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HMRC internal manual

Company Taxation Manual

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Corporation Tax: company reconstructions: loss streaming

The principles behind the ‘streaming’ of the allowance of CTA10/S45 carry forward losses in a CTA10/S940A company reconstruction are that:

  • the successor is only allowed loss relief for the losses belonging to the trade or part-trade which was transferred from the predecessor,

and

  • the transferred losses are only allowed against the profits from the trade or part-trade acquired from the predecessor.

The loss streaming rules do not apply where a whole trade is transferred and the successor either does not have an existing trade or carries on two separate trades after the transfer. The latter case is unusual, and there is guidance on it at BIM70535.

Identifying the losses and profits

In the first situation listed at CTM06060, where a company ceases to carry on a trade and another company begins to carry it on, there is a succession to a trade and the trade is carried on by the successor in an identifiable form. In this case CTA10/S944 (3) applies, the successor inherits the loss of the predecessor (subject to the relevant liabilities restriction - see CTM06250) and can set it off against any subsequent profit made by that trade, namely the trade carried on formerly by the predecessor. There should be no problem in identifying the relevant losses and profits as the trade succeeded to will be carried on in an identifiable form.

CTA10/S951 deems there to be a separate notional trade where the last three situations listed at CTM06060 exists. These are described below.

 

Trade merged with existing trade

Where the predecessor ceases to carry on a whole trade and the successor merges the activities of that trade with an existing trade:

  • all the predecessor’s losses are transferred (subject to the application of the relevant liabilities restriction - see CTM06250), and
  • those losses are allowed against subsequent profits of the transferred activity only.

Example

Company A carries on a trade of buying caravans from manufacturers and selling them retail. Company B carries on a trade of buying cars from manufacturers and selling them retail. Company A and Company B both prepare their annual accounts to 31 August.

31 August 2002 Company A transfers its trade to Company B, and both companies meet the common ownership condition within the time span set under ICTA88/S343 (now at CTA10/S941). Company B merges the transferred caravan trade with its existing car trade. Company B adopts new marketing techniques for the caravan part-trade and makes a profit from this activity.

The companies’ results are as below.

Company A    
     
Year ended 31 August 2002 Caravan trade loss (£38,500)
Company B    
Year ended 31 August 2003 Car activities profit £117,000
  Caravan activities profit £26,500

Company B cannot set the losses of £38,500 against the profits of £117,000 from the car activities. However Company B can set the losses of £38,500 transferred from Company A against the profits of £26,500 from the caravan part-trade. This leaves losses of £12,000 to carry forward for set-off against future profits of the caravan part-trade.

 

Part of a trade becomes whole trade

Where the predecessor transfers part of its trade and the successor carries that on as its whole trade:

  • only those losses attributable to the part-trade are transferred, and
  • those losses are (subject to the application of the relevant liabilities restriction - see CTM06250) allowed without restriction.

 

Part of a trade merged with existing trade

Where the predecessor transfers part of its trade and the successor merges that with an existing trade:

  • only the losses attributable to the part-trade are transferred, and
  • those losses are allowed against the profits of the transferred activity only.

Note

Where a transferred trade or part-trade is merged with the successor’s existing trade, the separate notional trade mechanism is applied solely to allow the CTA10/S940A losses. This means that:

  • The successor’s own CTA10/S45 carry forward losses arising before the CTA/S940A transfer are allowed against all post transfer trading profits of its enlarged trade, as long as this continues to be the same trade.
  • Losses arising to the successor after the transfer are not divided, but allowed against all post transfer trading profits of the same trade.
  • Where there is a choice between inherited CTA10/S940A losses and the successors own (pre- or post-transfer) losses, the losses are allowed in the order most favourable to the taxpayer. This normally means allowing the CTA10/S940A losses first.
  • The separate notional trade rules cease when all the CTA10/S940A losses have been used up.

If the activities of the separate notional trade actually cease, then relief for any unused losses is lost under the normal rules of CTA10/S45 as applied by CTA10/S944 (3).