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The Partnerships (Restrictions on Contributions to a Trade) Regulations 2005

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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”). The restrictions are (broadly) that losses are restricted to the individual’s capital contribution to the relevant trade. Section 119 of the Finance At 2004 imposes a charge to income tax where an individual has claimed film related losses in excess of his capital contribution to the trade. Sections 73 and 79 of the Finance Act 2005 supplement these provisions by giving the Commissioners of Inland Revenue a regulatory power to exclude amounts of any description specified in the regulations when computing the individual’s capital contribution to the trade.

These Regulations exclude amounts in two situations.

The first is where the individual takes out a loan to finance a contribution to a trade, and the loan is on limited or non-recourse terms, or in the event, the cost of repaying the loan is borne, assumed or released by someone else (see Conditions 1 to 3 in regulation 4). There is a backup test whether the individual’s loan repayment costs over any period of 5 years are less than they would be on arm’s length commercial terms (see Condition 4 in regulation 4).

The second is where arrangements are made so that the financial cost to the individual of making a contribution to a trade can be reimbursed by someone else (see regulation 5).

Regulation 1 provides for citation, commencement and effect. The powers to make the retrospective provision made by Regulation 1(2) are conferred by section 118ZN(3)(a) of the Income and Corporation Taxes Act 1988 and 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 a trade in the case where a loan is taken out to finance the whole or part of that contribution.

Regulation 5 provides for restrictions on computing the amount of an individual’s contribution to a trade, where the financial cost of making that contribution is reimbursed (or agreed to be reimbursed) by someone else.

Regulation 6 provides for exemptions from the rules in regulations 4 and 5. These exemptions are where financial costs are met by another person in the normal course of personal relationships, where an individual becomes unable to pay them, or where the costs borne by another person are taxed as income of the individual.

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 those individuals that make genuine business losses.

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