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Business rates deadline looms with penalties
New tax rules hit partnership trade losses

Business rates deadline looms with penalties

With the Valuation Office Agency planning to have all valuations for the 2005 Rating Revaluation completed in the next three months, businesses need to ensure that they meet the impending deadlines for submitting notices .

Otherwise they face costly penalties and the possibility of paying higher rates.

This new legislation, which came into effect last September, allows 56 days for completion and return of forms, which are being randomly sent out by the Valuation Office Agency. Once this period has passed, a fixed penalty of £100 can be levied and, if the information remains outstanding after a further 21 days, another £100 can be levied. After this there could be a charge of £20 per day until the form is returned.

The Valuation Office Agency now has power to levy a civil penalty on any company which fails to provide the relevant information needed to value properties for business rates.

Chas Crotched, Head of Taxation at ACCA said: "The next Rating Revaluation in 2005 may seem a long way off, but the deadline for action is imminent. To meet its aim of having 100% of valuations for the 2005 revaluation completed by May 2004, the Valuation Office is currently sending out complex questionnaires and businesses will need to ensure that these are completed correctly and returned forthwith."

"Failure to check bills and to make the necessary challenges to demands within time limits could have major cost implications for businesses. At present, less than half of all Rating Assessments are actually challenged and only a tiny amount of bills are properly queried. As an assessment can remain in place for up to five years, it is important to examine the basis of any calculation."

Business rates are essentially a tax on property occupation and ownership. Rateable Valuation Assessments are linked to rents, and rates are charged at a proportion of Rateable Value by way of the Uniform Business Rate (UBR) poundage, currently 44.4p in England .

In order to assist businesses, the Valuation Office has also introduced new ways in which information can be supplied. For individuals and companies responsible for more than one property a special facility has been developed for sending large amounts of information electronically. This is accessible from the Valuation Office Agency's website.

Ratepayers are also reminded that the Valuation Office will not pursue requests for information, and businesses will need to ensure that requested information for the Rating Revaluation is returned on time to avoid penalties.

David Tretton, the VOA's Director of Rating said, however, that: "We are more interested in obtaining the information requested than in pursuing the application of penalties. We need this information to ensure that rating assessments are accurate so that ratepayers do not pay any more in business rates than they have to."

"We have invested a great deal of effort to make it easier for people to give us information, but we need an effective method of ensuring people comply," Tretton continued. "If you have been sent a form, please ensure it is completed and returned to us as soon as possible as it is the person to whom we send the form (not their agent) who is liable."

New tax rules hit partnership trade losses

The government is to block what it sees as unacceptable tax avoidance over the use of partnership losses. The legislation, which has not been published, is effective from 10 February 2004 .

The new rules aim to curtail schemes which exploit relief for trading losses from partnerships that individuals may claim against their other income or gains. Some schemes, apparently, manipulate partnership sharing arrangements to allocate losses that are greater than an individual's economic contribution to a partnership in order to achieve a tax advantage. Others create large losses initially to set against income, but seek to avoid tax on later income flows by leaving the partnership before the majority of the income arises.

The changes 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. 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.

Details
The provisions involved are:

• Section 380 ICTA 1988 - relief for trading losses against general income of the same or the preceding year of assessment
• Section 381 ICTA 1988 - relief for trading losses incurred in the early years of a trade
• Section 353 ICTA 1988 - relief for loan interest paid
• Section 72 FA 1991 - trading losses relieved against capital gains

These provisions are collectively referred to by the Revenue as "sideways loss relief".

Where a partner who:

• is not a Limited Partner or a member of a Limited Liability Partnership;
• does not spend a significant amount of time in running the trade; and
• claims "sideways loss relief" for losses incurred in any of the first four years in which the partner carries on the trade,

"sideways" relief will only be allowed under the new rules to that partner on an amount of losses up to the amount contributed to the trade by that partner.

Changes will also be made to the existing loss relief rules for a member of a Limited Liability Partnership (LLP) that carries on a trade. The change will ensure that a partner who does not spend a significant amount of time in running the trade can claim "sideways loss relief" only up to an amount equal to the amount that he or she actually contributes to the partnership, either during the course of a trade or in a winding-up. It will prevent a claim by a partner which is based on a notional liability that they may never have to meet.

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.

These restrictions, the Revenue explains, will be applied after any existing rules which restrict losses or interest that may be set off against other income under section 353, section 380 or section 381 ICTA 1988; or against chargeable gains under section 72 FA 1991.

The restrictions will apply to trading losses derived from expenditure incurred on or after 10 February, and will apply to trading losses arising in the first four tax years in which the partner carries on the trade.

There is no impact from these changes on any person who works for a significant amount of time in running their own trade. They will continue to have access to full relief for losses from that trade against their other income for the same or an earlier year in accordance with the current legislation (subject to existing restrictions).

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:

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

The new rules will not apply to the special tax regime for Lloyd's Underwriters losses arising to from their underwriting business as the relationship between losses incurred and the capital invested is complex and could operate inequitably in underwriting, where the individual has a very wide liability for losses.

Any losses which an individual cannot set against other income or gains because of the new rules may be carried forward and set against later profits from the same trade.

Exit charge
New rules will be introduced, with effect from 10 February, where all the following conditions are met:

• An individual has claimed "sideways loss relief" for losses incurred in any of the first four years of a trade in which he or she is a partner;
• That partner did not spend a significant amount of time in running that trade in the year when the losses were incurred;
• The losses claimed derive from expenditure incurred in carrying out an agreement, and any rights to receive income under that agreement are disposed of in a way that is not chargeable to income tax; and
• The total losses claimed "sideways" by the partner from that trade in those first four years exceed the cumulative profits of the trade arising to that partner since they commenced in the trade.

Where those circumstances apply, a charge to income tax will be applied on the lesser of the disposal proceeds that are not otherwise brought into charge to income tax, or an amount equal to the amount of the losses claimed to the extent that they are greater than the cumulative profits.

Example : D, who also has a full-time employment, sets up a partnership (with others) which acquires the rights to market and distribute a new product. D does not spend a significant amount of his time running that trade.

The partnership contracts with a marketing company to carry out the actual work. No income arises initially and in the first year D's share of the trading loss is £100,000. D claims this loss against his employment income.

Income of £30,000 arises over the next two years. After two years, D sells his rights under the agreement for £80,000. This disposal may be chargeable to income tax under current rules, but if it is not then the new rules will impose a charge to income tax. The disposal proceeds amount to £80,000 but the balance of his losses claimed over taxable income from the same agreement amounts to £70,000.

This amount is lower than the disposal proceeds, and is therefore the amount that will be brought into charge to income tax. The balance of the disposal proceeds - £10,000 - will be brought into charge to tax under the chargeable gains rules.

Where there is a series of part-disposals of rights under the same agreement the legislation will look at the cumulative position. Returning to the above example, assume that D disposes of some of his rights for £40,000 after two years - and no charge to income tax otherwise arises. The proceeds are less than his excess of losses over profits so £40,000 is the amount brought into charge to income tax at that point in time.

In the next year £10,000 income arises under the reduced rights, and D then sells his remaining rights for £35,000. The excess of losses over cumulative profits is now £60,000. Cumulative disposal proceeds amount to £75,000 - of which £40,000 has already been brought into charge to income tax. The income tax charge is now to be on an amount of £20,000. The remainder, £15,000, is brought into charge under the chargeable gains rules.

The computations will not be adjusted for later profits. For example, if in the above example an income of £5,000 per annum continued after the second part-disposal there would be no effect on the calculations for previous years.

The profits are only relevant up to the point that the initial loss relief is "exhausted" as in the example above. The new rules will also ensure that related or connected agreements are brought together for the purposes of the calculations. This is to prevent attempts to claim losses for expenditure under one agreement whilst profits and the disposal of rights take place under another agreement, despite the fact that the two agreements deal with essentially the same subject matter.

These rules will apply to losses derived from expenditure incurred on or after today.

These rules will not have any effect on someone who actively spends a significant amount of time in running their own trade. The focus of this legislation is on what the Revenue describe as "contrived" schemes which create large losses from a trade soon after it is set up and commenced, and then try to avoid tax on later profits from that trade.

Edmund house, 27 St. James's Road, Dudley, West Midlands, DY1 3JD