Where a company makes a trading loss that cannot be relieved against other profits that year, or the previous year, the unrelieved loss can be carried forward against future profits from the same trade that incurred the losses. This carry forward also applies where the trade is transferred to another company under common control (basically 75% common ownership before and after the transfer).
A recent case before the First Tier Tribunal has held that where the trade is transferred to another company under common control carrying on the same trade, the brought forward losses may be set against the future profits of the merged trade as it was successfully argued that the loss making trade was subsumed into the profitable trade. The two companies concerned were both trading as department stores and the similarity of the two trades and rebranding of the stores into the same trading name was seen to be critical. In the particular case (Leekes Ltd v HMRC) the loss making trade was hived up following the acquisition of a competitor and merged with a profitable trade.
HMRC may yet appeal the court’s decision but it may be something to take into consideration if you are considering an acquisition or reorganising your group structure.
PJ
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