Revenue Note for Guidance

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Revenue Note for Guidance

PART 12

Principal Provisions Relating to Loss Relief, Treatment of Certain Losses and Capital Allowances, and Group Relief

CHAPTER 1

Income tax: loss relief

Overview

This Chapter contains the provisions affording income tax loss relief. The loss reliefs provided are —

In addition, certain payments assessed to tax under section 238 are treated as a loss arising in a trade or profession where the payments are incurred wholly and exclusively for the purposes of the trade or profession (section 390).

The availability of loss relief is restricted in the case of certain trades and activities. This may involve allowing the loss to be offset only against income arising to the person from the same trade or activity. The restriction can also apply where the losses are created or increased by the use of capital allowances (see Chapter 2 of this Part). This type of restriction of relief is known as “ring-fencing”. The most important such provisions are —

Special provisions also apply on the way losses may be used where they arise in a trade of farming (sections 661 and 662).

381 Right to repayment of tax by reference to losses

Summary

Any person who, either solely or in partnership, sustains a loss in any year of assessment in the carrying on of a trade, profession (including vocation) or employment is entitled to relief in respect of that loss. The amount of the loss is to be calculated in the same way that a profit would be calculated for the activity in question. The relief, which must be claimed, is granted by making a recalculation of the taxpayer’s income tax liability for the year by reference to a revised total income figure which is arrived at by the deduction of the amount of the loss from the person’s income for the year. To the extent that this recalculation shows that an overpayment was made the excess tax is repaid (without interest). The need to seek a repayment may be avoided if the claim for relief under this section is made before the final assessment for the year is made (for instance, the claim could be submitted along with the self assessment return under Part 41A.)

Strictly, loss relief under this section is to be calculated by reference to the year of assessment in which the loss arises. However, in practice, the relief is in certain circumstances (that is, in the case of a continuing business) given by reference to a loss sustained in the 12 month accounting period ending in the year of assessment for which the claim is made. However, it is open to the taxpayer to insist on the application of the statutory basis. The strict statutory basis for the relief is, however, applied in certain commencement, cessation and other cases.

By virtue of section 392 a taxpayer may opt to use capital allowances to create or augment a loss qualifying for relief under this section. Where this happens, relief is granted in respect of an actual loss sustained in a trade, etc before giving effect to any capital allowances which may be so utilised. Section 381A (inserted by section 18 of the Finance Act 2013) provides for a restriction of loss relief in certain cases where the loss is sustained in carrying on a “specified trade”.

Details

Loss relief

(1) Any person sustaining a loss in a year of assessment in the carrying on, either solely or in partnership, of any trade, profession (including vocation) or employment is entitled to relief in respect of that loss. Relief for any such loss is granted to a taxpayer by deducting the amount of the loss from the taxpayer’s income from all sources for the year in question (that is, the deduction is to be made in arriving at total income). Where this recalculation reveals an overpayment of income tax, the excess tax is repaid (without interest). It is necessary to make a claim for this relief. Section 381A provides for a restriction of loss relief in certain cases where the loss is sustained in carrying on a “specified trade”, section 381B provides for the restriction of loss relief for passive traders and section 381C provides for the restriction of loss relief that results from a tax avoidance arrangement.

Exclusion

(2) Loss relief is not available in respect of a loss sustained by the owner or part owner of a stallion from the sale of services of mares by the stallion or from the sole rights to such services.

(2A) However, after the 31 July 2008 when income from stallion stud fees becomes fully taxable, the exclusion referred to in subsection (2) will no longer apply. Losses incurred in a chargeable period which straddles 31 July 2008 will have loss relief limited on a time apportionment basis.

Order of relief

(3) Where loss relief is claimed, the following is the order in which the loss is set against the taxpayer’s income —

  • firstly, against the income of the individual which is of the same class (corresponding class) as the type of income which would have arisen from the business in which the loss is sustained had a profit rather than a loss been made,
  • secondly, against the other income of the individual,
  • thirdly, against income of the individual’s spouse or civil partner which is of the corresponding class, and
  • finally, against other income of the spouse or civil partner.

Normally, income of the corresponding class will be earned income and, accordingly, the loss will be set off in the order of (i) own earned income, (ii) own unearned income, (iii) spouse’s/civil partner’s earned income, and (iv) spouse’s/civil partner’s unearned income. Unearned income can be income of the corresponding class where the loss arises in a business where, for instance, the claimant is a sleeping partner. In such a case the order of set-off is (i) own unearned income, (ii) own earned income, (iii) spouse’s/civil partner’s unearned income, and (iv) spouse’s/civil partner’s earned income.

In the case of a body corporate liable to income tax, loss relief is calculated on the basis of a recomputation of the income tax which would have been payable if the profits/gains of the trade in which the loss was sustained had been reduced by the amount of the loss. The balance of any relief available is then to be set off against other income of the body corporate.

Computation of losses

(4) Losses are computed in the same way that profits would be for the activity in question.

Bar on double relief

(5)(a) Loss which is treated as reducing income of a given tax year is not to be taken into account in computing an assessment for a subsequent year.

(5)(b) Losses treated as reducing income for the purposes of relief under this section are treated as reducing the person’s income for the other purposes of the Income Tax Acts. This ensures that the same amount is not taken into account for the purposes of relief under this section and under some other provision of the Income Tax Acts in the same tax year.

Claims and appeals

A claim must be made to the inspector on the prescribed form within 2 years of the end of the year of assessment in which the loss is sustained. The claim is determined by the inspector.

A person who is not satisfied with the determination of the inspector may appeal the determination by notice in writing to the Appeal Commissioners. An appeal must be made within 30 days of the date of the notice of the determination. The Appeal Commissioners will hear and determine an appeal in the manner provided for in Part 40A.

Relevant Date: Finance Act 2017