Enter Your E-mail

Julie Butler comments on a recent 'spotlight' on arrangements considered by HMRC to be unacceptable tax planning subject to possible challenge, and their application to farming businesses.

Introduction

HMRC have published “Spotlight 8”, which concerns investments made by taxpayers to obtain trade loss reliefs. This tax relief is also known as “sideways Income Tax loss relief". Typically, the arrangements/schemes coming under scrutiny involve a large tax loss being generated, either in partnership or alone, by accounting for the arrangement as a trade and either writing down the value of trading stock, or claiming deductions or allowances for purported trading expenditure. Often these schemes are funded in part by borrowing and may include a mechanism that means repayment should be guaranteed. The individuals claim the loss as sideways loss relief against their other tax liabilities. HMRC consider that some of these schemes fail to meet the commercial and other requirements for sideways loss relief so that no relief will then be available to the participants.

So what does the attack on sideways loss relief have to do with farming? Was Spotlight 8 meant to impact on farming and equine businesses? Perhaps not but it does raise awareness of 'commerciality'. Many farms and studs can make large genuine Income Tax losses which are offset “sideways”. However, there are some operations which could perhaps be called into question.

Active Participation

HMRC also say that individuals participating in schemes coming under Spotlight 8 must meet the requirement that at least ten hours a week are spent personally engaged in the commercial activities of the trade carried on. HMRC states that the activities must be undertaken on a commercial basis with a view to profit, and that the activities undertaken by some of the participants in certain schemes, for example, reading scripts or medical journals, watching television or DVDs, etc., are insufficient to meet the test.

For arrangements made on or after 21 October 2009 a general restriction will also apply preventing sideways loss relief for a loss arising to a person from a trade, profession or vocation where a main purpose of the arrangements is to obtain a reduction in tax liability, i.e., an artificial arrangement. HMRC warn that in such circumstances they will challenge the arrangements and the activities of individual participants and litigate, if necessary. HMRC will also withhold repayments of tax resulting from claims to sideways loss relief in appropriate cases where they think the background is artificial.

Implications for Farming

Whilst Spotlight 8 in reality relates to certain “film partnerships” and other artificial schemes for tax losses it is further emphasis of the need to ensure the farming and equine activities are commercial activities. The ten hours a week spent on commercial activities associated with creating a profit must be met and HMRC are prepared to look at what activities are actually carried out.

Spotlight 8 should be seen as a useful “wake-up” call for studs, farms and large equine establishments, possibly bought with a view to shelter wealth from Inheritance Tax. Whilst these trades provide a wonderful lifestyle there must be evidence of a commercial approach.

Spotlight 8 puts the spotlight (excuse the pun) on commerciality, avoiding artificiality and ensuring that the ten hours spent are genuine, commercial and with a view to a profit. As a basic principle, Spotlight 8 can only increase awareness of the need for commerciality and lack of artificiality. This must make lifestyle farms and stud farms aware of the need to justify loss claims.

It can be said that there are three things certain in life and they are: death, taxes and that HMRC will ask to have sight of a business plan produced at the start of the business, to prove that the concept of commerciality and view to profit were considered from the beginning. A case for commerciality is considerably weaker if there was no business plan.