Investments to obtain trade loss reliefs - 'sideways loss relief' (Spotlight 8)
Published 5 August 2010
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HM Revenue and Customs (HMRC) are aware of schemes seeking to exploit Sideways Loss Relief (SLR) by generating trade losses for individuals.
Typically, a large loss is generated either in partnership or alone. It’s done by accounting for the arrangement as a trade, then either of the following:
- writing down the value of trading stock
- claiming deductions or allowances for purported trading expenditure
Often these schemes are funded in part by borrowing and may include a mechanism that means repayment is guaranteed. The individuals claim the loss as SLR against their other tax liabilities.
HMRC believes that these schemes fail to meet the commercial and other fundamental requirements for SLR, so no relief is available to the participants.
Furthermore, HMRC believes that individuals participating in these schemes do not meet another fundamental requirement:
- at least 10 hours a week are spent personally engaged in commercial activities of the trade
- duties are carried on with a view to earning profits from those activities
HMRC believes the activities that these schemes claim to do, are insufficient to meet the test. The following, for example are not sufficient:
- reading scripts or medical journals
- watching TV or DVDs
This is because they are not undertaken on a commercial basis with a view to profit. This result would mean that any trade loss would be subject to the sideways loss relief restrictions for non-active traders.
For arrangements made on or after 21 October 2009 a general restriction applies. It prevents SLR being claimed for a loss arising to any of the following:
- a person from a trade
- profession
- vocation
- where a main purpose of the arrangements is to obtain a reduction in tax liability
Whenever arrangements have been entered into to obtain a tax reduction by way of sideways loss relief HMRC will actively challenge these arrangements and the activities of individual participants and litigate, if necessary. HMRC will also withhold repayments of tax resulting from claims to sideways loss relief in appropriate cases.