Policy paper

Statement of Practice 10 (1991)

Updated 13 June 2016

1. This statement explains the basis on which HM Revenue and Customs (HMRC) interpret the term ‘a major change in the nature or conduct of a trade’ (or, as appropriate, ‘business’) for various corporation tax purposes.

2. The term is relevant in the following provisions:

Section 245 ICTA 1988, which prevents advance corporation tax paid in respect of distributions made, or deemed to be made, in an accounting period before a change of ownership from being carried forward to set against a corporation tax liability in an accounting period after a change of ownership, or carried back from an accounting period after the change of ownership to be set against a corporation tax liability of an accounting period before the change of ownership, when in any period of 3 years there is a change in the ownership of a company and a major change in the nature or conduct of a trade or business carried on by the company.

Section 245A ICTA 1988, which prevents advance corporation tax surrendered to a subsidiary company under Section 240 from being carried forward from an accounting period before the change of ownership to set against the corporation tax liability in an accounting period after the change of ownership when in a period of 6 years beginning 3 years before the change in the ownership there is a change in the ownership of the subsidiary company and a major change in the nature or conduct of a trade or business carried on by the surrendering company.

Section 767A ICTA 1988, which prevents the use of company purchase schemes to avoid payment of corporation tax, by enabling HMRC to collect any unpaid tax from the persons who previously controlled the company, or from companies under the control of such persons. It applies in certain circumstances where there is a change of ownership of a company and there is a major change in the nature or conduct of a trade or business of the company during the period of 6 years beginning 3 years before the change in ownership.

Section 768 ICTA 1988, which prevents a trading loss incurred in an accounting period before the change of ownership from being carried forward to set against trading income of an accounting period after the change of ownership when in any period of 3 years there is a change in the ownership of a company and a major change in the nature or conduct of a trade carried on by the company.

Section 768A ICTA 1988, which prevents a trading loss incurred in an accounting period after the change of ownership from being carried back to set against profits of an accounting period before the change of ownership when in any period of 3 years there is a change in the ownership of a company and a major change in the nature or conduct of a trade carried on by the company.

Section 768B ICTA 1988, which prevents excess management expenses or certain interest whether otherwise allowable as a charge or as a Case III debit from a period before the change of ownership from being deducted in computing the corporation tax profits of a period after the change of ownership, when in a period of 6 years beginning 3 years before the change in the ownership there is a major change in the nature or conduct of the business of the company.

Schedule 7A TCGA 1992, which restricts the set-off of pre-entry capital losses brought by a company into a group. Paragraph 7 Schedule 7A specifies the gains from which pre-entry losses are deductible and includes special rules for trades. Paragraph 8 Schedule 7A disregards the existence of a trade in relation to the period before a company joins a group if, within 3 years before or after that event, there is a major change in the nature or conduct of the trade.

The rules for ascertaining whether there has been a change in the ownership of a company for the purposes of Sections 245, 245A, 767A, 768, 768A and 768B are in Section 769. The rules for determining whether a company is a member of a group are in Section 170 TCGA 1992. These rules apply for the purposes of Schedule 7A subject to certain modifications contained within Schedule 7A itself.

3. Section 768 (4) sets out some of the circumstances which may amount to a major change in the nature or conduct of a trade for the purposes of Sections 768 and 768A.

Section 245 (4) sets out some of the circumstances which may amount to a major change in the nature or conduct of a trade or business for the purposes of Sections 245, 245A and 767A.

Section 768B (3) sets out one of the circumstances which may amount to a major change in the nature or conduct of a business for the purposes of Section 768B.

Paragraph 8 (2) Schedule 7A TCGA 1992 sets out some of the circumstances which may amount to a major change in the nature or conduct of a trade for the purposes of Schedule 7A.

HMRC will have regard to any of the circumstances specified in the relevant subsection, such as a major change in services or facilities provided in the trade, or a major change in customers of the trade or a change in the nature of the investments held. HMRC will also have regard, if appropriate, to changes in other factors, such as the location of the company’s business premises, the identity of the company’s suppliers, management, or staff, the company’s methods of manufacture, or the company’s pricing or purchasing policies to the extent that these factors indicate that a major change has occurred.

4. In considering whether there has been a major change in the nature or conduct of a trade or business, HMRC will have regard to a comparison of the conditions applying at any 2 points in the 3 years which includes the date of the change of ownership of the company or, for the purpose of Section 245A, Section 767A and Section 768B, at any 2 points in the period of 6 years beginning 3 years before the change of ownership. It will not matter whether the change occurs at a particular point in time or is the result of a gradual process. The gradual process may itself have begun before the beginning of the appropriate 3 (or 6) year period.

5. All of the relevant factors will be evaluated as a whole although, on occasion, a change in one factor may be decisive.

6. In the light of the judgement in the Court of Appeal (Northern Ireland) in the case of Willis v Peeters Picture Frames Ltd (56TC436) and the comments on that case in the High Court judgement in Purchase v Tesco Stores Ltd (58TC46), HMRC will have regard to both qualitative issues (such as whether something is or is not a change) and to quantitative issues (such as whether or not a change is a major change). To be a major change, the change must be more than significant (Gibson LJ in Willis v Peeters Picture Frames Ltd) though it does not necessarily have to be fundamental (Warner J in Purchase v Tesco Stores Ltd).

7. HMRC will not regard a major change in the nature or conduct of a trade as having occurred when all that happens is that a company makes changes to increase its efficiency, or makes changes which are needed to keep pace with the developing technology in the industry concerned or with developing management techniques.

8. Similarly, HMRC will not regard a major change in the nature or conduct of a trade as having occurred when all that happens is that a company rationalises its product range by withdrawing unprofitable items and, possibly, replacing them with new items of a kind related to those already being produced.

9. For some tax purposes, where part of a trade is transferred by one company to another in the same ownership, the different parts are treated as separate trades. This occurs in the rules for certain company reconstructions in Section 343 (8). For the purposes of Sections 768 and 768A only, where a transfer of part of a trade falls within Section 343 the transfer will not, by itself, be regarded as a major change in the nature or conduct of either the part-trade transferred or the part-trade retained by the transferring company, where it is relevant to consider either part separately. Instead, the trade of each company after the transfer (or, if appropriate, the relevant part of a combined trade) will be compared with the equivalent part of the combined trade before the transfer. This will apply whether the transfer occurs before or after the relevant change in the ownership. Where the transfer occurs after the change in the ownership, however, it may be necessary to consider whether it involves a major change in the nature or conduct of the undivided trade, as it subsisted at the date of the change in the ownership. In such cases it may be appropriate to regard the transfer as constituting a major change, depending on the surrounding circumstances. In practice, however, HMRC would not contend that the transfer constituted a major change if there was no other major change in either the original trade, or the parts into which it became divided, within the relevant three year period. The transfer of the whole or part of a trade or business may, however, constitute a major change for the purposes of Sections 245, 245A, 767A and 768B ICTA and Schedule 7A TCGA 1992.

10. Though the courts have made it clear that each case should be looked at in the light of all its facts, the following may assist in showing where HMRC regard the borderline falling in particular circumstances.

Examples where a change would not of itself be regarded as a major change

(a) A company manufacturing kitchen fitments in 3 old factories moves production to a new factory (increasing efficiency).

(b) A company manufacturing kitchen utensils replaces enamel by plastic, or a company manufacturing time pieces replaces mechanical by electronic components (keeping pace with developing technology).

(c) A company operating a dealership in a make of car switches to operating a dealership in another make of car satisfying the same market (not a major change in the type of property dealt in).

(d) A company manufacturing both filament and fluorescent lamps (of which filament lamps form the greater part of the output) concentrates solely on filament lamps (a rationalisation of product range without a major change in the type of property dealt in).

(e) A company whose business consists of making and holding investments in UK quoted shares and securities makes changes to its portfolio of quoted shares and securities (not a change in the nature of investments held).

Examples where a major change would be regarded as occurring

(f) A company operating a dealership in saloon cars switches to operating a dealership in tractors (a major change in the type of property dealt in).

(g) A company owning a public house switches to operating a discotheque in the same, but converted, premises (a major change in the services or facilities provided).

(h) A company fattening pigs for their owners switches to buying pigs for fattening and resale (a major change in the nature of the trade, being a change from providing a service to being a primary producer).

(i) A company switches from investing in quoted shares to investing in real property for rent (a change in the nature of investments held).

HM Revenue and Customs Manuals

Company Taxation Manual CTM06320 and CTM06380 advising taxpayers or their agents.

Note: this statement is as it appears in HM Revenue and Customs Statements of Practice (March 2009).