The First Tier Tribunal (FTT) has found In Leekes Ltd v HMRC Commissioners [2015] UKFTT 93 (TC) that that a taxpayer that succeeded to a trade was entitled to set carried-forward pre-succession losses against all of its trading profits and did not have to stream the profits of the succeeded trade and its existing trade.
Leekes Limited carried on a trade of running out of town department stores. In 2009 it purchased the share capital of Coles of Bilston Limited for £1. Coles’ trade at that date comprised three furniture stores plus warehousing facilities. In the eight months of trading prior to the sale Coles had a trading loss of £950,321. It had trading losses carried forward of £2,262,120.
Coles was hived-up by Leekes and became dormant. The three Coles stores were re-branded as Leekes stores and continued to trade selling the same types of products. The three Coles stores sustained a trading loss for the accounting period ending 31 March 2010.
Leekes corporation tax return for the year ended 31 March showed overall adjusted trading profits of £1,655,756. They offset this amount against trading losses for the same amount, which were said to have been brought forward under section 393 Income and Corporation Taxes Act 1988 ('ICTA 1988') (since rewritten to Chapter 1, Part 22, Corporation Tax Act 2010).
HMRC opened an enquiry into Leekes corporation tax return for the period ended 31 March 2010. A closure notice followed, disallowing the losses claimed, and Leekes appealed to the FTT.
The FTT allowed the appeal, concluding that Leeks was entitled to set the losses carried forward from the Coles business against its aggregate profits.
HMRC had accepted Leekes had succeeded to the trade of Coles, and therefore the trade losses of Coles were preserved and available to be set-off against future profits of Coles' trade. However, HMRC argued that section 343(3) ICTA only permitted Leekes to use those losses against any profits of a separately identifiable trade formerly carried on by Coles.
The FTT rejected this argument and stated that section 343(3) was drafted on the assumption that the successor would take on the original company's trade, rather than in combination with the predecessor's trade. The statutory provisions did not provide clear guidance as to how the legislation should be interpreted where this was not the case. The FTT concluded that the first limb of section 343(3) should be read as meaning the losses should be available 'as if the successor had sustained the losses in the post succession trade'.
The FTT preferred Leekes’ interpretation for three main reasons:
- their approach recognised that there is no explicit reference to a requirement to stream losses in section 343(1) and (3) and therefore it was not necessary to imply such wording into the statute;
- their approach avoided extensive deeming and practical difficulties, which would be the unavoidable result of HMRC's approach; and
- their approach was more closely aligned to commercial reality.
It is surprising that there were no existing authority on the issue of whether carried-forward losses on succession of a trade could be set against the whole of the successor's trading profits. Therefore, this will come as a welcome judgement to taxpayers and adds useful clarity for professionals. However, it is very likely that HMRC will seek leave to appeal to the Upper Tribunal.