Revenue clarification on interpretation of SI 2003/2815 The Tax Credits (Miscellaneous Amendments No.2) Regulations 2003. On 5 November 2003 SI 2003/2815 The Tax Credits (Miscellaneous Amendments No.2) Regulations 2003 were laid before Parliament, coming into force on 26 November 2003. Amongst other things these regulations provide for the carry forward of surplus trading losses for tax credit purposes.
The Chartered Institute of Taxation has obtained the following clarifications on the meaning of these regulations. The text of the correspondence is reproduced below.
On the possibility of leap-frogging 2002/03, we asked:
“If a claimant has a large loss in 2001/02, such that some loss is not relieved for tax credit purposes against their 2001/02 income, do they carry it forward against their 2003/04 tax credits trading profits, or does it have to be set against 2002/03 trading income first? We realise that this is a transitional problem arising only on commencement of the tax credits legislation but there will be some claimants in this position and they will need to know what to do.”
The Revenue replied:
“You asked whether an unrelieved portion of a 2001-02 trading loss should be set against a self-employed claimant’s 2002-03 trading income or whether the claimant should skip a year and set it against 2003-04 trading income. As you rightly say, this is a transitional problem only for the first year of the legislation. Given that 2001-02 (not 2002-03) was deemed to be the “previous year” for 2003-04 tax credit claims, any unrelieved portion of a trading loss from that “previous year” should be carried over to set against 2003-04 trading income when the self-employed make their 2004-05 tax credit claim. This will be made clear in the guidance notes accompanying the 2004-05 tax credit claim form.”
On the availability of losses from 2002/03 and other years where no tax credit entitlement arises, we asked:
“What happens if a claimant has a trading loss in 2002/03? Can this be carried forward against 2003/04 trading income for tax credit purposes (regardless of the loss claims for real tax purposes)? We presume that if a claimant has a trading loss from a period when they were not entitled to tax credits (eg they were under 25 or had no children), they will get no relief (even if the loss is carried forward for income tax purposes under s385). We take this from the wording “Any trading loss in the year” (our emphasis), ie it must be a year of a tax credit claim. This would seem to deny the relief for the 2002/03 loss (2002/03 is never a year of a tax credit claim), but again your clarification would be welcome.”
The Revenue replied:
“From my previous remarks, it follows that as 2002-03 is not a year of a tax credit claim, there is no relief for tax credit purposes in respect of a trading loss incurred that year. As you point out, this arises from the words “a trading loss in the year”, as it appears both in the existing Step Four in regulation 3 (1) of the Definition & Calculation of Income Regulations and in amending regulation 4 (2). The wording “in the year” refers to a year of a tax credit claim.”
On losses from an overseas trade, we asked:
“We presume that exactly the same loss reliefs rules will apply if, unusually, the loss arises in an overseas trade, but, again, we would be glad of your confirmation.”
The Revenue replied:
“The definition of “trading income” in regulation 6 of the Definition & Calculation of Income Regulations extends to taxable profits within Case V of Schedule D of the Taxes Act, which covers income arising from a trade carried on overseas. Consequently, I can confirm that the loss relief rules also apply to losses of an overseas trade.”
On the matter of the date regulations come into force, we asked:
“We think you will have to make it very clear when and how these amending regulations come into force. Presumably they cannot apply to tax credit claims already made and awarded but, equally, they must apply when final entitlement to 2003/04 credits comes to be computed and the request is made for 2003/04 income. This begs the question of how the £2,500 increase-in-income disregard will be applied to certain claimants. If, because of a change in the rules, they are using two different measures of income for the two years, will some adjustment to the £2,500 computation be necessary?
The issue of operative date may be even more complex for those with losses. Will a large loss from 2001/02 be available to carry forward against 2003/04 under these regulations (regardless of whether they leapfrog 2002/03 as may be the case depending on your answer to 1c above)?
The £2,500 disregard problem will also be relevant to those who made incorrect statements of income for 2001/02 due to mistakes in the claim form (eg leaving out Gift Aid payments or averaging farming profits when no averaging was due). We think that you may have to consider all the ramifications of these problems and make some sort of statement as to how they will be dealt with on the finalisation of 2003/04 awards.”
The Revenue replied:
“As you say, the amending regulations should apply when final entitlement in respect of 2003-04 tax credits comes to be computed and the request is made for 2003-04 income to enable a provisional award for 2004-05 to be made. The same £2,500 disregard will apply in those cases affected by the changes in the definition of income between 2001-02 and 2003-04 as in all other cases.
As I indicated above, an unrelieved loss from 2001-02 — irrespective of its size — will be available to carry forward against 2003-04 trading income under these amending regulations.
We will bear in mind your comments about the mismatch between the claim form and the Definition & Calculation of Income Regulations as part of our preparations for the renewal process.”
We hope to publish an article in Tax Adviser in March 2004 dealing with some other aspects of these new regulations.
We are specifically asking the Revenue to confirm:
- the position of those who have share related income under Part 7 of ITEPA arising prior to 26 November 2003, and
- the position of those who, in accordance with the instructions at box 5.5 on page 31 of the 2003 TC600 Notes, deducted losses brought forward from years prior to 2001/02 against their 2001/02 trading income.
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