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FHL sideways loss relief restrictions

FHL sideways loss relief restrictions

Have received an HMRC enquiry into a 2010-11 loss relief claim on an FHL business (against total other income) where the loss relates principally to capital allowances.

HMRC is asking for evidence of the amount of time spent in the management of the FHL business.  Not quite sure what he is getting at but feel that I need to know.

Is there some statutory (or case law) limitation on the sideways relief available here, and if so, is there a minimum number of hours per week that the taxpayer would have to satisfy?

Thanks for any pointers

With kind regards

Clint Westwood

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24th Feb 2013 21:19

The only thought I have is,

They are trying to prove that this individual is "active".

 

ITA 1007 s74 A limits relief for  losses and applies a £25,000 cap were an individual carries on a trade in a non active capacity i.e spends less than 10 hours a week!

 

If it is, then the rules will only allow loss relief on the contribution made, if they spend 10 hours or less on the business.

See

http://www.hmrc.gov.uk/manuals/bimmanual/BIM72640.htm

 

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24th Feb 2013 21:37

Join the club

Hi Clint - had exactly the same, as did another firm I heard of recently.  There must have been a glut of claims in this year.

What you are looking for is set out in HMRC's BIM75765 this seeks to restrict the sideways losses to a max of £25K for "non-active traders" which, in this case, means anyone spending on average < 10 hours a week in running the trade.

The legislation it is quoting from is ITA 2007 S74 and the 10 hours is quoted in S74C(2).

In my case it was a new FHL and I argued that the set up time in advance, in which major refurb went on, was relevant to the calculation in that pre-letting expenditure was allowed, as if spent on day one, and so the time involved in spending that money should also be included.  HMRC hinted that they would disallow pre-trade time involved in capital expenditure, but seeing as so much was Cap Allowances and that they also spent a lot of time in general arrangements,  HMRC were OK with what we contended.  We had no evidence but listed down everything that had to be done on a regular basis.  We were lucky that the local agents just found tenants and my clients then did everything else, including regular trips at over 100 miles each way.

Had this not been the case I was going to argue that whilst, in most respects, FHLs are treated like an ordinary trade this is one area in which the normal trade rules did not fit well.  In other words I can understand my painter & decorator client being expected to spend 10 hours a week in either doing or trying to find work, but, with a FHL, you have a property that sits their doing nothing until advertising or the weather encourages someone to stay, doesn't mean it's not run on a commercial basis, when it's available or in operation (for the defined weeks a year).

Good Luck and PM me if you need anything else.

 

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25th Feb 2013 06:26

re the calculation

Is it safe to assume that the denominator in working out the average hours per week can be limited to the days available for letting rather than the whole year?

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25th Feb 2013 06:41

Yes

That's what I'd do, especially if the property is in a seasonal area where the non-availability is not down to client's choice. 

It's not safe however, if the non-availability is as a result of personal choice, eg when used persnally or for friends/family, as this would indicate a non-commercial motive.

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25th Feb 2013 09:36

Hmm, had another look at BIM75765 and s,74C

The definition of the denominator is enshrined in statute: the greater of 6 months or the basis period.  For most ongoing businesses after the first period the basis period will be for a full year.  Either way, the days of availability seem to be irrelevant for this purpose.  Bummer.

With kind regards

Clint Westwood

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25th Feb 2013 10:57

Just by way of confirmation

There was a reader's query in Taxation last week on the "does the restriction really apply to FHLs?" point.  John Endacott, who writes on the subject of FHLs, was one of the respondents and confirmed what Arthur and Paul (in his first post) are saying.

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