Trade merged into the successor’s trade and loss relief
In Leekes v HMRC [2018] EWCA Civ 1185 (23 May 2018), the Court of Appeal (agreeing with the UT and disagreeing with the FTT) found that s 343 relief was only available against profits of the predecessor’s trade which was deemed to have been continued by the successor, and not in relation to the enlarged successor’s trade.
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 had 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 any income generated by what was formerly Coles’ business. If HMRC was correct, no relief was available in the relevant year because that part of the enlarged business taken over by Leekes from Coles remained unprofitable.
The parties had agreed the following formulation of the issue: ‘Where a company succeeds to a trade of a predecessor in which losses have been incurred and that trade forms part of a larger trade carried on by the successor including its existing trade, how does ICTA 1988 s 343(3) apply to the successor in relation to carry-forward loss relief for those losses?’
The Court of Appeal observed that ‘the gateway to s 393(1) is opened for the successor, in respect of the accumulated losses of the trade which it has acquired and begun to carry on for itself. The next question is one of quantum: for how much of the accumulated losses of the predecessor is the successor entitled to obtain relief?’ To answer that question, the Court of Appeal referred to the second limb of s 393(1): the successor is entitled to relief ‘for any amount for which the predecessor would have been entitled to relief if it had continued to carry on the trade’. The court considered that the ‘trade’ could not be Leekes’ enlarged trade but only the trade deemed to have continued; Coles’ trade. The ‘deemed continuity’ only applied to Coles’ trade, so that relief could only be obtained if and to the extent that Leekes derived trading profits from Coles’ former trade.
The court added that Leekes’ approach would place the successor in a more favourable position than the predecessor, which could not have been Parliament’s intention. As to the FTT’s concern about the practical difficulties in identifying the income which may qualify for relief where the predecessor’s trade becomes subsumed into the successor’s trade, the court simply pointed out that ‘it is not permissible to disregard the words of a statute because of a perception of practical difficulty’; and that the difficulty could, in any event, be avoided with ‘careful record-keeping’.
Why it matters: The issue, which the Court of Appeal decided in favour of HMRC, exists since the enactment of FA 1965 s 61; the provisions were re-enacted in ICTA 1988 s 393 and now exist as part of CTA 2010 Part 22 Chap 1. The issue is material to many business acquisitions and it will be interesting to see whether Leekes decides to appeal to the Supreme Court.
Trade merged into the successor’s trade and loss relief
In Leekes v HMRC [2018] EWCA Civ 1185 (23 May 2018), the Court of Appeal (agreeing with the UT and disagreeing with the FTT) found that s 343 relief was only available against profits of the predecessor’s trade which was deemed to have been continued by the successor, and not in relation to the enlarged successor’s trade.
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 had 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 any income generated by what was formerly Coles’ business. If HMRC was correct, no relief was available in the relevant year because that part of the enlarged business taken over by Leekes from Coles remained unprofitable.
The parties had agreed the following formulation of the issue: ‘Where a company succeeds to a trade of a predecessor in which losses have been incurred and that trade forms part of a larger trade carried on by the successor including its existing trade, how does ICTA 1988 s 343(3) apply to the successor in relation to carry-forward loss relief for those losses?’
The Court of Appeal observed that ‘the gateway to s 393(1) is opened for the successor, in respect of the accumulated losses of the trade which it has acquired and begun to carry on for itself. The next question is one of quantum: for how much of the accumulated losses of the predecessor is the successor entitled to obtain relief?’ To answer that question, the Court of Appeal referred to the second limb of s 393(1): the successor is entitled to relief ‘for any amount for which the predecessor would have been entitled to relief if it had continued to carry on the trade’. The court considered that the ‘trade’ could not be Leekes’ enlarged trade but only the trade deemed to have continued; Coles’ trade. The ‘deemed continuity’ only applied to Coles’ trade, so that relief could only be obtained if and to the extent that Leekes derived trading profits from Coles’ former trade.
The court added that Leekes’ approach would place the successor in a more favourable position than the predecessor, which could not have been Parliament’s intention. As to the FTT’s concern about the practical difficulties in identifying the income which may qualify for relief where the predecessor’s trade becomes subsumed into the successor’s trade, the court simply pointed out that ‘it is not permissible to disregard the words of a statute because of a perception of practical difficulty’; and that the difficulty could, in any event, be avoided with ‘careful record-keeping’.
Why it matters: The issue, which the Court of Appeal decided in favour of HMRC, exists since the enactment of FA 1965 s 61; the provisions were re-enacted in ICTA 1988 s 393 and now exist as part of CTA 2010 Part 22 Chap 1. The issue is material to many business acquisitions and it will be interesting to see whether Leekes decides to appeal to the Supreme Court.
