409D Restriction of reliefs where individual is not actively participating in certain trades

Summary

Section 409D is an anti-avoidance measure aimed at closing off the unintended use of capital allowances by passive investors in certain trades. The trades concerned are in the area of electricity generation, film and music production and oil and gas exploration and exploitation.

Individuals who are “passive investors” in such trades (that is, where they invest in such a business without actively participating in the running of the trade) will have their entitlement to tax reliefs restricted. Under this section, such individuals are not entitled to set-off losses and capital allowances of such trades against their other income so as to reduce their income tax liability. The section restricts the way the tax reliefs available work so that the reliefs can only be used to shelter the individual’s income from tax to the extent, if any, that it is earned from the targeted trades. The measure has no effect whatever on individuals or companies who are genuinely engaged in a full-time capacity in any of the trades targeted.

Details

Definitions

(1) An “active trader” is an individual who spends the greater part of his or her time working in, or in the management of, a trade.

The definition of “electronic” is taken from the Electronic Commerce Act 2000. It is used in relation to the production of films and music and is designed to encompass all media which might be used for the production of films and music properties. The definition seeks as far as possible to be technological neutral so as to be applicable to any new technology which might emerge.

A “specified trade” is a trade involving or consisting of the generation or supply of electricity, operations in the area of oil and gas exploration and exploitation, and various activities in the area of film and music production and exploitation.

The “specified provisions” are sections 305 and 381.

Section 305 allows capital allowances for machinery or plant which are not set off against income from the trade in which the machinery or plant is used to be set-off against other income of the individual (for example, professional income, employment income, income from other trades or rental income).

Section 381 provides for loss relief. The aspect of loss relief which this section is concerned with is the provision which allows the amount of the loss to be deducted from the other income (that is, income other than income from the trade in which the loss arises) of an individual for the year in which the loss is incurred.

A “relevant year of assessment” is the tax year 2002 and later years in which an individual carries on a trade of electricity generation other than as an active trader.

In the case of any other specified trade, a “relevant year of assessment” is the year of assessment 2003 and subsequent years.

Restrictions

(2) The restrictions apply where an individual carries on a trade of electricity generation or supply other than as an active trader. In other words, the section has no affect whatever in the case of an individual who carries on these trades in a full-time capacity. The section only applies to individuals who effectively are investors in the business and who engage others to carry on the actual trade.

Where the provision applies any relief due to be given in the tax year 2002 or a later year in respect of a loss in the trade or in respect of a capital allowance will be given only against income from that trade. In other words, the reliefs available are ring fenced and can be used only to reduce the income, if any, from the actual trade.

As a safeguard the final part of the provision ensures that the amount qualifying for relief and restricted as set out above cannot be used to obtain tax relief against any other income.

Relevant Date: Finance Act 2021