»Ê¹ÚÌåÓýapp

»Ê¹ÚÌåÓýapp principles behind the ‘streamingâ€� 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.

»Ê¹ÚÌåÓýapp 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. »Ê¹ÚÌåÓýapp latter case is unusual, and there is guidance on it at BIM80535.

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. »Ê¹ÚÌåÓýappre 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. »Ê¹ÚÌåÓýappse 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.

»Ê¹ÚÌåÓýapp companiesâ€� 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 profits £ 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:

• »Ê¹ÚÌåÓýapp 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.
• »Ê¹ÚÌåÓýapp 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).