Leekes Ltd v The Commissioners for HM Revenue & Customs
| Jurisdiction | England & Wales |
| Judge | Sales LJ,Arden LJ,Lord Justice Henderson |
| Judgment Date | 23 May 2018 |
| Neutral Citation | [2018] EWCA Civ 1185 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2016/4588 |
| Date | 23 May 2018 |
[2018] EWCA Civ 1185
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lady Justice Arden
Lord Justice Sales
and
Lord Justice Henderson
Case No: A3/2016/4588
Mr Nikhil Mehta (instructed by Sharpe Pritchard LLP) for the Appellant
Ms Elizabeth Wilson (instructed by the General Solicitor and Counsel to HMRC) for the Respondents
Hearing date: 13 March 2018
Introduction
This second appeal from the Tax and Chancery Chamber of the Upper Tribunal (Roth J and Judge Colin Bishopp) (“the Upper Tribunal”) raises a short question of construction of the legislation which, in specified circumstances, entitles a company to obtain relief from corporation tax for the carried forward losses of a trade, previously carried on by another company, to which it has succeeded. At the time with which we are concerned (the financial year 2009/10), the relief in question was still conferred by section 343 of the Income and Corporation Taxes Act 1988 (“ ICTA 1988”), although the main legislation relating to corporation tax had recently been rewritten to the Corporation Tax Act 2009 (“ CTA 2009”) which came into force on 1 April 2009 and applied to accounting periods ending on or after that date. The question has, however, been one of general application to the law of corporation tax since the introduction of that tax in the Finance Act 1965 (“ FA 1965”), because the relevant provisions remained in materially the same form from their first enactment in section 61 of FA 1965 until they were repealed and replaced (with some modifications) in Chapter 1 of Part 22 of the Corporation Tax Act 2010.
The parties have agreed a formulation of the issue which we have to decide, as follows:
“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?”
It is not in dispute that the appellant taxpayer, Leekes Limited (“Leekes”), was in principle entitled to relief in respect of the losses of a predecessor trade carried on by another company, Coles of Bilston Limited (“Coles”), following the acquisition by Leekes of the entire issued share capital of Coles on 18 November 2009, and the hiving up of Coles' existing business to Leekes on the next day so that it then formed part of a single continuing trade carried on by Leekes.
The issue which divides the parties, shortly stated, is whether (as Leekes contends) it was entitled to set the accumulated losses of Coles against the trading income of the whole of its enlarged trade, or whether (as HMRC contend) it was only entitled to set those losses against trading income derived from the former business which it had acquired from Coles, albeit as part of the now enlarged business. At the material time, in the first few months after the acquisition, the Coles part of the enlarged business remained unprofitable, so it generated no trading income (if viewed separately) against which any of the accumulated Coles losses could be set. On the other hand, the remainder of the Leekes' business was profitable, and in its corporation tax return for the financial year to 31 March 2010 Leekes purported to set approximately £1.7 million of the Coles losses (which amounted in all to about £3.2 million) against its income for the year, thus reducing its taxable profit to nil. The return also indicated that Leekes intended to carry forward the balance of Coles' accumulated losses to be utilised in a similar way in future years.
HMRC opened an enquiry into the return, and on 17 September 2013 they issued a closure notice disallowing the claim for relief. That conclusion was upheld on review, and Leekes then appealed to the Tax Chamber of the First-tier Tribunal (“the FTT”). Following a hearing in London on 8 January 2015, the FTT (Judge Rachel Short and Mr Nicholas Dee) allowed Leekes' appeal for the reasons given in their decision (“the FTT Decision”) released on 27 February 2015. HMRC then appealed to the Upper Tribunal, with permission granted by Judge Short. The appeal was heard on 4 May 2016, and by their decision released on 12 July 2016 (“the UT Decision”) the Upper Tribunal allowed HMRC's appeal.
Leekes now appeals to this Court, with permission granted by Gloster LJ on 21 December 2017. In granting permission, Gloster LJ said she was persuaded that the appeal “raises an important point of principle”, and that all four grounds of appeal had a real prospect of success.
The parties have at all stages been represented by the same counsel, Mr Nikhil Mehta appearing for Leekes and Ms Elizabeth Wilson for HMRC.
For the reasons which follow, I am satisfied that HMRC's construction of section 343 is correct, and although the point of principle involved is indeed an important one, I do not for myself feel any real doubt about the answer to it. It is perhaps worth observing, in this connection, that HMRC's interpretation of the legislation does not appear to have been challenged during the period of some fifty years between the enactment of FA 1965 and the present case, nor does its practical application appear to have given rise to significant difficulties.
The UT Decision is reported at [2016] STC 1970, and its neutral citation is [2016] UKUT 320 (TCC). The FTT Decision is also reported, at [2015] SFTD 433, neutral citation [2015] UKFTT 93 (TC).
Facts
There is little more that needs to be said about the facts, which are simple and have at all times been agreed.
Leekes carries on a trade of running out-of-town department stores, and at the relevant time it owned four such stores, three in Wales and one in Wiltshire. On 18 November 2009, as I have already said, Leekes purchased the entire share capital of Coles for £1. At that date, Coles 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 at fair values which yielded a net positive amount of £892,928. Coles then became dormant, and retained no liabilities. One of the Coles stores was renovated and re-opened in November 2010 selling Leekes' products. All three Coles stores were re-branded under the Leekes name and continued to trade, selling the same types of products as before. In August 2013 one of the former Coles stores was closed, leaving Leekes with a total of six stores.
As the FTT recorded, at [8], no specific price was paid by Leekes for the trading losses recognised in Coles' accounts.
The FTT also had before it an unchallenged witness statement of Mr Mike Fowler, the group finance director of Leekes. He explained Leekes' growth strategy in 2009, which had been targeted on the Midlands. He said that Leekes became aware that the Coles business was up for sale, and he knew that both companies had a wide range of common brands and suppliers in the furniture sector, and shared a similar customer base. The firms had a similar history, and there was every prospect that the merger of the two businesses would be a success, with enhanced product offerings. Leekes decided that there was no need to keep the Coles business as a separate trading entity, because their stores could be operated within the same structure as the existing 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: see the FTT Decision at [9] to [11].
The statutory framework
The charge to corporation tax
UK resident companies are chargeable to corporation tax on their profits for financial years: see section 2 of CTA 2009, which defines “profits” as meaning “income and chargeable gains” unless the context otherwise requires. By virtue of section 8 of CTA 2009, corporation tax for a financial year is calculated and chargeable, and assessments to tax are made, by reference to accounting periods. The tax is charged on profits arising in the year, on the full amount of profits arising in the relevant accounting period or periods, and if an accounting period falls within more than one financial year, the profits arising in that period must be apportioned accordingly.
The rules for calculating the profits (or losses) of a trade for an accounting period are set out in Chapter 3 of Part 3 of CTA 2009. For present purposes, nothing turns on those rules, except to note that (by virtue of section 47) losses are calculated on the same basis as profits, subject to any express provision to the contrary.
The basic provision which enables trading losses to be carried forward and set off against the trading income of a succeeding accounting period, so as to reduce the trading income for that later period, was at the material time contained in section 393 of ICTA 1988:
“(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...
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