HMRC v Leekes [2016] UKUT 320 (12 July 2016)
The Upper Tribunal (“UT”) has recently overturned a First-tier Tribunal (“FTT”) decision in relation to loss relief under section 343(3) of the Income and Corporation Taxes Act 1988 (“s343”) (now section 944 of the Corporation Tax Act 2010).
In November 2009, a retailer (“Leekes”) acquired the entire share capital of a furniture retailer (“Coles”) who had losses in that year, as well as carried forward losses, amounting to £3 million. Coles’ business was immediately incorporated into Leekes, rendering Coles dormant.
In the following year, Leekes sought to set off Coles’ losses against the trading profits of the enlarged business on the basis that it was the successor to Coles’ trade under s343. In 2013, HMRC opened an enquiry into that year on the basis that the set off could only be applied against income generated by what was formerly the Coles business and not the combined income of the enlarged business.
At first instance the FTT held that under s343 the Coles losses could be set off against the trading profits of the combined trade. However the UT has recently reversed this decision, ruling that ‘streaming’ is in fact the correct approach. This decision therefore restricts a taxpayer that acquired a loss making company and succeeded to its trade, from setting off the Predecessor’s carried forward trading losses against the trading profits from its combined trade. The correct approach is to use the losses only against the trading profits generated in respect of the predecessor’s trade. In this case, no relief would therefore have been available to Leekes because that trade remained unprofitable.
The UT agreed with HMRC’s argument that to interpret the legislation in any other way would put the successor company in a better position than the predecessor would have been in had the predecessor continued to carry on trade alone and as such there would be “ample opportunity for abuse” if the FTT decision was left to stand. Arguments by Leekes as to the potential practical difficulties in performing such a ‘streaming’ exercise were dismissed.
