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HMRC internal manual

Business Income Manual

Partnerships - loss relief restrictions: calculation of limit of relief: partners’ capital contributions

S103D, S104-S114 Income Tax Act 2007

The first step in calculating restrictions on sideways loss relief for affected partners is to apply those restrictions which are based on the individual partner’s capital contributions to the partnership.

The second step is to restrict sideways loss relief to an annual limit of £25,000, see BIM82611.

Partner’s capital contributions - general

Under the first step, the general approach is that the total sideways loss relief that an affected partner (see BIM82601) may be given in respect of their share of partnership trading losses sustained for a tax year is restricted to:

  • the partner’s capital contribution to the partnership at the end of that tax year, less
  • the total of all sideways loss reliefs (reduced by any recovered relief) previously given to the partner at any time in respect of losses from the same trade.

The definition of what constitutes the partner’s contribution to the partnership at any given time differs for limited partners, LLP members and non-active partners.

Guidance on how to calculate a particular partner’s contribution to the partnership is:

  • For limited partners, at BIM82615.
  • For LLP members, at BIM82625.
  • For non-active partners (including non-active LLP members), at BIM82640.

Partner’s capital contributions - purpose test

For all affected partners, capital contributions paid on or after 2 March 2007 do not count if the main purpose, or one of the main purposes, for contributing the capital to the partnership is for the partner to reduce their tax liability through sideways loss relief.

Qualifying film expenditure

The legislation provides that this purpose test does not apply to any loss derived solely from qualifying film expenditure. However, the legislation on which the definition of ‘qualifying film expenditure’ is based has now been repealed, so the exclusion is now unlikely to be seen in practice.

Expenditure is qualifying film expenditure if it is:

  • expenditure deductible in computing the profits of the partnership under any of the reliefs under the old regime for films which applied to qualifying films (see BIM56010);
  • incidental expenditure which, although not deductible under any of those reliefs, is incurred in connection with the production or acquisition of a film for which a deduction is given under any of those reliefs.

Incidental expenditure is expenditure on management, administration or obtaining finance. The extent to which incidental expenditure is connected to the production or acquisition of a qualifying film is to be determined on a just and reasonable basis.

Sideways loss reliefs

The sideways loss reliefs to be deducted from the capital contribution in restricting relief are those previously given to the partner at any time in respect of losses from the same trade by setting:

  • trading losses against the claimant’s general income (see BIM85015) or capital gains (see BIM85025) of the same or preceding year;
  • trading losses sustained in the first tax year in which the claimant carries on the trade, or in any of the next three tax years, against their general income of the preceding three years (see BIM85045).

Recovered relief

Past sideways loss reliefs given to affected partners are recovered in certain circumstances. Reliefs are recovered by the partner being charged to tax on an amount treated as income of a later year. Guidance on the circumstances in which past loss reliefs claimed by affected partners can be recovered is at BIM82675.