Tax Journal

HMRC v Leekes

19 July 2016

Setting off losses on a trade succession

Our pick of this week's cases

In HMRC v Leekes [2016] UKUT 320 (12 July 2016), the UT found that s 343 only allowed loss relief in relation to the predecessor’s continued trade.

Leekes ran department stores. In November 2009, it had purchased the entire share capital of Coles, which ran furniture stores and warehousing facilities. Coles had losses in that tax year, as well as carried forward losses. Coles’ business had then been hived up to Leekes and Coles had become dormant. Leekes had refurbished the stores previously owned by Coles and rebranded them as Leekes stores.

In its corporation tax return for the year ended 31 March 2010, Leekes had offset Coles’ losses against its own trading profits, on the basis that it had succeeded to Coles’ trade (ICTA 1988 s 343). HMRC accepted that there had been a succession; however, it considered that set off was only available against any income generated by what was formerly Coles’ business. If HMRC were correct, no relief was available in the relevant year because that part of the enlarged business taken over by Leekes from Coles remained unprofitable.

The UT observed that Coles, the predecessor for s 343 purposes, could not have carried on the enlarged trade but only its own smaller trade and it is only by reference to the profits, if any, of that trade that it would have been entitled to relief for accumulated losses. The UT concluded that s 343 therefore only allowed relief in relation to that trade; the ‘trade’ to which sub-s (3) referred was the same trade as the ‘trade’ referred to in sub-s (1). Any other interpretation would have created scope for abuse and profit streaming was not required in such circumstances.

Read the decision.

Why it matters: The UT noted that s 343 represented ‘an exception to the finality of s 337, without which the potential relief in respect of accumulated losses would be forfeited on cessation of the trade by the predecessor’. Therefore, the purpose of s 343 was ‘not to put the successor in a better position than that in which the predecessor would have found itself had it carried on the trade, but to transfer the potential for relief, without change, to the successor in a case falling within sub-s (1)’. 

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