HMRC v Leekes Limited [2016] UKUT 320 (TCC)

This case concerns tax losses acquired by Leekes Limited in an acquisition made in 2009 of a competitor.

Leekes Limited carried on a retail trade through four stores located in England and Wales.  In 2009 it acquired a struggling competitor in England for £1, taking on its four loss making stores.  The acquired enterprise had accumulated tax losses of £3m which Leekes believed would be claimable in future income years under s.45(4)(a) of the Corporation Tax Act 2010:

"The unrelieved loss is carried forward to subsequent accounting periods (so long as the company continues to carry on the trade."

Leekes was of the view that it carried on the same trade as the acquired firm, thus, the tax losses it acquired could be offset against total group profits in the following year.

The HMRC viewed this as an attempt at buying tax losses and in its opinion was contrary to the purpose of the legislation.  In its view the 'same trade' in this case amounted to operating the same trade in the same stores, thus the tax losses were only able to be offset against future profits made in the acquired stores rather than from the entire group.

This was an appeal to the Upper Tribunal.  It was the first case of its kind since the tax loss provisions were introduced in 1965.¹  The relevant tax loss provisions in 2009 were found under the Income and Corporation Tax Act 1988 (ICTA), which have since been re-written into the Corporation Tax Act 2010 (CTA).  The general principle in question here is consistent in both acts.

The Legislation

At the time of acquisition, the relevant sections were s.343(3) of the ICTA which provided:

"...the successor shall be entitled to relief under section 393(1), as for a loss sustained by the successor in carrying on the trade, for any amount for which the predecessor would have been entitled to claim relief if it had continued to carry on the trade."

And s.393(1) which provided:

"Where in any accounting period a company carrying on a trade incurs a loss in the trade, the company may make a claim requiring that the loss be set off for the purposes of corporation tax against any trading income from the trade in succeeding accounting periods; and (so long as the company continues to carry on the trade) its trading income from the trade in any succeeding accounting period shall then be treated as reduced by the amount of the loss."

The above two provisions have been re-written to a similar effect in s.45 and Part 14 of the CTA.

The Decision

The First Tier Tribunal had ruled in favour of the taxpayer.  However, in this case the Upper Tribunal overturned that decision in favour of the HMRC.  The Tribunal ruled that Leekes was wrong to assume that by virtue of being in the same industry as the acquired entity, it was entitled to offset its groupwide profits against the acquired tax losses.  The Tribunal ruled that in such a case only profits arising from the acquired stores could be offset against the acquired losses, assuming that the 'trade' was carried out in a similar manor and presumably with similar capital backing.  The ruling concluded with the following remarks:

"Although, on first reading, s 343(3) may appear somewhat obscure, we are satisfied that, when analysed in its context, there is no real room for doubt about its correct interpretation. It represents 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. We agree, however, with [the HMRC] that its purpose is 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)... We do not see how the subsection can be interpreted in any other way. As [the HMRC], in our judgment rightly, argued, the predecessor 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...Accordingly, HMRC’s appeal is allowed. The F-tT’s decision is set aside and the conclusion of the closure notice is restored. "²

Notes

Case [2016] UKUT 320 (TCC):  http://www.bailii.org/uk/cases/UKUT/TCC/2016/320.html

1.  p22
2.  p28,29&32

Legislation

Income and Corporation Tax Act 1988 (Which has since been re-written into the below act)
Corporation Tax Act 2010