One seems to discover on an alarmingly regular basis that truths which one has taken for granted for years turn out not to be true. So, when one finds ursine faecal matter in the forest or discovers that the Holy Father does in fact take Mass, it’s curiously reassuring. We were thus particularly comforted by the Court of Appeal decision in Leekes Ltd v HMRC [2018] EWCA Civ 1185.
The case was about the use of trading losses.
Leekes Limited (“Leekes”) had traded for many years. In 2009 it acquired the entire issued share capital of a company called Coles of Bilston Limited (“Coles”) and hived up Coles’ existing business so that it formed part of a single continuing trade carried on by Leekes.
There was no question but that Leekes was in principle entitled to tax relief in respect of the historic trading losses incurred by Coles and remaining unused at the date of the hive-up. The question was whether it was entitled to set the losses against the profits of the whole trade, or whether (as HMRC claimed) they were available only against the part of its trading profits that were attributable to the activities hived up.
The legislation in question has been in place since 1965 and, as the Court observed, HMRC’s interpretation does not appear to have been challenged in the courts in the 50-odd years that have since elapsed. The First-tier Tribunal decision [2015] UKFTT 93 (TC) in favour of the company had been overturned by the Upper Tribunal [2016] UKUT 320 (TCC) and some would say that it was a testament to the persuasive powers of the company’s counsel that consent to take the matter before the Court of Appeal had been obtained.
That Court did not “feel any real doubt” that HMRC’s construction was correct (“the only construction which the ordinary and natural meaning of the statutory language can bear, and it produces an obviously sensible result”) and the judgement is accordingly quite a short one.
It’s worth recording here for only a couple of reasons.
The first is to remind readers that the use of losses even against profits of the hived-up trade will be denied or restricted in three main circumstances:
- broadly, to the extent that liabilities are not hived up but are left behind in the acquired company;
- where the trade has become “small or negligible” before the change of ownership; or
- where there has been a “major change in the nature or conduct of the trade” within a period of eight years starting three years before the change of ownership.
The second reason is to mention how the provisions for succeeding to losses in this way now interact with the changes to trading losses introduced by Finance (No 2) Act 2017. The changes are hugely complex, but they include inter alia relaxations in the use of trading losses. In principle trading losses arising after 31 March 2017 now may be carried forward to subsequent accounting periods and relieved not only against profits of the trade in which they arose (as was the case before the Finance Act changes) but also against non-trading profits.
So, how does that change affect losses arising on a hived-up trade? How would the new rules have applied if Leekes had acquired Coles in 2019 instead of 2009 and the losses had all been post-March 2017 losses? The answer is to be found at CTA 2010 s676EB: for the first five years following the acquisition, the acquired losses may be deducted only against profits “that can fairly and reasonably be attributed to the carrying on by the successor company of the transferred trade”. That is not quite the same thing as saying that only the trading profits of the transferred trade are eligible for relief: there may be non-trading profits that are nonetheless attributable to the carrying on of the trade. Perhaps the most obvious example would be capital gains on disposal of trading assets.
For more on the use of losses, whether under the old or the post-F2A 17 rules, please get in touch with your usual BKL contact or use our enquiry form.
