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Spotlight 8 and sideways loss relief - What does it mean for farming


Julie Butler - Expert Author

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17th May 2010

HMRC have published “Spotlight 8”, which concerns investments made by taxpayers to obtain trade loss reliefs. This tax relief is also known as “sideways” income tax loss relief. Typically, the arrangements/schemes coming under scrutiny involve a large tax loss being generated, either in partnership or alone, by accounting for the arrangement as a trade and either writing down the value of trading stock or claiming deductions or allowances for purported trading expenditure. Often these schemes are funded in part by borrowing and may include a mechanism that means repayment should be guaranteed. The individuals claim the loss as sideways loss relief against their other tax liabilities. HMRC consider that these schemes fail to meet the commercial and other requirements for sideways loss relief so that no relief will then be available to the participants.

So what does the attack on sideways loss relief have to do with farming? Was Spotlight 8 meant to impact on farming and equine businesses? Perhaps not but it does raise awareness of commerciality. Many farms and studs can make large genuine income tax losses which are offset “sideways”. However, there are some operations which could be called into question.

HMRC also say that individuals participating in schemes coming under Spotlight 8 must meet the requirement that at least ten hours a week are spent personally engaged in commercial activities of the trade carried on. The activities which are claimed to be sufficient to meet HMRC’s test for ten hours a week, for example time spent on reading scripts or medical journals, watching TV or DVDs etc, must be in respect of a trade and undertaken on a commercial basis with a view to profit, otherwise the result that any trade loss would be subject to the sideways loss relief restrictions for non-active traders.

For arrangements made on or after 21 October 2009 a general restriction will also apply preventing sideways loss relief for a loss arising to a person from a trade, profession or vocation where a main purpose of the arrangements is to obtain a reduction in tax liability, i.e. an artificial arrangement. HMRC warn in such circumstances that they will challenge the arrangements and the activities of individual participants and litigate, if necessary. HMRC will also withhold repayments of tax resulting from claims to sideways loss relief in appropriate cases where they think the background is artificial.

Whilst Spotlight 8 in reality relates to “film partnership” and other artificial schemes for tax losses it is another emphasis of the need to ensure the farming and equine activities are commercial activities. The ten hours a week spent on commercial activities associated with creating a profit must be met and HMRC are prepared to look at what activities are actually carried out.

Spotlight 8 should be seen as a useful “wake-up” call for studs, farms and large equine establishments bought with a view to possibly shelter wealth from Inheritance Tax. Whilst these trades provide a wonderful lifestyle there must be evidence of the commercial approach.

Spotlight 8 puts the spotlight (excuse the pun) on commerciality, avoiding artificiality and ensuring that the ten hours spent are genuine, commercial and with a view to a profit. As a basic principle Spotlight 8 can only increase awareness for the need for commerciality and lack of artificiality. This must make lifestyle farms and stud farms aware of the need to justify loss claims. It can be said that there are three things certain in life and they are death, taxes and that HMRC will ask to have sight of a business plan produced at the start of the business to prove that the concept of commerciality and view to profit were considered from the beginning. A case for commerciality is considerably weaker if there was no business plan.

About the Author

Article supplied by Julie Butler F.C.A. Butler & Co, Bowland House, West Street, Alresford, Hampshire, SO24 9AT.  Tel: 01962 735544.  Email;, Website;

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification ISBN: 0754517691 (1st edition) and ISBN: 0754522180 (2nd edition) and Equine Tax Planning ISBN: 0406966540.  The third edition of Tax Planning For Farm and Land Diversification will be published shortly. 

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Article Published/Sorted/Amended on Scopulus 2010-05-17 17:55:13 in Tax Articles

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