Leekes Ltd – loss streaming confirmed by Court of Appeal

Fri 01 Jun 2018

The Court of Appeal has agreed with the Upper Tribunal in the case of Leekes Ltd that carried forward losses of an acquired trade can, under what was ICTA 1988 s343(3), but is now CTA 2010 s944(3), only be relieved against future profits from the acquired trade.

In broad summary where the acquired business is merged into an existing business of the acquirer, the carried forward losses relating to the acquired business can only be offset against the portion of profits attributable to that same business, and not against the whole profits of the merged business. The Court of Appeal commented:

‘If the construction advanced by Leekes were correct, the result would be to place the successor company in a more favourable position than the predecessor, because it would enable the successor to utilise the accumulated losses of the predecessor against trading income derived from a business which the predecessor had never carried on.’

Acquirers of such businesses will need to ensure they undertake careful record keeping so that they can identify the profits against which the acquired carried forward losses can be offset. The Court of Appeal makes the comment that “the possibility of claiming relief […under what is now CTA 2010 s944…] should be apparent to any well-advised company when it acquires the business of a predecessor and merges it with its own business”.

Background

Leekes Ltd carried on a trade of out-of-town department stores in Wales and Wiltshire and on 18 November 2009 acquired the entire share capital of Coles Ltd which carried on a similar trade from three furniture stores and a distribution centre in the West Midlands. In its eight months of trading prior to the sale, Coles had a turnover of £12.7 million and its trading loss for the period was £950,321. It also had trading losses carried forward of £2,262,120.

On 19 November 2009 the business of Coles was hived up to Leekes, with all the Coles stores being rebranded as Leekes stores. After the acquisition, the stores continued to sell substantially the same products and customers were served by the same staff. Unfortunately, however, the results achieved by the Coles stores after the acquisition did not hit the projected sales figures.

Leekes had contended that the legislation permitted an interpretation such that the losses could be used against the merged business because this amounted to an enlargement of the same trade. (See TTH 2 September 2016, 22 July 2016 and 22 May 2015 for previous coverage of this case.)  The Court of Appeal, has however confirmed this is not the case.

Comment

The Court of Appeal decision in this case confirms HMRC’s understanding of how the streaming rules operated. Corporate loss relief rules were substantially reformed with effect from 1 April 2017, introducing the ability to group relieve certain carried forward losses, liming the ability to offset carried forward losses against profits exceeding a £5m threshold, and widening loss relief anti-avoidance provisions.  For further advice on the tax treatment of corporate losses, please get in touch with a member of the Mazars Corporate Tax team.