Ten hours a week defines active involvement

The Government has introduced legislation to address tax avoidance schemes which exploit relief for trading losses through partnerships.

These schemes exploit tax reliefs that are intended for people who risk their own money in running genuine businesses, but according to the Paymaster General 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."

The Revenue’s press release goes on to add that “The new rules will apply to trades carried on in partnership, and will only affect partners who did not spend a significant amount of time working in the trade when the losses arose. The changes will not therefore affect genuine traders who actively run their own trade”

The Revenue has issued guidance notes (available here

Revenue Guidance) to explain how the measures would work. The guidance notes illustrate how the new rules would apply in a typical example as follows:

Example:

A, B and C form a partnership and each contributes £15,000. A and B run the trade full time, but C has a separate full-time employment and plays little part in running the trade. Profits and losses are to be shared

35:35:30 A:B:C. Losses of £60,000 arise in the first year of trade, of which

£18,000 is allocated to C. C may only set £15,000 against other income of the same or an earlier year. £3,000 is carried forward and can be treated as a loss of the following year (or can be set against profits of the same trade in a later year). In that following year, C contributes a further £5,000 to support the trade and is therefore entitled to claim the loss of £3,000 against other income as if the loss had arisen in that later year.

It is unlikely that many freelancers will be directly affected by these moves. However, looking at the detail there is an interesting point that might impact on anyone having discussions with the Revenue regarding Section 660A, the settlements anti avoidance legislation. Under that legislation one of the Revenue’s lines of attack is to question if the contribution made by partners and spouses to the business is such as to warrant the level of reward they receive from the business by way of dividends.

Clearly the moves against partnership arrangements contain a similar concept of a significant level of involvement. In the guidance notes the Revenue state that:

“For this purpose, "significant" will be regarded as a minimum of 10 hours per week, taken across the period as a whole. It will only include time spent by the partner playing an active and personal role in the operations of the trade. It will not therefore include activities such as:

a) Considering information to decide whether and how much to invest in a trade b) Considering reports and information provided largely by others about the progress of a trade c) Taking decisions concerning the trade based largely on information provided by others.”

This could well be useful as an argument to challenge a ruling under Section 660A where the level of contribution made by the spouse is at issue.

Kevin Miller, MA FCA