Back in 2009 Leekes Furniture Stores (Leekes or the taxpayer) acquired the entire share capital of another furniture store based in the West Midlands for £1, the acquired company was loss making and had significant amounts of losses brought forward and the day after acquisition Leekes then hived up the trade and assets and liabilities of the acquired company into its own company, thereby creating a much larger trade within one company.
There are corporation tax rules that allow the successor of a trade, in this case Leekes to utilise the losses brought forward and offset them against future profits of the trade so acquired. At the time the rules were contained in section 343 of the Income and Corporation Tax Act 1988, though now they are at Chapter 1 of Part 22 of the Corporation Tax Act 2010 and have been subsequently altered.
At the end of the financial year Leekes then offset the losses of the acquired trade against the whole profits of the newly enlarged trade within the one, Leekes, company. HMRC disagreed with this approach stating that the losses could only be offset against future profits of the trade acquired, ie the loss making operations acquired in the West Midland. Leekes appealed to the First-tier Tribunal (FTT) who found in the taxpayer’s favour thinking that to split the income streams within one company would be difficult.
HMRC appealed the Upper Tribunal who found in HMRC’s favour and overturned the FTT’s decision. Leekes then appealed to the Court of Appeal (CoA) who also found in HMRC’s favour. On a plain reading of the legislation it was clear that the successor of a trade should not be in a more favourable tax position than that of the predecessor and the predecessor didn’t have access to the profits that Leekes did. The CoA noted that the income streams could be split within the one company with adequate record keeping.
The decision can be found at: Leekes Ltd v HM Revenue & Customs – Find case law (nationalarchives.gov.uk)
This case highlights the difficulties with using acquired losses though it is important to note that the case was finally decided on the plain reading of the relevant legislation. Please do contact us if you have any questions around utilising losses within your company or group of companies. This is an area that we are very experienced with.
