ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
 UKUT 320 (TCC)
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE SALES
LORD JUSTICE HENDERSON
| LEEKES LIMITED
|- and -
|THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS
Ms Elizabeth Wilson (instructed by the General Solicitor and Counsel to HMRC) for the Respondents
Hearing date: 13 March 2018
Crown Copyright ©
Lord Justice Henderson:
"Where a company succeeds to a trade of a predecessor in which losses have been incurred and that trade forms part of a larger trade carried on by the successor including its existing trade, how does section 343(3) of [ICTA 1988] apply to the successor in relation to carry-forward loss relief for those losses?"
The statutory framework
The charge to corporation tax
"(1) Where in any accounting period a company carrying on a trade incurs a loss in the trade, the loss shall 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, or by so much of that amount as cannot be relieved under this subsection…
(7) The amount of a loss incurred in a trade in an accounting period shall be computed for the purposes of this section in the same way as trading income from the trade in that period would have been computed.
(8) For the purposes of this section "trading income" means, in relation to any trade, the income which falls or would fall to be included in respect of the trade in the total profits of the company…
(10) In this section references to a company carrying on a trade refer to the company carrying it on so as to be within the charge to corporation tax in respect of it."
Cessation of a trade and successions to a trade
"Where a company begins or ceases –
(a) to carry on a trade, or
(b) to be within the charge to corporation tax in respect of a trade,
the company's income shall be computed for the purposes of corporation tax as if that were the commencement or, as the case may be, the discontinuance of the trade, whether or not the trade is in fact commenced or discontinued."
"343 Company reconstructions without a change of ownership
(1) Where, on a company ("the predecessor") ceasing to carry on a trade, another company ("the successor") begins to carry it on, and -
(a) on or at any time within two years after that event the trade or an interest amounting to not less than a three-fourths share in it belongs to the same persons as the trade or such an interest belonged to at some time within a year before that event; and
(b) the trade is not, within the period taken for the comparison under paragraph (a) above, carried on otherwise than by a company which is within the charge to tax in respect of it;
then the Corporation Tax Acts shall have effect subject to subsections (2) to (6) below.
In paragraphs (a) and (b) above references to the trade shall apply also to any other trade of which the activities comprise the activities of the first mentioned trade.
(3) …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… relief if it had continued to carry on the trade."
"The words of the Fourth Rule appear to me quite plain. If the National Provincial Bank had not been in existence, and a new company had been formed for the purpose of taking over the business of the County of Stafford Bank, the case would have been directly within the terms of the Rule. In that case the new company would clearly "have succeeded to" the "trade, adventure, or concern" of the old. I do not see how it can make any difference that the person succeeding to a business had an existing business of his own of a similar kind. He none the less succeeds to an existing business… The respondents acquired by purchase the goodwill and assets of the County of Stafford Bank, and carried on its business in the same way as before, except of course that the accounts and profits of the business became merged in those of the National Provincial Bank."
See too, to similar effect, the judgments of Mathew LJ at 163, and Cozens-Hardy LJ at 164.
Analysis and discussion
"It is in our view clear that "the trade" to which subsection (3) refers is the same trade as that to which subsection (1) refers; there is nothing in the wording of the section to suggest that the draftsman intended to refer in subsection (1) to the predecessor's trade but in subsection (3) was contemplating the enlarged trade of the successor. We do not see how the subsection can be interpreted in any other way. As Ms Wilson, 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."
"56. In this instance because of the geographic location of the acquired business, it was possible to physically indentify a separate trade after the succession and more realistic to identify a separate stream of profits. But the fact that these particular circumstances make it more straightforward to identify a separate stream of profits can have no implications for what is in principle the correct interpretation of this legislation. In many instances a succession will mean a loss of identity for the acquired trade, as was recognised in the National Provincial Bank case and the legislation needs to be able to provide a sensible answer in those circumstances."
"(8) Where, on a company ceasing to carry on a trade, another company begins to carry on the activities of the trade as part of its trade, then that part of the trade carried on by the successor shall be treated for the purposes of this section as a separate trade, if the effect of so treating it is that subsection (1) or (7) above has effect on that event in relation to that separate trade; and where, on a company ceasing to carry on part of a trade, another company begins to carry on the activities of that part as its trade or part of its trade, the predecessor shall for purposes of this section be treated as having carried on that part of its trade as a separate trade if the effect of so treating it is that subsection (1) or (7) above has effect on that event in relation to that separate trade.
(9) Where under subsection (8) above any activities of a company's trade fall, on the company ceasing or beginning to carry them on, to be treated as a separate trade, such apportionments of receipts, expenses, assets or liabilities shall be made as may be just."
"Neither the fact that the taxpayer had previously carried on a similar business, nor the fact that after the acquisition it carried on the business which it had acquired as an indistinguishable part of its expanded business, prevented there from being a succession."
"Finally, and to my mind most significantly, subsection (9) provides that where any of the deeming provisions of subsection (8) come into operation, any necessary apportionment shall be made of receipts or expenses. The reference to the apportionment of receipts is of the first significance. It throws a flood of light on subsection (8). It shows, above all, that the requirements of subsection (8) (that the predecessor has ceased to carry on a trade and the successor has begun to carry on the activities of the trade as part of its trade) may be satisfied even though the trading activities in question are no longer turned to account or charged for separately by the successor but are absorbed into a single trade in which profits are realised by receipts which do not distinguish between the various activities by which they are earned."
"The solution adopted by subsection (8) is to concentrate on the trading activities and not the trade; to treat the trading activities which the successor begins to carry on as if they were a separate trade; to apportion part of the successor's receipts to the notional separate trade which it has begun to carry on, and then to apply subsection (1) with any semantic considerations which may be involved in that application to that notional separate trade. I can hardly think of a clearer way to bring a case like [Laycock] within subsection (1)."