An old farming partnership ( 2 partners) traded from the early 2000's.
It made a profit in 2004/05, and then made losses for the next 6 years from 2005/06 to 2010/11 inclusive.
one partner then left at the end of 2010/11 year and a new partner joined the remaining partner.
the new farming partnership then made losses for 2011/12, 2012/13 and 2013/14. Loss relief against PAYE income for both partners would have been claimed in most if not all years for both the old and new partnerships up to 2013/14.
The farm has made a profit in 2014/15
I am not sure of what the basis was for the old farming partnership in terms of whether it traded on a commercial basis or not, but I can say that the new farming partnership has been trading with a view to making a profit.
This is due to the amount of investment and time etc, that had been put in since 2011/12, and also because the PAYE income for the existing partners has now been greatly reduced, and so there will be a greater reliance on the Farm business for the partners livelihood going forward.
HMRC are now asking whether the losses for the period of the new partnership for 2011/12 to 2013/14 are caught by S67 ITA 2007, and should not have been claimed.
any ideas on this? how does the change in partners affect loss relief?
thanks
Replies (14)
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HMRC may well have a point, but you will need to look closely at the history.
With losses in 9 consecutive years loss relief should have been denied for at least 4 of those years unless there was a reasonable expectation of a profit. Since one of the partners has remained throughout, the partnership has been continuing the same trade throughout so HMRC have a case that the later losses for all 3 partners are not allowable for sideways relief. You will need to look at the books and the history to see if throughout the 9 year period there was always a reasonable and continuous expection of eventually turning a profit - did they make any changes in an attempt to reverse the losses, were the losses significant, were they being gradually reduced, was the new partner brought in to try and revive the practices etc.
Since you imply that all 3 partners had other paying jobs elsewhere you may find it difficult to argue the case that this was a viable trade throughout. You may be forced to withdraw many of the earlier sideways loss relief claims, repay tax and interest, then carry the losses forward instead. At least you now have profits to use them against.
Dates
Was there really a partnership throughout or was there a small period of sole trading?
If partnership continued throughout but partners changed, then where your year matches the fiscal year there is no doubt in my mind that the losses only available for carry forward. In my opinion as the one person traded throughout in the same trade, and loss claims are individual, his losses should have been automatically restricted anyway. The new partner is the only one who could benefit if there was a break.
Were capital allowances claimed to increase or create the loss. If to create then HMRC reopening could allow you to amend one year to break the 6 year into a smaller restricted period.
Capital allowances
For the purposes of S67 the loss is calculated without regard to capital allowances, which I take to mean that disclaiming them would not help.
@SKCOX
I agree that that was the case prior to the introduction of self-assessment but the changes made then made capital allowances an expense not an additional claim.
I was not aware of any exclusions to that treatment so please can you point me in the direction of the relevant legislation?
@ Marion It is in ITA 2007, section 67(2).
See also the recent Silvester decision: http://www.bailii.org/uk/cases/UKFTT/TC/2015/TC04682.html
When the old partner left and the new partner joined, was there any break?
See also last year's French decision: http://www.bailii.org/uk/cases/UKFTT/TC/2014/TC04053.html
and then cast your mind oversection 69.
Thanks Portia
Very interesting cases to read.
Shows how long it is since I had to look at a loss claim for a farmer doesn't it!!
Capital allowances ?
Yes the above are very interesting cases indeed. The French case may have some relevance to my case. The new partner joined in 2011/12, at which time there was a change from Beef farming to dairy Farming, due to the influence of the new partner.
Losses continued to be made for 2011/12, 2012/13 and 2013/14 years, due to having to purchase machinery and more importantly build up stock numbers, which eventually led to a profit in 21014/15 year.
How far back can the Inspector go now? He is only looking to disallow the losses from 2011/12 onwards at this stage?
Thanks
In light of your machinery purchase comment, are the losses you have computed those before or after capital allowances?
Something I have not dealt with for years but I thought it was losses ignoring capital allowances so purchases of machinery would surely have very limited impact, but as I said I have not dealt with farm accounts for a very long time (Mid to late 1990s) so comment may not be on point.
Well, the only year before 2011/12 for which the loss could potentially be disallowed under section 67 is 2010/11. However, regard needs to be given to section 70, which might make section 2011/12 the first year, in any event.
HMRC would need to use discovery to get at 2010/11, which has a four year time limit unless the taxpayer has not taken reasonable care, when it is six. There is a risk of HMRC also successfully taking the point for 2010/11.
Run two arguments:
That the old beef farming partnership ceased at the end of 2010/11 (or whenever exactly it was) and a new dairy farming partnership commenced at the beginning of 2011/12 (or whenever), andBoth the old and new partnerships have at all times satisfied the reasonable expectation of profit test. The old partnership always expected to return to the 2004/05 profit situation, and the new partnership always, in each tax year of loss, expected to be profitable in the subsequent period, although this was not realised until 2014/15.
That way if the old and new partnerships with a cessation of one trade and commencement of another argument succeeds, section 67 cannot apply for the years 2011/12 to 2013/14, and only 2010/11 is in jeopardy.
Even if that argument fails, you might get it accepted that the reasonable expectation of profit test was met for 2011/12 to 2013/14, leaving only 2010/11 in jeopardy.
To be fair though, this will probably go to tribunal.