Usually, a company can carry forward trading losses only so long as it continues to carry on the trade in which the losses arose: they cannot be used in any way in respect of any period falling after the company has ceased to carry on that trade.
The main exception is where the company ceases to carry on the trade on its transfer to another company which is, essentially, under common control. In that circumstance, the trading losses continue in existence and are available to the successor company.
There are, however, limitations to the losses that can be inherited in this way. One of the most important is the “relevant liabilities” restriction. Broadly speaking, this denies relief for the losses to the extent that liabilities are left behind in the old company and are not assumed by the successor. More specifically the restriction is calculated by:
- Calculating any liabilities as at the date the old company ceased trading which are not assumed by the successor company
- Deducting the value of the assets of the company as at that date which are not transferred to the successor company and
- Deducting the consideration (if any) given for the transfer
The result (if a positive number) is the amount by which losses taken over by the successor company are restricted.
The inheriting of losses and the application of the restriction were the subject matter of the recent First-tier Tribunal case of Spring Capital Limited  UKFTT 0699 (TC).
One complication of the case (there were several) was that there was no tidy sale agreement specifying a date of transfer: instead it was over a period of two or three months that the old company wound down its activities and the new company picked them up. During that period, both companies were conducting trading activities.
Since the legislation provides for the losses to be inherited “if, on a company ceasing to carry on a trade, another company begins to carry it on”, it might be thought that the legislation requires the two events to occur at the same time such that an overlap period when the trade is carried on by both the old and the new company might be fatal to the relief.
Thus, one of the points of interest in the Spring Capital case is the observation of the Tribunal that the legislation “is not confined to the situation where the predecessor company transfers its trade outright on a particular day to the successor company – for example, in circumstances where the predecessor and successor companies enter into a business sale agreement in the conventional form. Instead, [it] also applies in circumstances where the trade of the predecessor is wound down and the successor company starts to carry it on. It is, therefore, entirely possible for [the legislation] to apply in circumstances such as those in the present appeal i.e. where [the predecessor company] begins to wind down its trade and the appellant starts to carry on that trade over a period of time.”
Having established that the relief is available in principle, it then becomes necessary to determine at what date the necessary comparison of assets and liabilities is to be made. Is it at the start of the transfer period (as the company argued for in this case) or at the end?
The significance in the Spring Capital case was that during the overlap period, the old company had voted (but had not yet paid) a large dividend: at the end of the overlap period, the liabilities of the old company (and therefore the potential loss restriction) were much larger than they were at the start.
The answer to that question is that the legislation requires the calculation to be made when the old company ceases altogether to carry on the trade – that is, at the end of the overlapping period. This meant that, on the rather complex facts of Spring Capital, the “relevant liabilities” restriction exceeded the losses so that none of the old company’s losses fell to be inherited by the new company.
For advice on preservation of tax losses on a reconstruction or other transfer, please get in touch with your usual BKL contact or use our enquiry form.