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Paul Howard of Chiltern Tax Support for Professionals Limited outlines some of the key issues affecting claims for loss relief by companies.

Introduction

The credit crunch and other economic factors are taking their toll on some companies. Advisers may be asked to assist such companies in different ways, and they need to be able to recognise certain dangers and be proactive in preventing a loss of tax relief.

Sales, takeovers and changes of direction

Companies in difficulties are often sold or taken over. Sometimes the acquiring company may have a different existing trade, or it may implement a change of policy to try to turn around the business it has acquired. Either way, relief for past losses could potentially be lost, if the circumstances constitute a ‘major change in the nature or conduct of a trade’.

An example of a change of direction that resulted in a loss of relief is found in the 2005 case of Kawthar Consulting Ltd v HMRC. The company formerly supplied computer equipment and software, but ceased to trade in 1995. In 1998 it started to provide IT consultancy services, and this was held to be a different trade, with the result that no relief was available for brought forward losses of the former trade.

In a 1985 case (Pobjoy Mint Ltd v Lane), the Court of Appeal held that a change in purchasing policy was a major change in the conduct of the company’s trade. The company minted coins and medallions from gold and other precious metals. It had formerly purchased its gold from an associated company, but then it purchased that company’s entire stock of gold, and started to purchase gold direct from other wholesalers, resulting in much higher stock levels. The Court held that this change was a major alteration in the company’s trade.

Reorganisations

The 1976 Rolls Royce Motors Ltd v Bamford case provides a well known example of a loss of relief due to a change in the type of trade being carried on, following a reorganisation. Rolls Royce Ltd formerly manufactured cars and aero engines, but the company was placed into receivership, and the car manufacturing business
was transferred to Rolls Royce Motors Ltd. This new company claimed relief for Rolls Royce Ltd’s losses, but failed, as the losses were partly attributable to the aero engine business, which was not transferred to the new company.

Liquidations

A particular problem can arise where a company enters into receivership or liquidation, and its trade is transferred to a successor company. If all existing creditors are not transferred to the new company, trading losses carried forward may be restricted or completely disallowed under s 343 ICTA 1988. The amount disallowed will be the liabilities that are not transferred (excluding share capital and reserves), less the value of any assets not transferred and any sale consideration.

Overseas subsidiaries

On a positive note, it should be remembered that a foreign subsidiary’s overseas losses can now be relieved against a UK group company’s profits, provided all possible means of obtaining relief in the other jurisdiction have been exhausted. This effectively limits such relief to the situation where the foreign subsidiary has ceased to trade. The change is effective for accounting periods that begin on or after 1 April 2006, or that straddle that date.

Paul Howard is a Tax Director with Chiltern Tax Support for Professionals Ltd – paul.howard@chilterntsp.co.uk