UK Government Steps In To Curb Manipulation Of Partnership Losses

by Jason Gorringe, Tax-News.com, London

12 February 2004

The Government has brought forward legislation, effective from Tuesday, February 10, to address tax avoidance schemes which exploit relief for trading losses through partnerships.

The government has become worried that some schemes manipulate partnership profit-sharing arrangements to allocate losses that are greater than an individual's economic contribution to a partnership to achieve a tax advantage.

It also wants to prevent other schemes that create large losses initially to set against income, but seek to avoid tax on later income flows by leaving the partnership before the majority of the income arises.

"These schemes exploit tax reliefs that are intended for people who risk their own money in running genuine businesses, but the schemes manipulate tax relief to create claims for losses in excess of the capital at risk,” pointed out Dawn Primarolo, the Paymaster General, in a statement

“Schemes like this undermine the true purpose of tax relief and we are determined to take all appropriate action to counter them," she added.

According to the Inland Revenue, the new rules will apply to trades carried on in partnership, and will only affect partners who did not spend a significant amount of time working in the trade when the losses arose. The changes will not therefore affect genuine traders who actively run their own trade.

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