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«Revenue Operational Manual 12.01.02 [12.01.02] Income tax loss relief Restrictions to the amount of relief available Contents 1. Introduction 2. What ...»

Revenue Operational Manual 12.01.02

[12.01.02] Income tax loss relief

Restrictions to the amount of relief available

Contents

1. Introduction

2. What relief is available for trading losses?

2.1. Current year trading losses (section 381)

2.2. Carry forward of unused trading losses (section 382)

2.3. Terminal loss relief (section 385)

3. How relief is given under section 381

4. Claiming relief under section 381

5. Restrictions on relief available under section 381

5.1. Land losses (section 381A)

5.1.1. Definitions

(i) Specified loss

(ii) Specified trade

(iii) Specified trader

5.2. Non-active trades (section 381B)

5.2.1. Definitions

5.2.2. Case law

5.2.3. Exceptions

5.3. Tax avoidance arrangements (section 381C)

5.3.1. Definitions

5.3.2. The restriction

5.3.3. Case law

5.3.4. Exceptions

5.4. Capital allowances (section 409A - 409E)

5.5. Farming losses (section 662)

5.5.1. Non-commercial losses (section 662(2)(a))

5.5.2. 3 years of losses (section 662(2)(b))

5.6. Partnerships (section 1013)

5.7. Pre-trading expenditure (section 82)

Revenue Operational Manual 12.01.02

1. Introduction There are a number of sections which are relevant when determining what relief an individual can obtain for losses that arise in the course of a trade. This manual sets out the sections which provide for the relief and also details the sections that restrict that relief.

The interaction of the provisions dealing with loss relief and the provisions dealing with determining the assessable profits in situations of commencement/ cessation/change in accounting date are not dealt with in this manual.

2. What relief is available for trading losses?

2.1. Current year trading losses (section 381) When an individual is carrying on a trade or a profession and that individual incurs a loss for a year of assessment, then relief may be available under section 381 TCA 1997. That section provides that an individual may elect to have the trading/professional loss offset sideways against other income of the individual, or in cases of joint assessment, against income of the individual’s spouse/civil partner.

Section 392 TCA 1997 provides that an individual may treat the current year trading/professional capital allowances as an amount to be deducted in computing the profits or loss of that trade/profession for the purposes of making a claim for relief under section 381. If the section 381 loss (as augmented or created by the section 392 election) exceeds the individuals other income, the section 381 relief is treated as having been given first in respect of the tax loss of the trade in priority to the capital allowances (thereby leaving the capital allowances not set off under the claim to be carried forward to the following tax year).

2.2. Carry forward of unused trading losses (section 382) Section 382 TCA 1997 provides that a loss in respect of which relief is not given under section 381 is carried forward and set against the next available profits of the trade or profession (note that this does not include any capital allowances treated as a loss under section 392).

For this purpose, the profits of the trade or profession of the next year available to cover the loss carried forward, are the taxable profits for that year after deducting the capital allowances. If those profits (after capital allowances) are insufficient to fully absorb the tax loss carried forward, the balance is again carried forward to the following year of assessment, and so on, until the loss is fully used up.

2.3. Terminal loss relief (section 385) Terminal loss relief is dealt with in manual Part 12-05-06.

Revenue Operational Manual 12.01.02

3. How relief is given under section 381 Where in a year of assessment an individual sustains a loss in a trade or profession (whether carried on solely or in partnership with others), that individual can choose to make a claim for relief under section 381.

The loss available for the claim is the amount computed under the rules of Schedule D Case I or Case II, in the same way as the taxable profits would be computed, before deducting any capital allowances. However, a claim may be made under section 392 to have the loss increased by the amount of capital allowances less any balancing charges.

If a taxpayer chooses to claim relief under section 381 then he cannot choose to use only part of the loss against part of his income. Instead, if a claim for relief is made, the full loss must, in so far as possible, be set off against all of the taxpayer’s income. Equally, if that individual is jointly assessed, then he/she cannot choose to claim relief against his/her income, but not against his/her spouse’s/civil partner’s income. Losses in excess of the individuals other income must first be offset again trading income of his/her spouse/civil partner with any remaining excess offset against the other income of his/her spouse/civil partner.

Section 381(6) provides that an individual may make a claim for loss relief under the section not later than 2 years after the end of the year of assessment to which the claim relates. Any claim for a repayment of tax under section 865 arising out of, for example, an error or mistake in the original tax return, would therefore need to be made within that same 2 year timeframe1.

4. Claiming relief under section 381 Once the amount of the section 381 loss to be claimed has been determined, relief under section 381 is given on a repayment basis by re-computing the taxpayer’s liability to income tax for the year of claim. In this regard, section 381(5)(b) provides that relief for the losses is regarded as a deduction in computing total income. The revised income tax liability is compared with that calculated before the section 381 relief claim and any excess tax paid is refunded to the taxpayer.

Section 381(6) provides that any claim for repayment of tax must be made in the appropriate form within 2 years of the year of assessment in which the loss was sustained. The claim for relief can be made on the Form 11 or Form 12 as appropriate by entering the amount of the loss to be set off against other income.

Claims may also be submitted electronically via ROS Form 11 and eForm 12.

Although a section 381 claim is technically one of a repayment of income tax previously assessed, if a valid claim is submitted on the Form 11/Form 12 for the relevant year in which the loss is sustained, the final self-assessment on the income may be reduced by the amount of the loss claim thus negating the need to seek an amended assessment.

It should also be borne in mind that the tax loss is the amount resulting from the computation for the period before any capital allowances or balancing charges are taken into account (subject to the making of a section 392 claim). However, in determining whether an individual is a ‘chargeable person’ for self-assessment

–  –  –

purposes, the amount of the individual’s non-PAYE income, for the purpose of applying the €5,000 threshold, is the amount after taking a deduction for capital allowance.

5. Restrictions on relief available under section 381 There are a number of restrictions on how much relief an individual can claim under section 381. The main restrictions are dealt with below.

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5.4. Capital allowances (section 409A - 409E) Section 30, Finance Act 1998 introduced a restriction on the amount of relief available for tax losses arising from certain property based tax incentives. Where an individual is entitled to claim capital allowances under certain property reliefs, such as industrial buildings or hotels, this amendment restricts the loss relief available by virtue of a claim under section 392. It provides that in general an individual can only claim relief for €31,750 of the losses created from using capital allowances against his or her other income.

–  –  –

5.7. Pre-trading expenditure (section 82) Pre-trading expenses which are deductible under section 82(3) are not permitted to create or augment a claim for a loss under section 381.



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