Leekes Ltd v HM Revenue & Customs

Relief for a predecessor company’s carried-forward trading losses is limited to the trading income of the predecessor trade. Under section 343(3) of the Income and Corporation Taxes Act 1988, the successor is treated as continuing that former trade for the purpose of claiming relief under section 393(1). The provision does not permit the losses to be set against income from the successor’s pre-existing business merely because the businesses have been merged. Section 343(8) and (9), which provide for deemed separate trades and apportionment, address different forms of succession and do not alter the result in a straightforward succession under section 343(1). Practical difficulty in identifying the relevant income cannot justify departing from clear statutory language; appropriate record-keeping can address the difficulty.

Leekes acquired the entire share capital of Coles and the next day took over Coles’ business, which became part of Leekes’ enlarged furniture and department-store trade. Coles ceased trading and had accumulated trading losses. Leekes claimed to set those losses against the profits of its whole enlarged trade. HMRC 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). The Court of Appeal considered whether section 343(3) permitted the predecessor losses to be set against all the successor’s trading income, or only income attributable to the predecessor trade.

Appeal dismissed unanimously. HMRC’s construction of section 343(3) was correct.

1. Section 343(3) confers relief under section 393(1). That relief concerns losses of a single trade, set against trading income from that trade in succeeding accounting periods while the company continues to carry it on. The successor cannot use section 343(3) to obtain sideways relief or relief against other categories of income under section 393A, apart from any claim already made by the predecessor under section 393A(1).

2. The first limb of section 343(3) creates a retrospective hypothesis that the predecessor loss was sustained by the successor in carrying on the acquired trade. This opens the statutory gateway to relief. The second limb determines the amount of relief by hypothesising that the predecessor had continued to carry on its trade. The words “the trade” therefore refer to the predecessor trade, not the successor’s enlarged trade. Relief is available only against trading income derived from the former predecessor trade, even where it has become part of a merged business.

3. The type of succession recognised in Bell v National Provincial Bank of England, Limited, where an existing business absorbed an acquired business, was accepted as falling within section 343(1): [1904] 1 KB 149 (CA). The fact that accounts and profits were merged did not prevent succession.

4. The analysis in Falmer Jeans Limited v Rodin (HM Inspector of Taxes) concerning the materially similar predecessor provisions was accepted as explaining section 343(8) and (9): [1990] STC 270. Those subsections address cases involving deemed separate trades and apportionment of receipts, expenses, assets or liabilities. They do not require an apportionment mechanism in the simpler case governed by section 343(1). The earlier decisions in Laycock v Freeman, Hardy and Willis Limited and Briton Ferry Steel Co, Limited v Barry formed part of that statutory context: [1939] 2 KB 1; [1940] 1 KB 463.

5. Perceived administrative difficulty could not justify disregarding clear statutory language. The difficulty of identifying income from the predecessor trade could be avoided or reduced by careful record-keeping.

• Court of Appeal (Civil Division) — The appeal from the Upper Tribunal was dismissed: [2018] EWCA Civ 1185.
• Upper Tribunal (Tax and Chancery Chamber) — HMRC’s appeal from the First-tier Tribunal was allowed. The Upper Tribunal held that the predecessor losses could be relieved only against income from the predecessor trade: [2016] UKUT 320 (TCC).
• First-tier Tribunal (Tax Chamber) — Leekes’ appeal against HMRC’s closure notice was allowed: [2015] UKFTT 93 (TC).