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11. Table Of Statutory Provisions Notes

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Corporate & Business Taxation

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- This table is designed to summarise the statutory provisions found and referred to in the main Notes, as an aid to revision or quick reference - Note that the following statutory provisions are set out in a different order to the main Notes This table also contains provisions on Debt and Equity/Distributions/Company Buy-Backs not covered in the main Notes STATUTORY PROVISION WHAT IT SAYS FURTHER COMMENTS

6. LOSS RELIEF - INCOME, CAPITAL GAINS AND CORPORATION TAX LOSS RELIEF - INCOME TAX RULES (UNINCORPORATED SOLE TRADERS AND PARTNERSHIPS) Section 64 Income Tax Act Carry Across/Carry Back: A person can claim The loss can be set against all income 2007 for loss relief for the loss making year or the (including trade profits, dividends, interest, previous year. The whole of the loss has to be and from any trade not just the same trade - used up (so no partial loss used to reduce c.f. Section 83 (c/f) and Section 89 (c/b personal income to amount of personal relief). terminal losses); same as Section 72 (c/b Unused loss carried back one year. early years). No "same trade" requirement. Section 72 ITA, Section 73 Early Years Carry Back: Where losses arise in But relief will be denied unless the business ITA 2007 the first year the trade is carried on, or the was conducted in a commercial basis next three years, these losses can be set with a view to a profit (Section 74, and against any income in the three years this mirrors Section 42 CTA 2010) preceding the loss (Section 73) The loss can be set against all income Section 72 is an alternative to Section 64. (including trade profits, dividends, interest, He can either choose to set off the losses made and from any trade not just the same trade - in the first 4 years against his previous income, c.f. Section 83 (c/f) and Section 89 (c/b or set them off against those 4 years under terminal losses); same as Section 64 (c/a and Section 64 carry-across or carry-back 1 year. Any c/b 1 year). There is no equivalent to surplus loss from either could be claimed under early-years c/b for corporations - the other. individuals only. Section 83 ITA 2007 Carry Forward: A loss sustained can be Same trade required (as with Section 45 1

Corporate & Business Taxation

Section 86 ITA 2007

Section 89 ITA 2007

Section 90 ITA 2007

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carried forward without time limit against CTA 2010 for groups): Gordon & Blair, profits of the same trade. This does not mean Rolls-Royce, Netlogic. all income of the individual, but taxable And the loss can only be set off against receipts from the trade. The loss must be - so business profits (not all income - c.f. far as possible - deducted from the earliest Section 64 and Section 72; same as Section subsequent profits. 89 (carry back terminal losses) Carry Forward: Trade Transferred into Company: Generally Section 83 ITA carry-forward is not available when the trade ceases: the loss relief cannot then be "sold" on. However, where the sole trader incorporates and the whole or main consideration for the transfer is the taking of shares in the new company, he can carry-forward his losses indefinitely against any future income (and not just profits from the trade) which he receives from the company where he continues to own the shares. Thus he can carry forward the old losses against salaries or dividends received from the new company indefinitely - the reason is to secure parity between a sole trader (same trade receipts) and a shareholder in a company (same trade income) trying to extract income from the company. Section 86 applies automatically as if the original business had not ceased. Section 86 ITA can be seen as an income tax equivalent of CGT INCORPORATION RELIEF (SECTION 162 TCGA, BELOW) in that it allows a carry forward of trading loss where incorporation relief is used (but not s165 or s169 TCGA 1992, which will treat the trade as having ceased when they are used) Carry Back (Terminal Losses): Where a The deduction can only be made against terminal loss (Section 90) is sustained in the last business profits i.e. profits from the 12 months of business, the loss may be set same trade (Section 89(3)) (not all income - against business profits in that year and the c.f. Section 64 and Section 72; same as 3 previous years of assessment (i.e. last 4 Section 83 (carry forward) years of trading). Meaning of "Terminal Loss": A terminal loss E.g. Trade ceases October 5 2010. Terminal is any loss made in the trade in the period losses = losses incurred April 5 - October 5 starting with the final tax year before cessation 2010 + October 5 to April 5 2009. and so much as the period before that 2

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(penultimate period) as falls within 12 months before cessation of the trade. INDIVIDUAL TRADE LOSSES TREATED AS ALLOWABLE CAPITAL LOSSES Section 71 ITA 2007 Treating Trade Loss as CGT Loss:

Section 261B TCGA 1992 Section 261C TCGA 1992

A person who is unable to deduct all of a loss under a claim for trade loss relief may be able to treat the unused part as an allowable loss for capital gains tax purposes per Section 261B and Section 261C TCGA Treating Trade Loss as a CGT Loss:

Where a person has a Section 64 loss relief claim (carry across/carry back 1 year) and either (a) has nil/no income for the relevant tax year, or (b) has made a claim under Section 64 to set off the loss, the extent to which there is surplus loss after setting off against taxable income may be treated for CGT purposes as an allowable loss in that tax year. The amount treated as an allowable loss is no longer regarded as available for income tax relief, and cannot be deducted for CGT purposes after the person has permanently ceased to carry on the trade in which the loss was made (i.e. relief can only be used where the trade has not ceased) LOSS RELIEF - CORPORATION TAX RULES (for INCORPORATED COMPANIES AND GROUPS, including trades within a company) Section 45 CTA 2010 Carry Forward: Company carrying on a trade SAME TRADE REQUIRED (c.f. SECTION makes a loss in the trade; relief given for the 37): For example where one company carries loss against trading profits. on two (unincorporated) trades, in order to carry forward the losses of one or both trades Unlike Section 37 (carry across and carry back against the profits made from the other one year), and unlike Section 39 (carry back of trade, ask whether the two trades are terminal losses) the losses can only be carried the same. forward against taxable profits (not capital gains) of the same trade in the future. Same trade: Gordon & Blair, Rolls-Royce, Robroyston, Netlogic and HMRC Manual Losses are set against the first subsequent BIM70595. These cases also determine 3

Corporate & Business Taxation

Section 46 CTA 2010

Section 37(3)(a) CTA 2010

Section 37(3)(b) CTA 2010

Section 37(7) CTA 2010

Section 42 CTA 2010

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accounting period, and thereafter indefinitely (unlike c/b for 1 yr only) Carry Forward (Interest): Where there are insufficient profits to set the Section 45 losses against, any interest or dividends (from investments and which would be trading receipts but for their taxing under other provisions) can be treated as profits for the purposes of loss relief

Carry Across: Losses can be used against profits in the same accounting period, and all profits (inc. CG) can be used Carry Back 1 Year: Where Section 37(3)(a) carry-across cannot be fully relieved against profits in the same year, you can carry back the leftover loss for the prior 12 months. But this leftover trading loss can only be used after using the carry-across relief for that previous tax year. Claim within 2 Years: The claim for loss relief must be made within the two years of the end of the loss-making period Restriction on Section 37 Loss Relief: Carryacross and 1 year carry-back cannot be claimed unless the trading loss is (a) on a commercial basis and (b) with a view to a profit with a reasonable expectation of profit 4

whether a company operates one trade or two trades. Nuclear Energy v Bradley: Section 46 can only be used if the dividends, interest or investments from which they derive are "integral to the trade" having regard to the nature of the trade and the purpose for which those funds are held. Short term deposits for short term liabilities will count, but interest on long-loans used to fund expenses of decommissioning power stations cannot be used seen as Section 46 "trading income." SAME TRADE NOT REQUIRED (this is because Section 37 is headed "relief for trade losses against TOTAL profits" The company need not be carrying on the same trade (and this mirrors Section 64 ITA 2007); whereas the "same trade" condition applies only for carry-forward and terminal losses (s39 CTA 2010), but not carry-back

The same restriction applies to group surrender of trading losses under Section 99 CTA 2010 by virtue of Section 100(2)(b) which says that surrenderable group trading losses must be relievable under Section 37.

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"MAJOR CHANGE" - CHANGE OF OWNERSHIP Section 673(1), (2), (3) Change of Ownership = Disallowance: If CTA 2010 there is a change in ownership of the company AND either (1) there is a major change in the nature or conduct of the trade within 3 years of the change in ownership, OR (2) the trade becomes small or negligible before any significant revival of the trade, at any time after the change in ownership Section 719 CTA 2010

Section 673(4) CTA 2010

HMRC Statement of Practice (SP) 10/91

Section 674 CTA 2010

"Change of Ownership": Either (A) a single person acquired a holding of over 50% of ordinary share capital of the company; OR (B) 2 persons together acquire more than 50% of the ordinary share capital and one acquires at least 5%
"Major change": A major change means a major change in the type or property dealt in, services or facilities that the trade provides, or customers, outlets or markets of the trade. A major change does not occur if changes are introduced to increase efficiency, keep pace with technology or rationalise the business by withdrawing unprofitable items.

Disallowance: The disallowance of losses applies to Section 37 (carry across and 1 year carry-back) and to Section 45 (carry forward of the loss) 5

Look out for the difference between (1) and (2): a major change must happen within 3 years of the change; whereas if the trade becomes negligible and revives, this can happen at any time after the change in the ownership. Note also that "within" in (1) means before or after the event; whereas (2) says "any time after the change of ownership" "Ordinary share capital" means beneficial ownership (defined in Wood Preservation to mean "more than the legal shell") - Section 1154(6) CTA 2010

Major Change: Willis v Peeter's Picture Frames, and Purchase v Tesco Stores and HMRC SP10/91 (below)

Example: If a dealership in one type of car switches to another make in order to satisfy the same market (i.e. both saloon cars), this is not a major change. But it will be a major change if the dealership switches from saloon cars to tractors. "Major change" applies to all CTA loss reliefs! But the "same trade" proviso applies only to carry-forward (Section 45), but not to carry across/back (Section 37).

Corporate & Business Taxation Section 675 CTA 2010

Section 676 CTA 2010


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Disallowance of CAA Balancing Allowance: Where Section 674 bites on carry-forward of losses, it also prevents the company from using any balancing allowance when working out a balancing charge against the company "for any accounting period beginning before the change in the ownership" of the company. Section 944 Restriction: Under Section 944, on a hive down without change of ownership, normally the losses of the trade can be carried forward to the new subsidiary. Section 676(2) operates so that on a transfer of the hiveddown subsidiary to a third party with a "major change" (that is, Section 673ff bites), the third party cannot use the carried forward losses otherwise available to the new subsidiary by virtue of Section 944 applying.

See also Section 266/267 Capital Allowances Act 2001 and Section 948 CTA 2010 (no balancing allowance where a successor to a qualifying activity without a hive-down, and a company reconstruction, respectively)

Carry back of terminal losses (3 years): Where the company ceases a trade, it can set its "terminal losses" (defined below) against profits of the previous 3 years before the loss making accounting period. The rule is the later profitable year first.

Example: A loss made in 2009 (where trade is ceased in 2009) will be set off against profits made in 2008 (first) and then 2007, and then 2006. Note: cannot be set off against profits made in 2009. The reason is because Section 39 extends the "12 months" to "3 years" with regard to Section 37(1)(b) (which refers to the time before the loss-making period starts). This is contrast to

Like Section 37, and unlike Section 45, "profits" includes capital gains and not just 6

Example: A owns a trade (X). A hives down the loss-making X into X Ltd. A then sells X Ltd to B such that X Ltd is now owned by B. Section 944 allows a carry forward of losses incurred by A (when it carried on the X trade) to X Ltd, but Section 676 operates to prohibit B from using X's carried-forward losses where there has been a major change in the nature of the trade from either A or X to B. This is a paradigm example of "loss buying" behaviour (in this case, B buys a hiveddown subsidiary of A (X Ltd) rather than purchasing the trade (X) direct; in the latter case Section 674 would apply).

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trading income. Furthermore, there is a "same trade" restriction (parity with s 89 ITA).

Section 37(1)(a) which refers to profits made in the loss-making accounting period (not Section 39's concern!) Section 39(3) CTA 2010 Definition of terminal losses: The whole of Example: Cessation of trade in June 2012. any loss made in the accounting period Accounting periods run from October - starting in the immediately preceding 12 October. Take into account the whole of the months of cessation and the losses made in losses from October 2011 - June 2012. Also the proportion of the penultimate take into account losses made June 2011 - accounting period October 2011 as a pro rata of that accounting period. Thus if there are £12k of losses in the October 2010-2011 accounting period, since June - October 2011 is 5 months of the 12 months, the losses for the penultimate accounting period will be 5/12 x £12k = £5k Section 41 CTA 2010 Restriction on Terminal Loss Relief: Section DISCONTINUANCE OF TRADE. NB if the 39 does not allow a carry-back of losses for three trade ceases but is carried on by another years if after the cessation of the trade, the party (who is in scope of the corporation tax); trade is continued by a party not subject to if same ownership they can use S944 carry corporation tax OR Section 39 is being forward but predecessor cannot use exploited as the "main purpose" for terminal loss carry back (see Section "schemes" to obtain terminal loss relief. 944(2) below). COMPANY RECONSTRUCTIONS WITHOUT CHANGE OF OWNERSHIP (INTRA-GROUP HIVE DOWNS) Section 940A CTA 2010 Where there is a transfer of a trade between Where a trade (previously unincorporated) is companies with common ownership, Section newly incorporated (a hive down) the new 944 will (a) prohibit the use of "terminal losses" subsidiary will be able to carry forward under Section 39 in relation to the predecessor's historic losses against future trading loss-making trade, but (b) will allow carryprofits as long as the ownership (Section forward under Section 45 of losses made by 941) and the tax (Section 943) conditions are the predecessor in that trade to the successor satisfied. carrying on that trade 7

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