When a company purchased the share capital of another company in which losses had been incurred, ICTA 1988, s 343(3) provided that the purchasing company was only entitled to set those losses against trading income derived from the former business, not against the trading income of the entire enlarged trade.
The appellant company ran department stores, and on 18 November 2009 it purchased the share capital of a company (C Ltd) which owned three furniture stores. The acquired business was not kept as a separate entity but was hived up at fair value on 19 November 2009 and its stores were operated within the appellant’s existing structure. In the period prior to the sale C Ltd incurred a trading loss of over £950,000. It had trading losses carried forward of over £2,262,000. The appellant claimed relief for losses amounting to £1,655,756 in its corporation tax return for the year ended March 2010. The appellant’s corporation tax computation showed adjusted trading profits of £1,655,756 offset against trading losses of the same amount brought forward (under ICTA 1988, s 393).
Following an enquiry, HMRC disallowed the losses claimed. The point in dispute to be resolved by the First-tier Tribunal (FTT) was whether losses made by C Ltd prior to succession were available to the appellant (under ICTA 1988, s 343(3)), or whether they could only be used against the profits of C Ltd’s trade post succession (‘streaming’). There was no dispute that there had been a ‘succession’ for the purposes of s 343.
The FTT ( UKFTT 93 (TC)) preferred the appellant’s interpretation of s 343(3) to that of HMRC for three main reasons: (1) it recognised there was no explicit reference to a requirement to stream losses (in s 343(1) and (3)); (2) it avoided the practical difficulties of application inherent in HMRC’s approach; and (3) it provided an approach to the legislation more closely aligned to commercial reality. The FTT concluded that the streaming rules in s 343(8) were not an extension of s 343(1) and (3) but were discrete standalone provisions which were intended to apply in very specific situations in which s 343(1) would not apply. All the losses of C’s trade which had been subsumed with the appellant’s trade should be available for offset against the combined profits of the appellant. HMRC appealed.
The Upper Tribunal (UT) agreed with HMRC’s argument that the purpose of s 343(3) was not to put the successor company in a better position than the predecessor company would have been if it carried on the trade. The UT stated ( UKUT 320 (TCC)) that while on first reading s 343(3) may appear somewhat obscure, when analysed in its context there was no real doubt about its correct interpretation. The ‘trade’ to which s 343(3) referred was the same trade as that to which s 343(1) referred. There was nothing in the wording of the section to suggest that the draftsman intended to refer in s 343(1) to the predecessor’s trade but in s 343(3) was contemplating the enlarged trade of the successor. The predecessor could not have carried on the enlarged trade but only its own, smaller trade. It would only have been entitled to relief for accumulated losses by reference to the profits, if any, of that smaller trade.
No requirement for streaming was provided by the draftsman because none was necessary; s 343(8) contemplated a different situation in which a successor had taken over only the activities of another’s trade. HMRC’s appeal was allowed, and the taxpayer company appealed to the Court of Appeal.
The court agreed with the UT. The successor company notionally stepped into the shoes of the predecessor, and could not obtain more by way of relief than the predecessor would have done if it had continued to carry on the business itself. Arguments to the contrary failed because the wording of ICTA 1988, s 343(3) was clear and unambiguous. Moreover, HMRC’s interpretation of the legislation did not appear to have been challenged in the period of some 50 years between the enactment of FA 1965 and the present case, and neither had its practical application given rise to significant difficulties. The taxpayer company’s appeal was dismissed.
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