In Leekes Limited v HMRC [2015] UKFTT 0093 (TC), the First-tier Tribunal (Tax Chamber) ("FTT") has held that a taxpayer that succeeded to a trade was entitled to set carried-forward pre-succession losses against all of its trading profits and did not have to stream the profits of the succeeded trade and its existing trade.

Background

Leekes Limited ("the Appellant") carries on a trade of running out-of-town department stores.  At the relevant time, it owned four stores. On 18 November 2009, the Appellant purchased the entire share capital of Coles of Bilston Limited ("Coles") for £1.  Coles' trade at that date comprised three furniture stores plus warehousing facilities.

In the eight months of trading prior to the sale, Coles had a trading loss for the period of £950,321, and had trading losses carried forward of £2,262,120.

On 18 November 2009, the Appellant purchased the entire share capital of Coles for £1. Coles' trade at that date comprised three furniture stores plus warehousing facilities. In the eight months of trading prior to the sale Coles had a turn-over of £12.7 million and its trading loss for the period was £950,321. It had trading losses carried forward of £2,262,120.

On 19 November 2009, the business of Coles was hived-up to the Appellant at fair value of £892,928. Coles became dormant following the transfer of its business and retained no liabilities. One of the Coles stores was renovated and re-opened in November 2010 selling the Appellant's products. All three Coles stores were re branded as Leekes stores and continued to trade selling the same types of products. The three Coles stores sustained an aggregate trading loss of £176,258 for the accounting period ending 31 March 2010.

The Appellant's corporation tax computation for the year ended 31 March 2010, showed overall adjusted trading profits of £1,655,756.  The Appellant offset this amount against trading losses for the same amount, which were said to have been brought forward under section 393 Income and Corporation Taxes Act 1988 ("ICTA 1988").

The Appellant stated in the notes to its tax computation that it had succeeded to the Coles trade and had losses available for offset under section 343 ICTA 1988 (since rewritten to Chapter 1, Part 22, Corporation Tax Act 2010) of £3,167,441 of which £1,655,756 was offset in the current period.

HMRC opened an enquiry into the Appellant's corporation tax return for the period ended 31 March 2010. A closure notice followed, disallowing the losses claimed, and the Appellant appealed to the FTT.

The law

So far as relevant, section 343 ICTA 1988 provided:

"(1) Where, on a company ("the predecessor") ceasing to carry on a trade, another company ("the successor") begins to carry it on, and –

  1. on or at any time within two years after that event the trade, or an interest amounting tonot less than a three-fourths share in it belongs to the same persons as the trade, or such an interest belonged to at some time within a year before that event; and
  2. the trade is not, within the period taken for the comparison under paragraph (a) above,carried on otherwise than by a company which is within the charge to tax in respect of it; then the Corporation Tax Acts shall have effect subject to subsections (2) to (6) below.

In paragraphs (a) and (b) above references to the trade shall apply also to any other trade of which the activities comprise the activities of the first mentioned trade ...

(3)  Subject to subsection (4) below and to any claim made by the predecessor under section393A(1), the successor shall be entitled to relief under section 393(1) as for a loss sustained by the successor in carrying on the trade, for any amount for which the predecessor would have been entitled to relief had it continued to carry on the trade."

FTT's decision

The FTT allowed the appeal, concluding that the Appellant was entitled to set the losses carried forward from the Coles business against its aggregate profits.

HMRC accepted that the Appellant had succeeded to the trade of Coles, and therefore the trade losses of Coles were preserved and available to be set-off against future profits of Coles' trade.  However, HMRC argued that section 343(3) ICTA only permitted the Appellant to use those losses  against any profits of a separately identifiable trade formerly carried on by Coles.

The FTT rejected this argument. In the view of the FTT, section 343(3) was drafted on the assumption that the successor would take on the original company's trade, rather than an amalgamation with the predecessor's trade.  The statutory provisions did not provide clear guidance as to how the legislation should be interpreted where this was not the case.  The FTT concluded that the first limb of section 343(3) should be read as meaning the losses should be available "as if the successor had sustained the losses in the post succession trade".

The FTT preferred the Appellant's interpretation of the relevant provisions.  This was for threemain reasons.  Firstly, the Appellant's approach recognised that there is no explicit reference to a requirement to stream losses in section 343(1) and (3), and therefore it was not necessary to imply such wording into the statute. Secondly, the Appellant's approach avoided extensive deeming and practical difficulties, which would be the unavoidable result of HMRC'sapproach.  Thirdly, the Appellant's approach was more closely aligned to commercial reality.

Comment

Surprisingly, despite being on the statute book since 1965, there was no existing authority on the issue of whether carried-forward losses on succession of a trade may be set against the whole of the successor's trading profits or only that part arising from the succeeded trade. This decision provides helpful clarification of the position.

Taxpayers will welcome the FTT's rejection of HMRC's restrictive interpretation of the relevant provisions, however, given the facts in this case must be fairly common, it is likely that HMRC will seek to appeal to the Upper Tribunal.