ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with current practice. Change 19: Employment losses: disapplication of restriction of set-off of capital allowances against general income: section 128
This change disapplies a potential restriction on the ability of an employee to set off part of a loss attributable to first-year allowances. The restriction was designed to apply to trades rather than employments and is extremely unlikely to apply to employments.
Section 384A of ICTA is an anti-avoidance section dealing with the restriction in certain circumstances of the ability of an individual to set off part of a loss attributable to first-year allowances against general income. It was designed to counter contrived arrangements under which higher rate taxpayers were able to reduce their tax liabilities by entering into partnerships with a corporate member.
The provision was originally enacted as section 41 of FA 1976. The particular scheme that the provision was designed to counter operated as follows. An individual or individuals liable to income tax at the higher rates would enter into a partnership, which would include a corporate member. The partnership would acquire machinery or plant, which was then leased out. The partnership would be entitled to first-year allowances, which would be shared between the individual members for offset against general income taxable at high rates. But income received from the leasing activity would be allocated to the corporate member and be taxed at the much lower corporate rate. Therefore an advantage was obtained because of the mismatch between the rates at which income was taxed and first-year allowances were relieved.
The provision was drafted to counter not only this scheme but also other possible arrangements. Section 41(1) of FA 1976 (which gave rise to section 384A(2) of ICTA, rewritten in section 77) fulfilled the function of dealing with the identified scheme, while section 41(2) of FA 1976 (which gave rise to section 384A(4) of ICTA, rewritten in section 78) was designed as a blanket provision to counter future schemes. It operated by denying loss relief if an individual entered into a scheme with the sole or main benefit of obtaining a reduction in tax by way of first-year allowances made in connection with the transfer of a trade or an asset in certain circumstances.
It is clear that what is now section 384A(4) of ICTA was drafted to catch schemes or arrangements involving transfers of trades or assets being made to create artificial benefits to traders. But one part of it, section 41(2)(a)(ii) of FA 1976 (now section 384A(4)(b) of ICTA), could also potentially catch a transfer of an asset by an employee. But this is simply because the loss provisions apply across trades, professions, vocations and employments.
The ability of an employee to acquire an asset qualifying as machinery or plant in respect of which first-year allowances are available is limited, given the wholly, exclusively and necessarily rule that ensures that only assets necessary for carrying out the duties of the employment can qualify. There is, therefore, very little potential for an employee to enter into a scheme for the reduction of a liability to tax by acquiring an asset which enables a claim for first-year allowances (which can be set off against employment income) to create a loss.
So, in the context of rewriting the loss provisions for employments separately from those for trades, professions and vocations, this provision has not been rewritten for the purposes of the employment loss provisions.