Another important announcement in the March Budget was the proposed relaxation in the rules for setting off a company’s losses against the profits of future periods. These proposed changes that will allow set off against profits of any source are currently being consulted on and, if enacted, will apply to losses arising from 1 April 2017 onwards. Until then the set off of losses remains restricted, particularly when there is a change in the ownership of the company.
Currently, where there is both a change in the ownership of a company and also a major change in the nature or conduct of the trade carried on by that company within a 3 year period, the carry forward of trading losses is denied from the date of the change ownership. This measure is clearly designed to restrict the utilization of losses following a company sale.
HMRC take a great deal of interest in the way in which the trade is carried on during the run up to the sale and also post sale and have recently reissued detailed guidance as to how they interpret the rules based on previously decided cases.
For example, changes to improve company efficiency and rationalizing the product range are not viewed as major changes. However, changing the customer base or market sector being supplied may be seen as a major change, thereby blocking the carry forward of trading losses against future profits.
This can be a significant factor in business sales and we can advise you accordingly.
Merger of trades following an acquisition
HMRC have recently won a case before the Upper Tier Tribunal that the trading losses of a competitor company could not be set off against the profits of the acquiring company following the merger of the trades of the two companies. The two companies in question were both involved in the retail trade where 4 loss making department stores were merged with 3 profitable stores. The court held that the trading losses should be streamed and could only be set against future profits of the 4 loss making stores, overturning a previous decision by the First Tier Tribunal.
Buying the trade and assets of the target company
Note that if instead of buying the loss-making company, the trade and assets are acquired, then the trading losses will lapse and will not be available to the purchasing company. This however may be commercially more attractive as the purchaser will not take over the liabilities of the vendor company.
Other important tax considerations would be the transfer of plant and machinery, including fixtures, at market value rather than tax written down value, and the ability to obtain corporation tax relief for the value of intangibles, but not goodwill.
Remember to get in touch with us if you need support in connection with buying or selling a business.