Revenue Note for Guidance

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Revenue Note for Guidance

Schedule 25C

Determination of Amount Of relief to be treated as referable to Specified Reliefs as respects relief carried forward from tax year 2006 to 2007

Overview

This Schedule contains provisions for dealing with the allocation of certain reliefs carried forward from the year 2006 to the year 2007 as between amounts referable to specified reliefs and amounts referable to other reliefs.

The apportionment of relief carried forward from 2006 to 2007 is to operate, broadly, by applying to the relief carried forward to 2007 a fraction where the numerator is the total of the person’s restricted reliefs of that type over the previous 4 years and the denominator is the person’s overall amount of tax reliefs of that type used over the same period. All relief brought forward into 2003 from earlier years is disregarded.

As this approach is a broad-based one the taxpayer is allowed a facility to apply to Revenue to have the apportionment replaced by some longer or shorter period that would give a fairer result.

Revenue’s refusal to accept an alternative period for apportionment can be appealed by notice in writing to the Appeal Commissioners. The appeal must be made within 30 days after the date of the notice of the assessment. The appeal is heard and determined in the manner provided for in Part 40A.

Once the relief carried forward into 2007 is allocated as between specified and other reliefs, the rules in Chapter 2A of Part 15 ensure that specified and other reliefs will not become mixed up in the future as effect will be given to unrestricted reliefs (including such reliefs carried forward) before specified reliefs. However, this does not mean that all unspecified reliefs will be taken before specified reliefs as the tax computational rules require certain reliefs to be deducted before others.

Details

Excess trading capital allowances carried forward from 2006 to 2007

(1) Section 304(4) provides that where full effect cannot be given for an allowance in the year in which it is made, the allowance or the part of it for which effect cannot be given is to be added to the allowances to be made in respect of a trade or profession in the following year or if there are no such allowances in that year the allowances forward become the allowances for that following year. If full effect cannot be given for the excess in this way they can be carried forward to the next following year in the same way. That is, they become part of the allowances for the next following year or the allowances for that next year, if appropriate.

This paragraph seeks to allocate excess allowances carried forward from 2006 to 2007 between specified reliefs and unspecified reliefs by reference to the use of industrial buildings type allowances over the 4 years 2006, 2005, 2004 and 2003.

All capital allowances carried forward which originally arose under Part 9 and which were made to the individual in taxing his or her trade or profession are brought into the calculation. The total amount brought into 2007 from 2006 is apportioned as between specified and other reliefs by applying to the amount carried forward a fraction. The amount determined by the application of this fraction becomes the amount of the relief carried forward under section 304 which is to be regarded as specified reliefs. This amount will be treated as a specified relief in its own right (see entry at Reference Number 15A of Schedule 25B) but only to the extent that the amount so determined is actually used in 2007. Any un-used excess of this amount which is carried forward to 2008 will be the amount of the specified relief under section 304 for the tax year 2008 (to the extent that it is used in 2008) and so on.

The apportionment works by applying to the amount of excess capital allowances arising in the individual’s trade or profession and brought forward to 2007 (that is, RF in the formula) a fraction where the numerator constitutes the total of the person’s specified reliefs made under Chapter 1 of Part 9 over the previous 4 years (that is, SR in the formula) and the denominator is the total of all the person’s capital allowances made under Part 9 in taxing the person’s trade in that period (that is, TR in the formula). Excess allowances brought into 2003 from 2002 and excess allowances arising in the 4-year period are disregarded.

Trading losses carried forward under section 382 from 2006 to 2007

(2) Section 382 allows losses incurred in a trade or profession to be carried forward from one year to the next to the extent that the losses are not relieved in the year they are incurred under section 381. This paragraph seeks to allocate such losses carried forward from 2006 to 2007 as between specified reliefs and other reliefs. These losses could consist of actual trading losses, losses arising or increased because of entitlement to a double rent deduction, and losses arising or increased because of the capital allowances due to the individual for the year are added to the losses of the year or are used to create a loss in the year under Chapter 2 of Part 12.

The amount determined under this paragraph as the amount of losses forward that are referable to the use of specified reliefs will be treated as a specified relief to the extent that those losses are actually used in 2007 (see entry at Reference Number 41 of Schedule 25B). If any of these losses remain unused for 2007 and are carried forward to 2008 under section 382 the amount carried forward will be an amount of specified relief for the tax year 2008 and subject to the restriction (to the extent that they are actually used in 2008) and so on.

The apportionment of losses forward works by applying to the amount of losses arising in the individual’s trade or profession and brought forward to 2007 (that is, RF in the formula) a fraction.

The numerator of the fraction (referred to as SR in the formula) is the total of two amounts (referred to as DR and SA). The first amount referred to as DR is the total amount of loss relief for the 4 year period which is referable to the use of the double rent deduction authorised under sections 324, 333, 345, 354 and paragraph 13 of Schedule 13. Only double rent deductions that contributed to the creation of, or an increase in the amount of, losses are brought into the apportionment calculation. Where a double rent deduction only reduced taxable income without creating or increasing the level of the losses in the trade it is not brought into the apportionment calculation. By referring to relief under section 381 (which gives relief for current year losses) no account is taken of losses forward to 2003 from 2002. Likewise there is no double counting of relief brought forward within the 4 year period. The second amount (referred to as SA) is the total of the capital allowance made to the individual under Chapter 1 of Part 9 in the previous 4 years for buildings and structures that are specified reliefs. Excluded are excess allowances within the period. Also excluded is any year in which a claim is not made under Chapter 2 of Part 12. This means that only capital allowances that contribute towards the creation of, or increase in, a loss are brought into the apportionment calculation.

The denominator (referred to as TR) is also the total of two amounts (referred to as TL and TA). The first amount (referred to as TL) is the total of the losses arising to the individual in his or her trade or profession in the 4-year period disregarding any capital allowances treated as losses by virtue of Chapter 2 of Part 12

The second amount (referred to as TA) is the total of all the capital allowances made to the individual under Part 9 in taxing the individual’s trade or profession. Excluded are years where a claim is not made under Chapter 2 of Part 12. Also excluded are any excess capital allowances during the 4 year period. All allowances made to the individual in taxing his or her trade are included here because it is a requirement of Chapter 2 of Part 12 that all the capital allowances of the year be used under those provisions to create or augment a loss.

Capital allowances used in a rental activity

(3) Section 305(1) provides that where full effect cannot be given for an allowance in the year in which it is made, the allowance, or the part of it for which effect cannot be given, is to be available for deduction from the person’s income to be charged under Case V of Schedule D. If full effect cannot be given for the excess in this way it can be carried forward to the next following year in the same way. That is, it is available for set off against the person’s Case V income in the next following year and so on.

This paragraph seeks to allocate any excess allowances carried forward from 2006 to 2007 between specified reliefs and other reliefs by reference to the use of industrial buildings type allowances over the 4 years 2006, 2005, 2004 and 2003.

All capital allowances carried forward under section 305 are brought into the calculation. The total amount brought into 2007 from 2006 is apportioned as between specified and other reliefs by means of a formula. The amount determined by the formula becomes the amount of the relief carried forward under section 305 which is to be regarded as specified reliefs. This amount will be treated as a specified relief in its own right (see entry at Reference Number 15B of Schedule 25B) but only to the extent that the amount so determined is actually used in 2007. Any un-used excess of this amount which is carried forward to 2008 will be the amount of the specified relief under section 305 for the tax year 2008 (to the extent that it is used in 2008) and so on.

The apportionment works by applying to the amount of excess capital allowances arising in the individual’s rental activity and brought forward to 2007 (that is, RF in the formula) a fraction where the numerator constitutes the total of the person’s specified reliefs made under Chapter 1 of Part 9 over the previous 4 years (that is, SR in the formula) and the denominator is the total of all the person’s capital allowances made under that Chapter in taxing the person’s rental income in that period (that is, TR in the formula). Excess allowances brought into 2003 from 2002 and excess allowances arising in the 4-year period are disregarded.

Losses arising in a rental activity

(4) Section 384 allows losses incurred in a rental activity to be carried forward to the next year. This paragraph seeks to allocate such losses carried forward from 2006 to 2007 as between specified reliefs and other reliefs. The amount determined under this paragraph as the amount of losses forward that are referable to the use of specified reliefs will be treated as a specified relief to the extent that those losses are actually used in 2007 (see entry at Reference Number 43of Schedule 25B). If any of these losses remain unused for 2007 and are carried forward to 2008 under section 384 the amount carried forward will be an amount of specified relief for the tax year 2008 and subject to the restriction (to the extent that they are actually used in 2008) and so on.

The apportionment of losses forward works by applying to the overall amount of losses arising in the individual’s rental activity and brought forward to 2007 (that is, RF in the formula) a fraction. The numerator of the fraction (referred to as SR in the formula) is the total of “section 23-type“ deductions the individual was entitled to for the 4 year period. The denominator is the total of all rental deductions, including “section 23-type“ deductions the individual was entitled to for that period.

Option to seek an alternative apportionment basis

(5) An application for an alternative apportionment basis must be made to Revenue in writing setting out the alternative basis sought. Any alternative basis is confined to either a longer or shorter period than the 4 years used in the preceding paragraphs. Also the year 2006 must always form part of any apportionment period.

Revenue are required to accept the taxpayer’s basis, confirm the amount determined under the provisions of this Schedule or to set out a new amount determined on the basis of some other time period. The reason for allowing Revenue to accept some other basis that that set out by the taxpayer or the Schedule is to provide some grounds for reaching some mutual agreement with the taxpayer.

Revenue’s refusal to accept an alternative period for apportionment can be appealed by notice in writing to the Appeal Commissioners. The appeal must be made within 30 days after the date of the notice of the assessment. The appeal is heard and determined in the manner provided for in Part 40A.

Both Revenue and the Appeal Commissioners are to disregard any application or appeal that has as its basis a requirement that effect be given to specified reliefs before reliefs that are not specified reliefs and also to disregard any attempt to alter the basis on which the amounts are calculated.

Once an amount is determined under this paragraph it takes the place of the amount determined under the appropriate preceding paragraph.

Relevant Date: Finance Act 2020