In Spring Capital Ltd v HMRC [2019] TC7471 the First Tier Tribunal (FTT) dismissed a claim for the carry forward of corporation tax losses on the transfer of a trade; liabilities not transferred exceeded the corresponding level of assets.
Before April 2017 CorporationTtax trading losses carried forward could only be used against future profits of the same trade.
Under s343 ICTA 1998 (s944 CTA2010 from 1 April 2010):
- Where a trade is transferred between two companies without a change of ownership, brought forward losses of the predecessor company may be transferred to the successor company.
- The losses are restricted where liabilities held immediately before the predecessor company ceases trading are not transferred to the successor company (“relevant liabilities”), and these exceed assets immediately held before cessation not so transferred (“relevant assets”).
The case followed an Upper Tribunal decision about the predecessor company, Spring Salmon and Seafood Ltd (SSE) where a claim to terminal loss relief was disallowed. This affected what losses were available to be carried forward to Spring Capital Ltd as successor company in the present case.
- SSE transferred its trade to Spring Capital when the companies were commonly owned.
- On the face of it relevant liabilities exceeded relevant assets by more than the amount of losses available for transfer before restriction.
- Certain balances on the SSE balance sheet immediately before transfer were in question:
- A corporation tax repayment claim. As the claim was withdrawn it was agreed this amount had to be added to the relevant liabilities figure.
- The status of an interim dividend of £1m and whether the associated cash was a relevant asset.
- A disputed (by HMRC) directors' loan account creditor balance which the appellant claimed was a debtor and therefore a relevant asset.
- A potential PAYE/NIC liability of £521,114.
The parties were agreed that the conditions of s343 were met in respect of common ownership and the transfer of a trade within the requisite time period of two years from the cessation of the transferring company’s trade. The only question to be resolved was therefore what restriction, if any, was to be applied to the losses transferred.
The FTT dismissed the appeal:
- The date of cessation of the predecessors trade is not always the same as the date of commencement of the successor trade: there may be a gradual winding down by the first company but it was the date of cessation which was relevant for the assets v liabilities test.
- It was for the appellant to prove that relevant assets exceeded relevant liabilities.
- An interim dividend does not create a liability but in any event here it was paid before cessation so the relevant cash could not be taken into account in assessing relevant assets.
- The directors loan account was also not a relevant asset. The appellant had not proved that it had become a debtor as a result of the dispute with HMRC.
- Due to the amounts involved for the other items no opinion was required on the PAYE/NIC as relevant liabilities already exceeded relevant assets by more than the losses in question.
Comment:
Due to the requirement to wait for the Upper tribunal decision in Spring Salmon Seafood, applications by the appellant for the judge to recuse himself, which were refused, and a separate case regarding the above mentioned PAYE/NIC liabilities, this case took 5 years to finally be heard by the FTT. One wonders how the costs of taking the case match up against the potential corporation tax savings had the £424,544 of losses been allowed.
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