By John Keeble With businesses facing unprecedented challenges, company directors may need to consider administration…
PLEASE NOTE: Information in this article is correct at the time of publication, please contact DFA Law for current advice on older articles.
There are all sorts of things one can do with trading losses under Corporation Tax (CT), but the fall-back position is that losses can be carried forward and set against the next available profits ‘of the same trade’.
That sounds very simple…and regrettably for one company, it is.
The company acquired another company. As is common in such circumstances, the acquiring company wished to ‘hive up’ the acquired company’s trade into its own business. Not only does this usually simplify matters administratively, but it can also mean that any skeletons in the cupboard of the acquired company will stay in it, not impact on the acquirer.
So it was that the acquisition continued and in due course a CT computation was produced which set the trading losses brought forward of the acquired company against the profits earned by the company that bought it.
This is all quite standard practice, in principle, but HM Revenue and Customs took a slightly different view, arguing that the buying company’s trade was only partly the same as the trade of the company it had bought, so the losses could only be set off against the profits earned by the same activity. To be available for set-off, the profits had to be earned in the same trade.
The Upper Tribunal and, subsequently, the Court of Appeal confirmed that HMRC’s argument was correct.
There are other limitations on the use of brought-forward losses in such circumstances. Loss relief will also be denied when the existing trade has become small or negligible, where liabilities are not ‘hived up’ with the assets and where the nature or the conduct of the trade changes in the three years before or five years after the change in ownership.
In practical terms, if you are seeking to acquire a business with retained losses and those losses are wanted in order to reduce forward CT liabilities, it is essential to make sure that the existing trade of the acquired company can be made profitable.
For advice on the purchase or sale of a company, contact us.