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HMRC internal manual

Business Income Manual

Partnerships: licence-related losses: exit charge

S804-S809 Income Tax Act 2007

This potential exit charge was introduced as part of a package of anti-avoidance measures to counter avoidance schemes used mainly by partnerships in the film industry. Although its initial target was partners carrying on a trade of exploiting film-related licences, the exit charge applies to any licence-related losses.

Partners affected

The exit charge applies to an individual who:

  • carries on a trade as a non-active partner at any time during an early year of trading;
  • claims sideways loss relief for a loss which is:

    • derived to any extent from expenditure incurred in exploiting a licence acquired in carrying on the trade, and
    • sustained, on or after 10 February 2004, in an early year of trading; and
  • receives non-taxable consideration on or after 10 February 2004 for the disposal of either the licence or a right to income under an agreement related to or containing the licence.

‘Non-active partner’ includes a limited partner, but otherwise has the meaning in BIM82640.

‘Early year of trading’ is explained at BIM82640.

‘Sideways loss relief’ is explained at BIM82601.

‘Non-taxable consideration’ means not otherwise chargeable to Income Tax. The consideration may be received by the partnership (with a share of it being allocated to the individual partner), or it may be received directly by the individual.

Licence has a wide meaning, being the ability to do something under any kind of contract or agreement. For the avoidance of doubt the legislation makes it clear that a licence includes an agreement which imposes an obligation to do something (as opposed to conferring a right to do so). Fulfilling such obligations may therefore count as exploiting the licence.

An agreement is related to a licence if they are both entered into (in whatever order) in pursuance of the same arrangement.

Disposal of licence

A ‘disposal’ is very widely (but not exhaustively) defined to include:

  • the revocation of the licence,
  • the disposal, surrender or loss of rights or income (including a case in which the disposal etc, is part of a larger disposal etc.),
  • the individual’s leaving the partnership (including a case where the partnership is dissolved),
  • a default in the payment of income to which the partnership or the individual has a right,
  • certain changes in profit- or loss-sharing ratios.

Chargeable amount

The individual is subject to a stand-alone charge to Income Tax as miscellaneous income on an amount for the tax year in which the consideration for the relevant disposal is received, whether this is before or after the relevant sideways loss relief is claimed. This is to prevent someone side-stepping the charge by delaying their claim to loss relief until after consideration is received.

It does not matter whether the individual (or anyone else) is still carrying on the trade when the income is treated as received.

The chargeable amount is the lower of:

  • the total of all amounts of non-taxable consideration received by the individual in the current or previous tax years less any relief recovered on a previous chargeable event, or
  • the amount of relevant licence-related losses for which the individual has claimed sideways loss relief (net of any previously recovered relief) less any licence-related profits on which the individual has been taxed.

A relevant licence-related loss is a loss:

  • derived to any extent from expenditure incurred on or after 10 February 2004 in exploiting a licence acquired in carrying on the trade, and
  • sustained in an early year of trading while the individual was a non-active partner.

Licence-related profits are the individual’s profits from the trade which derive from income arising from an agreement related to or containing the licence.

The extent to which a loss or a profit is derived from any particular expenditure or income is determined on a just or reasonable basis.

Interaction with films exit charge

If the receipt of the consideration is an exit event for the purposes of a film exit charge (see BIM56515 onwards), it does not count as consideration for the purpose of a licence-related exit charge.