Income Tax Act 2007 section 78

First-year allowances and annual investment allowances: arrangements to reduce tax liabilities

Section 78 targets anti-avoidance situations where an annual investment allowance or first-year allowance has been claimed in connection with a qualifying activity or asset, and arrangements exist whose main or sole purpose is to generate a tax reduction through sideways loss relief.

• The section applies where an annual investment allowance or first-year allowance relates to a "relevant" qualifying activity or asset, and specific tax-motivated arrangements are in place.
• A qualifying activity is relevant if, at the time the expenditure was incurred or subsequently, it was carried on by the individual as a partner in a firm, or was transferred to a connected person.
• An asset is relevant if, after the expenditure was incurred, the individual transferred it to a connected person or sold it to anyone at below market value.
• The arrangements are caught if the sole or main benefit the individual could expect from the transaction giving rise to the expenditure is a reduction in tax liability through sideways relief.