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HMRC internal manual

Company Taxation Manual

Corporation Tax: company reconstructions: transfers of trade

CTA10/S940B (2) & CTA10/S951 (8)

For CTA10/S940A to apply there must be a transfer of either a trade or part of a trade between the companies concerned. CTA10/S940B (2), as extended by CTA10/S951, covers four situations as follows:

  1. A company ceases to carry on a trade and another company begins to carry it on.
  2. A company ceases to carry on a trade and another begins to carry on the activities of that trade as part of its trade.
  3. A company ceases to carry on partof a trade and another company begins to carry on the activities of that part as its trade.
  4. A company ceases to carry on part of a trade and another company begins to carry on the activities of that part as part of its trade.

The scope of CTA10/S940B (2) and CTA10/S951 was discussed in Falmer Jeans Ltd v Rodin (1990) 63TC55.

CTA10/S940A may also apply where:

  • a company ceases to carry on a trade,

and

  • thereafter another company carries on part of that trade either as its trade or as part of its trade.
     

Succession

CTA10/S940B (2) applies in the first situation above. This is where a company ceases to carry on a trade and another company begins to carry it on. For a transfer of a trade to fall within this first category there mustbe succession to the trade. There is guidance on succession at BIM80620+.

There is succession, and (in this respect) CTA10/S940B (2) is satisfied, when the purchaser takes over enough of the vendor’s trading activities for it to be established that the purchaser is carrying on the same trade. This is shown by:

  • the ‘substance’ view of succession in Malayalam Plantations Ltd v Clark (1935) 19TC314, and
  • the approach of looking at the realities of the situation inWadsworth Morton Ltd v Jenkinson (1967) 43TC479, a case which concerned the IT ancestor of Section 940A (FA53/S19 and FA54/S17).

Succession can also occur when the purchaser merges the transferred trade with an existing trade of its own. provided that the trading activities formerly carried on by the vendor are still being carried on in an identifiable form as in Briton Ferry Steel Co Ltd v Barry (1939) 23TC414.

 

Activities of a trade

CTA10/S951(1) applies in the second situation above. This is where:

  • a company ceases to carry on a trade,

and

  • another company begins to carry on the activities of that trade as partof its trade.

It was decided in the Falmer Jeans case that this second category covers cases where the trade was transferred but the ‘identifiable form’ test was not met. In the case of Laycock v Freeman, Hardy and Willis Ltd (1938) 22TC288 the ‘identifiable form’ test was not met. It is not necessary that the purchaser carries on all the activities.
 

CTA10/S951 (3) applies if:

  • enough activities are taken over to form a separate trade,

and

  • if the purchaser treats those activities as a separate trade, they are in factthe same trade the vendor formerly carried on.

 

Activities of a part of a trade

CTA10/S951 also applies in the third and fourth situations above. These third and fourth categories are required because there cannot be succession to part of a trade (BIM70640). The conditions of CTA10/S940A are not satisfied where mere assets or activities that do not amount to part of a trade are transferred.

There is no definition of ‘part of a trade’ in the Act. But it can be regarded as a severable part of a company’s trading activity that is capable of:

  • being a free-standing apparatus,

and

  • making profits or losses in its own right.

It does not have to amount to anything as distinctive as a branch or division.