BIM75765 - Losses - restriction of relief: Trade losses - non-active traders - overview
FA2008 introduced ITA07/S74A and S74B. These anti-avoidance measures which largely mirror the non active partner restrictions introduced in FA2007, restrict the extent to which losses made by individuals in a trade carried on in a non-active capacity can be set off against their income or capital gains.
ITA07/S74A imposes an annual limit of £25,000 on the amount of losses for which sideways loss relief can be given. This restriction has effect for losses made on or after 12 March 2008, see BIM75766.
ITA07/S74B provides that no sideways loss relief may be given for tax generated losses. This section applies to non-active sole trader losses arising from relevant tax avoidance arrangements made on or after 12 March 2008 but before 21 October 2009, see BIM75769.
A loss arising from relevant tax avoidance arrangements entered into on or after 21 October 2009 is subject to the prohibition on sideways loss relief for tax-generated losses introduced in FA2010, see BIM75761-BIM75762.
In applying the FA 2008 provisions, first consider whether the losses are post 11 March 2008 tax generated losses (for which no sideways loss relief is allowed). If not, then consider whether the £25,000 limit applies.
Affected losses
The FA2008 provisions restrict relief for losses made in a trade carried on by an individual, otherwise than as a partner in a firm, in a non-active capacity. For information on non-active partner restrictions see BIM72640 - BIM72650.
Exceptions
The restrictions in ITA07/S74 and S74B do not apply to professions or vocations.
The restrictions do not apply to companies or partners but note there are separate restrictions for partners see BIM72600 onwards.
Losses from qualifying film expenditure see BIM75768 are unaffected by these provisions.
“Trade” for these purposes does not include the underwriting business of a member of Lloyds.
Losses incurred before 12 March 2008 - there are special rules for dealing with straddling basis periods, see BIM75767.
Reliefs restricted
The loss reliefs which are subject to restriction are:-
- Sideways relief as defined at ITA07/S60(4). This is broadly the setting of trade losses against general income under ITA07/S64 (BIM75410) and ITA07/S72 (BIM75450).
- Setting trade losses against capital gains for the same, or preceding, year under TCGA92/S261B (BIM75420).
Relief against income and gains, 1 and 2 above respectively, is commonly referred to as “sideways loss relief”.
The non-active trader loss restrictions apply after the other loss relief restrictions in BIM75701 - BIM75760.
Under SA taxpayers are responsible for limiting their own claims as a consequence of this measure.
Annual limit
The amount of sideways loss relief given to an individual for all affected losses for any tax year is capped at £25,000. The £25,000 is reduced by the amount of sideways loss relief given to the individual as a non-active or limited partner.
If the trade losses arise from an avoidance scheme no sideways loss relief is due and effectively the annual limit is nil see BIM75769.
Meaning of “non-active capacity”
An individual carries on a trade in a non-active capacity during a tax year if the individual
- carries on the trade at a time during the year, and
- during the relevant period does not spend, on average, at least 10 hours a week personally engaged in activities of the trade. Those activities must be carried out -
- on a commercial basis and
- with a view to the realisation of profits as a result of those activities.
Meaning of “relevant period”
The relevant period is the basis period for the tax year, unless this is shorter than 6 months.
If the basis period for the year is shorter than 6 months the relevant period is the period of 6 months
- beginning with the date the individual first started to carry on the trade (if the basis period begins with that date) or
- ending with the date on which the individual permanently ceased to carry on the trade (if the basis period ends with that date).
Recovery of excess relief
Sideways loss relief given on the assumption that the individual would satisfy the active criteria can be recovered by making an assessment to income tax under ITA07/S74C(5) in the event that the “active” test is failed.
