In Leekes v HMRC [2015] UKFTT 93 (27 February), the FTT found that, following a trade succession, all the losses of the predecessor’s trade that had been subsumed with the successor’s trade were available for offset against the combined profits of the successor company.
Leekes ran department stores. In November 2009, it had purchased the entire share capital of Coles, which ran furniture stores and warehousing facilities. Coles had losses in that tax year, as well as carried forward losses. Coles’ business had then been hived up to Leekes and Coles had become dormant. Leekes refurbished the stores previously owned by Coles and rebranded them as Leekes stores.
In its corporation tax return for the year ended 31 March 2010, Leekes had offset Coles’ losses against its own trading profits, on the basis that it had succeeded to Coles’ trade (ICTA 1988 s 343). HMRC accepted that there had been a succession; however, it considered that set off was only available against the profits of Coles’ trade post succession.
The FTT noted that the underlying assumption of s 343 is that a succession will lead to a single new trade. HMRC’s suggestion that the two trades should be treated as separate parts, for the purpose of identifying tax losses, was counter to this principle. Furthermore, the tax legislation should be interpreted to produce a result in line with commercial reality. The first limb of s 343(3) therefore meant that the losses should be available ‘as if the successor had sustained the losses in the post succession trade’ and no restriction in the quantum of losses – by reference to the profits available in the notional trade of the predecessor post succession – could be implied.
Why it matters: The FTT pointed out that s 343 was rather ‘succinct’ and that there was no authority directly on the point of deciding which losses are available for offset on a trade succession. This case answers the question for now; all losses are available. It remains to be seen whether HMRC will appeal.
In Leekes v HMRC [2015] UKFTT 93 (27 February), the FTT found that, following a trade succession, all the losses of the predecessor’s trade that had been subsumed with the successor’s trade were available for offset against the combined profits of the successor company.
Leekes ran department stores. In November 2009, it had purchased the entire share capital of Coles, which ran furniture stores and warehousing facilities. Coles had losses in that tax year, as well as carried forward losses. Coles’ business had then been hived up to Leekes and Coles had become dormant. Leekes refurbished the stores previously owned by Coles and rebranded them as Leekes stores.
In its corporation tax return for the year ended 31 March 2010, Leekes had offset Coles’ losses against its own trading profits, on the basis that it had succeeded to Coles’ trade (ICTA 1988 s 343). HMRC accepted that there had been a succession; however, it considered that set off was only available against the profits of Coles’ trade post succession.
The FTT noted that the underlying assumption of s 343 is that a succession will lead to a single new trade. HMRC’s suggestion that the two trades should be treated as separate parts, for the purpose of identifying tax losses, was counter to this principle. Furthermore, the tax legislation should be interpreted to produce a result in line with commercial reality. The first limb of s 343(3) therefore meant that the losses should be available ‘as if the successor had sustained the losses in the post succession trade’ and no restriction in the quantum of losses – by reference to the profits available in the notional trade of the predecessor post succession – could be implied.
Why it matters: The FTT pointed out that s 343 was rather ‘succinct’ and that there was no authority directly on the point of deciding which losses are available for offset on a trade succession. This case answers the question for now; all losses are available. It remains to be seen whether HMRC will appeal.
