Gone are the times one had a reasonable expectation that a struggling business would be nurtured back to life with the benefit of new profits generated being relieved for tax purposes by former losses as a matter of course. Whilst we have always had a rule that the profits needed to be generated from the same trade we had not, until recently, had a time cap on the use of such losses, unlike many other countries.
George Osborne's 2015 Budget followed a court case (Leekes Ltd v Revenue & Customs) in which the Revenue lost. Here, a company ran out of town department stores and acquired another company running furniture stores and warehousing facilities, which had accumulated significant trading losses. Following the acquisition, the trade was transferred and the Leekes branding was adopted although the stores continued to sell the same types of products to essentially the same demographic customer base.
Although the stores formerly run by the target company continued to incur an overall loss, Leekes was allowed by the Court to offset part (£1.6m) of the losses brought forward against the profits of the combined business.
It is thus of little surprise that the first foray into restricting losses carried forward announced in the Autumn Statement 2014, whereby banks are limited to claiming loss relief up to 50% of their profits, was swiftly followed by new anti-avoidance measures designed to further restrict relief for trading and other losses carried forward. In particular, companies entering contrived arrangements to turn historic losses of restricted use into more versatile in-year deductions will be prevented from obtaining a tax advantage.
Whether the above arrangement is now considered to be sufficiently contrived to fall within the new measures, only time will tell.
If you have any concern about your profit and loss and how the new anti-avoidance measures may affect your business, please get in touch with your usual UHY adviser.
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