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HMRC chairman

Paul Gray has been confirmed as executive chairman of HMRC. He has been chairman since David Varney stepped down in September 2006, having been appointed deputy chairman in 2004. Paul Gray joined HM Treasury as an economist in 1969, and also spent two years as a corporate planner with Booker McConnell Ltd in the 1970s. Between 1988 and 1990, he was economic affairs private secretary to the prime minister and returned to the Treasury in 1990 to work on monetary policy. In 1998, he joined the then Department of Social Security as head of policy, later being appointed second permanent secretary and managing director, pensions and disability in the department of Work and Pensions.
www.number-10.gov.uk

Sideways loss relief

HMRC have recently published a Brief on 'sideways loss reliefs', i.e. trading losses arising to an individual which can be set against his other income under TA 1988, ss 380 and 381 and capital gains under FA 1991, s 72. Currently, the amount of trading losses for a tax year for which a non-active partner can claim sideways loss relief is restricted broadly to the amount of capital that the partner has contributed to the partnership. The Government proposes to introduce new legislation to exclude certain capital contributions from this amount.
Under the changes, additional restrictions will apply to the amounts that a relevant partner may claim as relief for trading losses under TA 1988, ss 380 and 381, and FA 1991, s 72. Two changes affect the amount of trading losses for a tax year for which a relevant partner can claim sideways loss relief:

• A purpose test for capital contributions by a relevant partner to a partnership when applying the existing restrictions based on capital contributed in TA 1988, ss 117, 118ZB and 118ZE.
• An annual limit of £25,000 (or, if lower, the amount of trading losses for that tax year for which the relevant partner can claim sideways loss relief after applying existing restrictions in ss 117, 118ZB, 118ZE and 118ZL).

A relevant partner for this purpose will be an individual who, on or after 2 March 2007:

• carries on a trade as a partner in a partnership at any time during the tax year; and
• is a limited partner, or any other partner who does not devote a significant amount of time to the trade in the relevant period for the tax year.

For this purpose:

• an individual does not devote a significant amount of time to a trade in the relevant period for a tax year if, in that period, the individual spends an average of less than ten hours a week personally engaged in activities carried on for the purposes of the trade;
• the relevant period means the partner's basis period for the tax year, unless it is shorter than six months;
• if the partner's basis period for a tax year is shorter than six months because the tax year is the first year of trading, the relevant period is the period of six months beginning with the date on which the individual first started to carry on the partnership trade;
• if the partner's basis period for a tax year is shorter than six months because the tax year is the last year of trading, the relevant period is the period of six months ending with the date on which the individual permanently ceased to carry on the trade (if the basis period ends with that date).

A relevant partner's contribution of capital to the partnership for the purpose of applying restrictions in ss 117, 118ZB and 118ZE will exclude any amount of capital paid by the partner to the partnership where one of the main purposes for contributing the capital to the partnership is to obtain a reduction in tax liability by means of sideways loss relief.
The purpose test will apply to all contributions of capital paid by a relevant partner to a partnership on or after 2 March 2007, except those paid under a relevant pre-existing obligation, i.e. an obligation in a contract made before 2 March 2007 which cannot be varied or extinguished by the exercise of a right conferred on the individual (whether or not under the contract).
The limit on the amount of trading losses for a tax year for which sideways loss relief can be claimed will be the lower of:

• £25,000; or
• the amount of trading losses for that tax year for which the relevant partner can claim sideways loss relief after applying restrictions based on capital contributed in ss 117, 118ZB and 118ZE.

The annual limit will apply to the aggregate of all trading losses for a tax year from all partnerships in which the individual was a relevant partner for that tax year and will only apply to trading losses sustained by a relevant partner on or after 2 March 2007. It will not apply to losses from a trade which consists of the underwriting business of a member of Lloyd's.
Losses sustained on or after 2 March 2007 for a partner's basis period that straddles 2 March 2007 are the losses for that basis period less any 'pre-announcement losses', which are:

• any part of the trading losses for the basis period as is derived from a capital allowance or relevant film-related expenditure deducted under ITTOIA 2005, Chapter 9 Part 2 where the expenditure giving rise to these specific statutory reliefs was paid before 2 March 2007, or was paid on or after 2 March 2007 in meeting a relevant unconditional obligation to pay, and
•  the relevant proportion of any part of the trading losses for the basis period not derived from a capital allowance or relevant film-related expenditure.

See www.hmrc.gov.uk for further details.
'Smaller ventures in high-risk industries, which rely on start-up funding from individual wealthy investors, are likely to be hit by an immediate change to the tax regime', says Peter Penneycard of PKF. Sideways loss relief encouraged individuals to invest in high-risk ventures by allowing them to write off initial losses against their tax bill while opening up the opportunity for profits if the venture succeeded. Peter says further that 'loss relief has been a feature of investment partnerships for many years and reduced the initial risk for individual investors, making it easier for businesses operating in high-risk sectors to secure start-up funding'. He adds that the Government's changes 'effectively cut off a ready source of investment capital to such businesses. Many prospective businesses will have to look much harder to find alternative funding. It is going to be particularly difficult for those operating in sectors like biotech or film where returns can be high but the chance of failure is equally great'.
HMRC Brief 18/07, 2 March 2007

Bond washing

Concern has been voiced over HMRC recently approaching some charities about their potential liabilities under the bond washing legislation. Bond washing involves selling a bond just before it is due to pay the dividend or interest, then buying it back after the dividend or interest has been paid when the price is lower. This results in an income profit for the purchaser, free of tax if a charity, but usually a capital gain for the original vendor.
According to UHY Hacker Young, charities do not gain any tax advantage from bond washing 'because they are already exempt from income and capital gains tax, so HMRC is trying to tax profits that would ordinarily be tax-free'. Hacker Young's Roy Maugham says that charities are not involved in tax avoidance of any sort, adding 'if companies are evading tax through bond washing, HMRC should tackle the problem at the source'. He says: 'many charities are unlikely to be aware of what their fund managers are doing, so if they are being used as a conduit for bond washing, it is probably unwittingly. Charities also have an obligation to their funders and beneficiaries to maximise their investment income'.
HMRC say on their website that 'the longstanding legislation on bond washing does not just apply to charities. It applies equally to all. There is no crackdown on charities in this area, but charities do need to be aware of the tax implications of certain transactions. Having identified that some charities have overlooked the potential for liabilities in this area, HMRC will be working with charities and their representative bodies on the way forward'.
Any charities that have specific concerns about this should contact Graeme Slater at HMRC Charities on 0151 472 6222.

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