The application of the loss streaming rules within the transfer of trade provisions (previously s343 ICTA 1988, now in CTA 2010 s940A et seq) was recently considered by the FTT in the case of Leekes Ltd v HMRC.
Very broadly a company which carried the a retail business through a number of branded high street stores took over another company with a similar business and following the acquisition of the shares immediately transferred the whole of the business of the acquired company into the acquirer. The acquired shops were rebranded and run as part of an enlarged business. The decision noted as a statement of fact that following the reorganisation the acquired stores continued to sell the same type of goods to the same customers and such selling was undertaken by much the same staff as before.
The taxpayer contended that the acquirer had succeeded to the acquired company’s trade and HMRC accepted this as a question of fact.
As a result the transfer fell within s343(1) and the taxpayer argued that the loss streaming rules in s343(8) could have no application because as a matter of statutory construction these rules only applied where the transaction fell within the circumstances set out within s343(8).
HMRC disagreed and refused to allow losses transferred across from the acquired company to be offset against any profits of the original trade of the acquirer.
The FTT agreed with the taxpayer.
It is surprising that having accepted that the transfer of the acquired company’s business was a succession HMRC should attempt to argue that the loss streaming rules should apply, as the previous authority of Rodin V Falmer Jeans seems to have clearly established that s343(8) was intended to extend the scope of section s343 to transactions which didn’t constitute a succession, and that it was only that extended category of transactions to which the provisions of s343(8) applied.
In our view the legal position has been clear for some time. If the transaction results in the acquirer succeeding to the acquired company’s trade then there is no streaming. However the difficult practical issue that one has always needed to address is determining whether a particular transfer does involve a succession. This is a question of fact based on the circumstances of the transferee and transferor both before and after the transfer.
In the upstream Oil and Gas industry we have examples of where HMRC have accepted that the transfer of the whole of an oil and gas company’s business into another company already carrying on such a business does constitute a succession (in which case HMRC accepted that streaming was not in point), but we have also seen examples of transactions where, based on facts which appeared to us to be on all fours to the succession cases, HMRC were not prepared to accept that the succession had occurred.
If groups are looking to reorganise in circumstances where one or more of the companies involved have losses then the loss streaming rules do need to be carefully considered. In some cases, falling foul of these rules could result in no effective relief being available for the losses. There are of course a number of other provisions that will need to be factored in. This decision may be helpful in assisting companies in determining whether their potential transaction could give rise to a succession although Oil and Gas and retail businesses have their differents.
If you would like to discuss the issues raised in this note please contact Paul Rogerson firstname.lastname@example.org or your normal CWE contact