CW Energy LLP

Change in ownership – availability of carried forward trade losses

The anti-loss buying rules, where applied, deny companies under new ownership the benefit of carried forward unused tax losses in place at the date of change of ownership. They apply where there has been a major change in the nature or conduct of the (company’s) trade, or where, prior to the change in ownership, the scale of the activities in the trade has become small or negligible without any significant revival.

Companies undertaking oil and gas exploration, appraisal and development can accumulate significant losses prior to production and the industry has therefore been particularly concerned about HMRC’s policy and practice in implementing these rules. The rules are potentially widely drawn and as a result, have acted as an impediment to sales of oil and gas assets.

At industry’s request, HMRC undertook to provide guidance on how they saw the rules applying to ring-fence trades. However, it is over 2 years since HMRC produced a first draft of their proposed guidance. This guidance sets out HMRC’s view that it will be unusual for the rules to apply to ring-fence transactions and also includes a commitment to allow companies to apply for clearance, in cases where there still may be some uncertainty.

Given HMRC’s increased vigilance on the use of losses and the continuing delay, there had been some concern that this guidance might not be finalised. However, we are pleased to hear that HMRC has now committed to publishing guidance in the Oil Taxation Manual with the redrafted content conforming broadly to what has been discussed previously with industry.

Additionally, although the wording has been tightened up since the previous draft was shared with industry, HMRC has stated that there has not been any change in policy since the matter was discussed a couple of years ago.

The redrafted guidance reiterates HMRC’s position on loss-buying, warning that the guidance cannot be relied upon where companies are seeking to enter into transactions the main purpose, or one of the main purposes of which, is to gain a tax advantage, and that HMRC will not provide clearance where loss-buying is the primary purpose of the transaction.

On the other hand, HMRC will give clearances on the question of whether they will take the view that a major change in the nature or conduct of the trade has or will occur, where the buyer can show they are acquiring a genuine, viable and commercial trade, albeit possibly requiring some changes to move it into profit. CW Energy has experience of obtaining a number of such clearances in the last couple of years on the basis of the draft guidance.

There will, of course, be grey areas and doubts that arise from particular circumstances, but the guidance will provide a significant level of comfort for a whole range of transactions and where necessary we expect that companies will to be able to obtain HMRC clearances on the issue in respect of planned transactions provided of course they are not tax-driven.

February 2020