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HMRC internal manual

Company Taxation Manual

Corporation Tax: loss-buying: major change in nature or conduct of a trade

CTA10/S673 (2) and (4)

CTA10/S673 (2) applies where, within any period of 3 years there is both:

  • a change in the ownership of a company,


  • a major change in the nature or conduct of a trade carried on by the company.

CTA10/S673 (4) says that a ‘major change in the nature or conduct of a trade’ includes:

  • a major change in the type of property dealt in or services or facilities provided in the trade,


  • a major change in customers, outlets or markets of the trade.

CTA10/S673 (2) and (4) are aimed mainly at cases where, although a company’s trading activities change after a change in ownership, they are still close enough to its previous activities to make it difficult to show one trade ceased and another began.

The difficulty of demonstrating that a cessation of trade occurred (BIM80565+) when changes are spread over a period is shown in the analogy of a village grocer’s shop in Rolls-Royce Motors Ltd v Bamford (1976) 51TC344.

CTA10/S673 (2) addresses the problem of the organic development of trades by setting a three-year period over which to make a comparison. CTA10/S673 (4) goes further by including in this comparison the effect of gradual processes of change that began before the three-year period.

Williams v Peeters Picture Frames Ltd (1983) 56TC436 was about whether a change in customers amounted to a major change in the conduct of a trade. The company was taken over by a group. From then on the company sold its products to one of the group distribution companies, which in turn sold them to Peeters’ original customers. Peeters sold their products to the intermediate company at cost plus a small mark-up.

The Special Commissioners held this would be a major change in the conduct of a trade if looked at in isolation. But on the basis of the unusual facts of the case it did not represent a major change in the customers, outlets or markets of the trade. The Court of Appeal in Northern Ireland would not interfere with this decision.

Peeters should be distinguished from any case in which:


  • the ultimate customers are different from the original customers,


  • the prices at which the goods are sold to the intermediate group company are significantly higher or lower than the original selling prices.

The manipulation of prices for the supply of goods or services between the loss-maker and other businesses owned by its new owner is a common feature of loss-buying cases. The loss maker is converted into a tax shelter for trading income which would otherwise have been channelled through other companies or unincorporated businesses. The new owner can get the same result either by diverting profitable trading activities into the newly acquired company, or charging out some of its expenditure elsewhere. None of these forms of mischief was evident in Peeters.

Peeters is of general application because it establishes that CTA10/S673 (2) contains a qualitative as well as a quantitative test.

There will be no major change unless there is a change of kind. And that change of kind must be major as a matter of degree. In the Peeters situation, a change of kind would be a change in the manner of disposing of goods.

This interpretation was followed in the stock relief case Purchase v Tesco Stores Ltd (1984) 58TC46. The case was about the meaning of ‘a major alteration in the conduct of the trade’. Major was said to mean more than significant but less than fundamental.

Sometimes one change is enough to satisfy CTA10/S673 (2). But all relevant factors should be considered.

SP10/91 (see CTM06380) gives further guidance on HMRC’s approach to major change cases. Paragraph 3 of SP10/91 refers to factors not mentioned in CTA10/S673 (4), such as a change in the identity of a company’s suppliers. But in cases where it is necessary to invoke CTA10/S673 (2), the factors in CTA10/S673 (4) are often also found to be present. Particular notice should be taken of the examples given at paragraphs 7 and 8 of the SP - cases where we would not consider there was a major change.

In most cases, the relevant trading changes are made after the change in ownership. But sometimes the prospective loss-buyer may be able to arrange for changes to be made before acquiring the company’s shares. CTA10/S673 (2) makes it clear that the period of comparison can be any three-year period as long as it includes the date the company changed hands. It may therefore be easier to establish a clearer picture of the original trade by selecting a starting point some time before the change in ownership.