restriction of relief: non-active traders - overview
S74A Income Tax Act 2007 (ITA 2007)
There are anti-avoidance measures which largely mirror the non-active partner restrictions described in BIM82640, which 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.
S74A ITA 2007 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 BIM85766.
For losses arising from relevant tax avoidance arrangements made on or after 12 March 2008 but before 21 October 2009 there was also a provision which provided that no sideways loss relief could be given to non-active sole traders for tax-generated losses (see BIM85769). That provision was replaced by the more general prohibition of sideways loss relief for tax-generated losses as described in BIM85762.
In applying these anti-avoidance 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.
The 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 BIM82640-BIM82650.
Neither the annual £25,000 limit nor the pre 21 October 2009 rules on tax-generated losses apply to professions or vocations.
The restrictions do not apply to companies or partners but note there are separate restrictions for partners, see BIM82600 onwards.
Losses from qualifying film expenditure (see BIM85768) 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 BIM85767.
The loss reliefs which are subject to restriction are:-
- Sideways relief as defined at S60(4) ITA 2007. This is broadly the setting of trade losses against general income under S64 ITA 2007 (BIM85015) and S72 ITA 2007 (BIM85045).
- Setting trade losses against capital gains for the same, or preceding, year under S261B Taxation of Chargeable Gains Act 1992 (BIM85025).
Relief against income and gains, 1 and 2 above respectively, is commonly referred to as ‘sideways loss relief’.
Under self assessment taxpayers are responsible for limiting their own claims as a consequence of this measure.
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 BIM85769.
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 ten 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 six months.
If the basis period for the year is shorter than six months the relevant period is the period of six 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 in the event that the ‘active’ test is failed.