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Films, smoke and mirrors

At first glance you could get the impression that the recent HMRC brief on partnership losses is about countering avoidance - an impression that's rather strengthened by the fact that it's headed "Tackling Avoidance". Indeed, we fell for it (see our BrassTax piece of last week).

But closer examination shows that the scope is much wider than anything that could reasonably be described as avoidance. For example, my wife (who has no income) wants to start up a business and I (a higher-rate taxpayer employed full-time) am happy to fund the start-up losses. We form a partnership and I stump up the considerable start-up losses. Hitherto I would have got tax relief on them. Now the relief is to be restricted to £25,000 - is this "tackling avoidance"? Or take the example of Mr Entrepreneur. He's been in the habit of backing likely lads who have a good business plan but no money. He typically forms an LLP with them, leaves them to run it and writes cheques to fund the start-up losses until the business either fails or becomes successful. Was his claim to sideways tax relief on money he had genuinely lost in supporting a real trade really "avoidance"? Not by any definition that we recognise. Well, whether it was or it wasn't, his relief will now be restricted to £25,000 per year. Mr Entrepreneur and other backers of enterprise and initiative may need to consider whether they need to find more tax-efficient way to fund new businesses, perhaps by loans to a limited company: but this is surely a restriction too far.