA(1) provides that this section applies if a person makes a loss in a tax year from carrying on a trade, profession or vocation, either in a sole capacity or as a partner, and that loss arises directly or indirectly in consequence of, or otherwise in connection with, relevant tax avoidance arrangements (as defined in new section 74ZA(3)).
6.Section 74ZA(2) provides that no sideways relief or capital gains relief may be given to the person for the loss within section 74ZA(1). This restriction is subject to section 74ZA(5).
7.Section 74ZA(3) defines “relevant tax avoidance arrangements” for the purposes of section 74ZA(1).
8.Section 74ZA(4) defines “arrangements” for the purposes of section 74ZA(3).
9.Section 74ZA(5) provides an exception where a loss derives wholly from qualifying film expenditure defined in section 74D of ITA.
10.Section 74ZA(6) defines capital gains relief for the purpose of this section. The definition of sideways relief is in section 60(4) of ITA.
11.Paragraph 6 repeals section 74B of ITA.
12.Paragraphs 7 and 8 make consequential amendments to sections 74C and 74D of ITA relating to the repeal of section 74B of ITA.
13.Paragraph 9 repeals section 81 of ITA.
14.Paragraph 10 makes consequential amendments to Schedule 6 to the Finance Act 2009 relating to the introduction of new section 74ZA of ITA and the repeal of section 81 of ITA.
15.Paragraph 11 provides commencement rules.
Background Note
16.A person who makes a loss in a trade, profession or vocation may claim for the loss to be offset against their other income and capital gains. This is commonly known as “sideways loss relief”.
17.Despite previous legislative action to deter those who seek to misuse the sideways loss relief rules, the Government has continued to see evidence of avoidance activity that relies on the creation of contrived losses for use as sideways loss relief. This puts at risk substantial sums of tax.
18.The Financial Secretary to the Treasury (Stephen Timms) announced in a written statement on 21 October 2009 that legislation would be introduced with effect from that date to prevent sideways loss relief being given where the loss arises from arrangements and a main purpose of the arrangements is to obtain a tax reduction by means of sideways loss relief.