Film and other structured finance partnerships, as a tax efficient tool for private investors, are rendered ineffective as regards losses generated on or after 2 March 2007 under proposals to be confirmed in the forthcoming Finance Bill.

Sideways loss relief, under which trading losses for a tax year can be offset against other income (principally) of that or certain earlier tax years, is to be curtailed in relevant partnership situations as regards losses incurred from 2 March 2007.  Relief will thus be restricted to set off against future profits from the same partnership trade.

The proposals target limited partners and those individuals who spend less than 10 hours per week, on average, personally engaged in the partnership’s trading activity.  Where the new provisions apply, the sideways relief (as regards losses from any or all partnerships affected in a given tax year) will be limited to £25,000 per individual.

Two types of partnership trade are exempted from the £25,000pa personal limit, specifically professions and Lloyd’s Underwriters.

An extension to the existing anti-avoidance rule, which limits relief to the capital contributed by the partner concerned, is introduced at the same time.  The effect is to disregard capital contributed on or after 2 March 2007, the main purpose (or one of the main purposes) of which is to enable sideways relief (otherwise) to be obtained, excepting that paid under a pre-existing obligation.

Transitional rules are to apply to basis periods of account straddling 2 March 2007.

Various issues not mentioned in the HMRC Press Release, likely to be the subject of much lobbying, clarification and/or possible revision prior to publication of draft legislation, include:

The draconian nature and scope of the proposals,which appear to affect taxpayers who will not have participated in marketed planning arrangements.

The case for effectively foreshortening a form of funding for the film industry, the ending of specific tax reliefs for which had previously been announced.

The impact on government policy in relation to combating global warming etc. from such discouragement of partnerships, some already set up, to  engage in carbon credits trading and R & D in finding solutions to global warming.

The need for the above “purpose” test, re capital contributed, given the £25,000 individual limit, which on its own is expected to be  sufficient to cause many marketed arrangements to be withdrawn.

The application of the proposals to other types of structured finance arrangements, e.g. in connection with property development, hitherto relying on  accounting rules to accelerate recognition of project costs.

For further information contact Anne Gregory-Jones, Neil Simpson or Charles Osborn.