HMRC – 2 Taxpayers – 1
The taxpayer has been unsuccessful in their appeal against the Upper Tier Tribunal decision in the Leekes loss streaming case.
The Court of Appeal have closely followed the reasoning in the UTT holding that the effect of section 343(3) ICTA 1988 is that the successor to the trade previously carried on by another company under the same ownership was only entitled to set losses transferred to it against the profits the predecessor would have earned, absent the transfer.
The Court rejected the argument that the streaming provisions only apply where there are transfers of part of the activities or part of the trade of the predecessor and saw no difficulty in the fact that the legislation only explicitly appears to provide for the need to apportion costs and income in the case of such part transfers.
The reasoning behind the decision of the Court is that they perceived that allowing losses to be set against the successor’s profits other than those transferred in would have given the successor an unwarranted benefit as compared to the position of the predecessor had no such transfer occurred. It seems that the court believe that to find in favour of the taxpayer would have provided an opportunity for tax avoidance. The key argument in refuting this perceived benefit, which does not seem to have been put by the taxpayer, is that it would have been open to the group to have injected the activities carried on by the successor into the predecessor in which case the losses of the predecessor would have been available to shelter the combined profits, on the basis that the activities would have almost certainly have been treated as carried on as a single trade.
The provisions under consideration are the pre-consolidation provisions now found in Part 22 CTA 2010, however given the grounds for the decision it seems clear that this decision equally applies to the current wording.
It is hoped that the taxpayer will appeal and that the Supreme Court will look to place more emphasis on the precise wording of the relevant section which we believe favours the taxpayer’s interpretation rather than HMRC’s.
This continues to be a very important decision for the oil and gas industry, and the loss streaming rules remain a trap for the unwary when considering restructuring whether following an acquisition or indeed simply in cases where an existing group structure is being reworked.
If you would like to discuss the issues raised in this note, please contact your normal CWE contact.