Revenue and Customs Commissioners v Leekes Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 12 July 2016 |
| Neutral Citation | [2016] UKUT 320 (TCC) |
| Date | 12 July 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Hon Mr Justice Roth, Judge Colin Bishopp
Ms Elizabeth Wilson, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the appellants
Mr Nikhil Mehta, counsel, instructed by Deloitte LLP, for the respondent
Corporation tax – Acquisition of company with accrued losses by company carrying on similar trade – Whether acquirer entitled to set losses against income of enlarged group – Income and Corporation Taxes Act 1988 (ICTA 1988), s. 337, 343, 393 – Losses to be set only against income of predecessor's trade – Appeal allowed.
In connection with a trade succession, the Upper Tribunal held that trading losses incurred by the predecessor company before the succession must be streamed against profits of the predecessor's trade after the succession.
It was common ground that Leekes Ltd (Leekes) succeeded to the trade of Coles Ltd (Coles) and that the trade consisted of the running of out of town department stores. The issue at stake was whether Leekes could relieve trading losses incurred by Coles before the succession against the profits of the combined single trade after the succession by virtue of ICTA 1988, s. 343(3). That section provided that the successor shall be entitled to relief under s. 393(1) as for a loss sustained by the successor in carrying on the trade, for any amount which the predecessor would have been entitled to relief had it continued to carry on the trade.
The issue to be resolved was that, in twice referring to trade in the quoted extract from ICTA 1988, s. 343(3), it was not clear whether one or both of the references was to the successor's combined trade post succession, or to just that part of the successor's combined trade which represented the former trade of the predecessor company i.e. whether it was necessary to stream the losses.
The First-tier tribunal (FTT) upheld the taxpayers appeal, concluding that the taxpayer could indeed relieve the Coles' trade losses against future profits of the single combined Leekes and Coles trade for three main reasons. The first reason was that there was no explicit reference to a requirement to stream losses in ICTA 1988, s. 343(1) and (3), unlike s. 343(8) where such a requirement is made more explicit. The second reason was that it avoids extensive deeming and practical difficulties of application with are the unavoidable result of HMRC's alternative interpretation. The third reason was that it provides an approach to the legislation which is more closely aligned to commercial reality.
The Upper Tribunal, overturning the judgment of the FTT, held that references to the trade in ICTA 1988, s. 343(3) are to the trade of the predecessor company i.e. the trade to which s. 343(1) referred. There was nothing in the wording of the section to suggest that the draftsman intended to refer in sub-section (1) to the predecessor's trade but in sub-section (3) to the enlarged trade of the successor. The UT could not see any other way in which the provision could be interpreted. The UT disagreed with the FTT about the relevance of the commercial reality of a succession which it considered was not a reason to over-ride the words of the statute. Finally, the UT found that the clear policy reasons behind the provision were to restrict the relief to that which would have been available to the predecessor.
The provisions of ICTA 1988, s. 343(3) are now re-enacted in CTA 2010, s. 944 and, whilst the wording has been modernised and subtly altered as part of the tax law re-write project, inherent uncertainties remain. This judgment is therefore a welcome clarification of the rules.
[1] The respondent to this appeal, Leekes Ltd (Leekes), carries on retail trade from department stores. Before November 2009 it traded from four such stores, three in Wales and one in Wiltshire. On 18 November 2009 it acquired the entire issued share capital of Coles of Bilston Ltd (Coles) for £1. Coles carried on a similar trade from three stores and a distribution centre in the West Midlands. On the following day Coles' business was hived up to Leekes, and Coles became dormant. Leekes rebranded the former Coles stores, and it continued to trade from all of the stores until August 2013 when one of the former Coles stores was closed, leaving Leekes with a total of six stores.
[2] Coles had been making trading losses for some time, and at the date of its acquisition its accumulated losses amounted to about £3 million. Leekes maintains that it is entitled to obtain relief for those losses by setting them off against the income of the enlarged business, and in its corporation tax return for the year to 31 March 2010 it set about £1.7 million of the losses against its income for the year, reducing its taxable profit to nil. The return also showed that it was intended that the balance of Coles' accumulated losses should be carried forward for utilisation in a similar fashion in future years.
[3] The present appellants (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 appealed to the First-tier Tribunal (the F-tT). HMRC's reason for rejecting the claim, reflected in their case before the F-tT, was that Leekes could set Coles' accumulated losses only against any income generated by what was formerly Coles' business. If HMRC are correct, no relief was available in the relevant year because that part of the enlarged business taken over by Leekes from Coles remained unprofitable.
[4] The F-tT (Judge Short and Mr Dee) decided that Leekes was right, and that it was entitled to the relief it had claimed. HMRC now appeal to this tribunal with permission granted by Judge Short.
[5] The relevant legislation at the date of the acquisition (it has since been re-written to the Corporation Tax Act 2010) was to be found in the Income and Corporation Taxes Act 1988 (ICTA). The starting point is s 337(1):
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.
[6] If the matter rested there, Leekes would have no right to any relief for Coles'...
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