Cutting business costs while avoiding tax problems
A French company with a UK subsidiary had recently taken over an English company (the "target company"). The activities of the English company were similar to the activities of the existing UK subsidiary of the French company. The target company had made losses, which had not been relieved for tax purposes. The group were keen to achieve economies of scale, arising from the similar activities of the existing UK subsidiary and the target company. At the same time they were also interested in protecting the right of the target company to set off its brought forward losses for tax purposes against future profits.
Where a company incurs a trading loss, there are various ways in which that loss can be relieved for corporation tax purposes. One form of relief is that the trading loss can be said of against subsequent profits from the same trade. There is, however, a significant exception to this where there is a change in the ownership of the company. If, within any three-year period, there is both a change in the ownership of the company and a major change in the nature or conduct of a trade carried on by the company, then losses incurred in an accounting period beginning before the change of ownership cannot be set against income or other prophets of an accounting period ending after the change of ownership. The change in ownership and the change in the nature or conduct of the trade can occur in either order or at the same time.
The clients were concerned that, if they integrated their operations, the target company would lose its right to relief for brought forward losses. The French company had recently bought the target company, so there had been a change of ownership. If the businesses of the two UK companies were merged, that could well amount to a major change in the nature of conduct of the trade carried on by the target company. We advised on the extent to which the companies could share resources, thereby reducing costs, without this amounting to a major change in the nature or conduct of the trade of either company.
