Trading Losses and Succession – Leekes Ltd v HMRC

A recent case on trading losses could have implications going forward as it was found that, in the specific circumstances, losses from an acquired trade could be used against profits from the existing trade.

The case in question, Leekes Ltd v HMRC (TC4298), was heard by the First-Tier Tribunal.

Leekes Ltd previously owned four department stores and purchased Coles, a company with three furniture stores as well as warehousing facilities.  Coles had been loss making for a number of years. The Coles trade was hived up to Leekes Ltd and the stores were all rebranded as Leekes stores; however the former Coles stores continue to sell furniture predominantly.

Leekes claimed the brought forward losses incurred by the Coles business against the profits of the combined business for the year to 31 March 2010, which was the first following the acquisition.

HMRC argued that the losses incurred in the Coles business could be used only against future profits from that business, and could not be used against the previous Leekes business.

It was common ground between the company and HMRC that Leekes Ltd succeeded to the trade of Coles Ltd and that the trade consisted of the running of out of town department stores.

The issue at stake was therefore whether Leekes could relieve trading losses incurred by Coles before the succession against the profits of the combined trade after the succession by virtue of the provisions of ICTA 1988, s. 343(3).  Interestingly, HMRC agreed that ICTA 1988, s. 343(8) did not apply in this case.  Section 343(8) deals with situations in which there has been a succession to something different than the trade of the successor company, but in that case specifically requires that losses are kept separate.

Section 343(3) stated that ‘the successor shall be entitled to relief under s. 393(1) as for a loss sustained by the successor in carrying on the trade, for any amount which the predecessor would have been entitled to relief had it continued to carry on the trade.’

The legislation did not make it clear whether it was necessary to stream the losses as it was not clear whether the “trade” referred to was the post or pre-acquisition trade.

The First-tier tribunal found in favour of the taxpayer company, concluding that the Colesʼ trade losses were relievable against future profits of the combined post-acquisition trade for three main reasons:

1. There was no explicit reference to a requirement to stream losses in s. 343(1) and (3), unlike those of s. 343(8) where there is such a specific.

2. That requiring the company to stream losses would involve extensive practical difficulties in application.

3. That such an approach to the legislation is more closely aligned to commercial reality.

This ruling may help to give greater clarity to taxpayers on the treatment of such losses.  As was admitted in the case, the legislation itself is fairly vague and therefore the decision should be useful. It is possible that HMRC may seek to appeal or look to rewrite the legislation to achieve HMRCʼs preferred interpretation.

It should also be noted that ICTA 1988, s. 343(3) is re-written at CTA 2010, s. 944 but the substance of the rules appears to be unchanged in the process.