An exit event occurs when an individual’s capital
contribution to the trade becomes less than the sideways loss
relief claimed by the individual, or when the excess of loss relief
claimed over the capital contribution increases (see
BIM56615). Putting it more simply, this
is just saying that the individual has claimed more loss relief
than he has actually lost – and thereby has an unfair tax
advantage.
An individual’s capital contribution to the trade is
defined as the amount that the individual has contributed to the
trade as capital, less any amount:
For a member of a limited liability partnership the amount
contributed to the trade as capital is read as the amount of
capital he subscribes to the limited liability partnership.
Drawing out and receiving back refer to obtaining amounts
back from the trade or partnership (drawing out is active, the
individual himself draws out; receiving back is passive, the
individual receives capital back).
Reimbursement by any person can include reimbursement by the
partnership of which a partner is a member, or from another
partner. For the avoidance of doubt the legislation also makes it
clear that reimbursement includes reimbursement effected by
discharging or assuming all or part of a liability of the
individual. This puts it beyond doubt that reimbursement includes
someone else meeting an individual’s liability under a loan
taken out to invest capital in the trade – film tax deferral
schemes normally include such a loan (see
BIM56455).
Some partnership schemes were devised where the
partner’s capital contribution was artificially inflated with
amounts for which the partner was not personally at risk (see
BIM56545): for example, where the loan
was limited liability or not repayable by the partner. It might be
argued that there is no reimbursement to an individual because it
was not his liability in the first place. We do not accept that
those schemes work, but, to put the matter beyond doubt,
legislation was included in FA05/S79 which added further
restrictions on the amounts which can be treated as a
partner’s capital contribution to the trade. These
restrictions are described at
BIM56635.
In a film sale and lease back scheme, accountancy normally
treats the finance lease rentals as equivalent to payments of
interest and repayments of capital on a loan (
BIM56410). Therefore, when these amounts
are withdrawn by the partners, this is likely to be shown as
withdrawals of a partner’s capital contribution. However, for
tax purposes these amounts are fully taxable as income. To prevent
unfair application of these rules, the legislation makes it clear
that any amount which is chargeable to IT on the individual as
profits of the trade should not be treated as a sum drawn out or
received back by the individual.
It is possible that some amounts received by individuals,
including liabilities reassigned (for example, an investor’s
loan), could be regarded either as consideration received (see
BIM56615) for a disposal of rights to profits from the trade, or as
a reimbursement of a capital contribution. Indeed, by defining an
exit event in terms of consideration received and in relation to
the capital contribution, the legislation was designed to ensure
that any exit would be caught under one or other of these.
To prevent a double charge, any amount of non-taxable
consideration which is included in computing the chargeable amount
cannot also be included in calculating a reduction in an
individual’s capital contribution to the trade.
