The Inland Revenue has closed another income tax loophole which previously allowed partners to offset trading losses from one business against another for tax avoidance purposes.
Changes are effective immediately to the loss relief rules concerning Limited Liability Partnerships, says the Revenue, to prevent any business partner - who does not spend “significant” time or more than 10 hours a week – from claiming sideways loss relief.
From February 10th, all partners will only be allowed to offset their income against losses up to the amount they contributed, rather than against the cut of the profit or loss they hold, says Dawn Primarolo.
“These schemes exploit tax reliefs that are intended for people who risk their own money in running genuine businesses, but the schemes manipulate tax relief to create claims for losses in excess of the capital at risk. Schemes like this undermine the true purpose of tax relief and we are determined to take all appropriate action to counter them,” she adds.
In the past, partners could claim such tax “sideways loss relief” by offsetting some of the profits they may have made in one business within the early years against their shared losses in another, until the gains made on one side had been balanced over the course of four years against any losses.
However, changes to four key tax clauses – three from the ICTA 1988 – were required, says the Revenue, some partnerships were using sideways loss relief rules on income tax create large losses initially to set against income, and then seek to avoid tax payments on future income flows by leaving the partnership before the majority of income arises.
For example, A, B and C each contribute £15,000 to a business partnership, of which C plays little part in its running. For the amount invested, C receives 30% of the profit or loss, which amounts to a £18,000 loss in the first year.
As he invested £15,000 in the first year, C is allowed to part of the £18,000 loss in year one. He then contributes a further £5,000 in year two, so he is then allowed to offset the remaining £3,000 loss against the £5,000 invested as if the loss had arisen in that year.
The Revenue stresses this will only affect partners which do not spend a significant time in each trade where losses arise.IFAonline
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