The Upper Tier Tribunal have overturned last year’s First Tier Tribunal decision in the Leekes V HMRC case, and held that losses are required to be streamed even where the whole of the predecessor’s trade is transferred.
In our Newsbrief of 16 March 2015 we reported that the First Tier Tribunal decision meant that where a company succeeded to a trade carried on by a group company there was no requirement to stream.
This confirmed our view of the law at the time although there remained the uncertainty as to exactly what was needed for there to be a succession.
Details of the appeal
The taxpayer had argued that where there had been a succession in the case of the transfer of the whole of the trade, the streaming rules set out in s343(8) did not apply and there was no other requirement to stream. Essentially losses transferred were available for offset against the whole of the profits of the merged trade. The First Tier Tribunal accepted this.
HMRC appealed and the issue was re-examined by the Upper Tier Tribunal earlier this year. The decision has just been released and reverses the position. HMRC argued that even though the streaming rules in s343(8) were not in point as there was a transfer of the whole of the trade and a succession to that trade, the successor was only entitled to set losses transferred to it against the profits the predecessor would have earnt, absent the transfer. The Tribunal seems to have been swayed by HMRC’s argument that the transfer of trade rules should not put the successor in a better position than the predecessor in terms of which profits could be sheltered.
It is hoped that the taxpayer will appeal.
Last year’s verdict offered groups greater freedom to utilise loss relief when transferring a company’s trade in its entirety in cases where the facts supported the contention that there had been a succession. The position in relation to the transfer of part trades was not examined in the case, and indeed CWE have always believed that the streaming rules only apply for these cases.
However, with the present decision, the streaming requirement has been re-stated, and indeed appears to have been extended to cover even those cases where it is clear that there has been a succession.
The facts in the Leekes case were straightforward and the court in coming to its decision was not swayed by the possibility of practical difficulties of apportioning profits.
In practice, if streaming is to be applied there could be significant practical difficulties, for example, how does one treat subsequent acquisitions or sales of assets?
The grounds for the decision could also throw into question whether there could be a restriction of loss offset where assets are transferred into a company without an existing business if that company subsequently acquired further assets.
In the past where there was a concern that streaming applied companies would ensure if at all possible that the loss-making company was used as the successor company and this will continue to be the default strategy. Of course this may not always work particularly where the group has a number of loss-making companies.
Intra-group transfers will require, in the first instance, judgement as to whether a transfer constitutes simply a transfer of assets, a part trade or a trade; the calculation of any losses that will accompany the transfer of a trade or part-trade; and the identification of the profits against which such losses may be used.
Readers should also be aware of the relevant liabilities rules which seek to restrict losses transferred.
These issues are likely to be particularly complicated in the case of oil and gas trades. Therefore companies looking at acquisitions or reorganisations should carefully review the implications of the decision.
CW Energy can assist in all these areas.