Leekes Ltd v HM Revenue & Customs

The Court of Appeal construed section 343(3) of the Income and Corporation Taxes Act 1988 and held that a successor company is entitled only to trading loss relief to the extent that the predecessor would have been entitled to relief had it continued to carry on its own trade. The successor cannot set the predecessor’s carried forward trade losses against the successor’s wider or different trading income that was not earned by the predecessor’s trade. The court relied on section 343(3)’s wording read with section 393(1) (the basic carry‑forward rule), and on the deeming and apportionment provisions in section 343(8)–(9) which cater for cases where activities must be treated as a separate trade.

The Court rejected the taxpayer’s argument that, where the predecessor trade is merged into the successor’s existing trade, the losses may be set against the combined trade as a whole. The reasoning rejected any construction that would give a successor a better position than the predecessor or enable use of losses against income from a trade that the predecessor did not carry on.

Background and parties: Leekes Limited acquired the entire issued share capital of Coles of Bilston Limited and hived up Coles’ business to itself so that the Coles stores became part of Leekes’ enlarged trade. Coles had accumulated trading losses. Leekes sought to set substantial Coles losses against Leekes’ profitable trading income for the year to 31 March 2010.

Procedural history: HMRC opened an enquiry and disallowed the claim. The First-tier Tribunal allowed Leekes’ appeal ([2015] UKFTT 93 (TC)). The Upper Tribunal allowed HMRC’s appeal ([2016] UKUT 320 (TCC), reported [2016] STC 1970). Leekes appealed to the Court of Appeal with permission granted by Gloster LJ.

Nature of the claim: The appellant sought relief under the statutory successor provisions permitting a company which succeeds to a predecessor’s trade to obtain relief for that predecessor’s carried forward trading losses.

Issues framed: The central question was whether section 343(3) of ICTA 1988 permitted the successor to set predecessor losses against the entirety of the successor’s enlarged trade (including its pre‑existing profitable activities), or only against trading income derived from the predecessor’s former trade as carried on by the successor.

Court’s reasoning:

• The Court emphasised that section 343(3) confers relief "under section 393(1)", which is the rule for carry‑forward of losses in respect of a single trade; that relief can only operate while the company carries on that trade and only against "trading income from the trade".
• Section 343(3) entitles the successor to relief "as for a loss sustained by the successor in carrying on the trade, for any amount for which the predecessor would have been entitled to relief if it had continued to carry on the trade". The statutory hypothesis refers to the predecessor's own trade, not to an enlarged trade which the predecessor never carried on.
• The deeming and apportionment provisions in section 343(8)–(9) (and the analysis in Falmer Jeans) show Parliament addressed cases where activities must be treated as a separate trade and provided for apportionment of receipts and expenses; those provisions do not imply that subsection (3) was intended to allow use of predecessor losses against unrelated trading income.
• Practical difficulties in identifying post‑succession streams are not a reason to depart from unambiguous statutory wording; careful record‑keeping can address allocation issues.

Conclusion: The Court upheld the Upper Tribunal: relief is confined to trading income attributable to the predecessor’s trade as carried on by the successor. The appeal was dismissed.

Appeal dismissed. The Court held that section 343(3) of ICTA 1988 confines relief to amounts for which the predecessor would have been entitled to relief had it continued to carry on its own trade; the successor may therefore only set predecessor losses against trading income derived from the predecessor’s trade (as a component of the enlarged trade), not against income from other parts of the successor’s business. The statutory wording is clear and must be followed; section 343(8)–(9) supports the statutory structure for cases requiring apportionment.

First-tier Tribunal allowed Leekes ([2015] UKFTT 93 (TC)). Upper Tribunal allowed HMRC on appeal ([2016] UKUT 320 (TCC), reported [2016] STC 1970). Permission to appeal to the Court of Appeal was granted by Gloster LJ; appeal heard before the Court of Appeal and dismissed ([2018] EWCA Civ 1185).