ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL Contribution to the firm
For individuals who are members of limited liability partnerships (LLPs), the source legislation restricts sideways or capital gains relief for trading losses by reference to the individual’s contribution to the limited liability partnership (see section 118ZC(2) and (3) of ICTA).
By contrast, for individuals who are limited partners or non-active partners (who are not also members of LLPs), the source legislation restricts sideways or capital gains relief for trading losses by reference to the individual’s contribution to the trade (see sections 117(3)(a) and 118ZG(2) and (3) of ICTA).
But partnership law is more likely to look at capital contributed to the partnership (referred to in the relevant sections of the Act as the firm), rather than to capital contributed to a trade that the partnership carries on. For instance, a person might become a limited partner in a partnership formed under the Limited Partnership Act 1907 (LPA). Under section 4(2) of the LPA the person, at the time of entering into the partnership, contributes a sum or sums as capital (or property valued at a stated amount). The LPA does not prevent further amounts being contributed at a later date. But the intention of the LPA is that the contribution is to the firm, not the trade. The firm uses the capital contributed to fund its various activities – be that one trade or more than one trade and any investments etc that the firm might hold. And the individual has limited liability for the debts and obligations of the firm, rather than just for the debts and obligations of any trade that the firm happens to carry on.
The Act reflects this by providing that sideways or capital gains relief restrictions on trade losses (and related anti-avoidance provisions) operate in relation to an individual’s “contribution to the firm” rather than “contribution to the trade”. This is, in principle, taxpayer-favourable as it may allow sideways relief or capital gains relief to be obtained by reference to a larger amount than would otherwise be the case. See sections 104(4), 105(2), (4) and (6), 106(4), 110(4), 111(2) and (4) to (6), 792(3), (4), (7) and (8), 793(2) and (4), 794(4), 797(2) and (5) and 801(2), (3) and (8) and Schedule 2 Part 14 (individuals in partnership: recovery of excess relief and individuals claiming relief for film-related trading losses).