Mar 262013

This is a technical analysis of the new restriction on the carry forward of trading losses when a company undergoes a change in ownership. The legislation refers to the Corporation Tax Act 2010 (“CTA 2010”).

Tax specialists will be familiar with the subject matter. For those who are not so familiar with these rules, there is another article to follow.

Starting point – the “major change” rules

The “major change” rules apply whenever there is a change in a company’s ownership. The company will be unable to carry forward its past trading losses in either of the following two situations:

  • A major change in the nature or conduct of the trade occurs within any three year period that includes the date on which the company was transferred to the new owner;
  • The scale of the company’s activities had become small or negligible prior to the acquisition, with no significant revival in the interim; (broadly, the company was effectively dormant – we shall not consider this situation as it hardly occurs in practice).

The three year rule can be illustrated by the following diagram:

Trading losses major change 4

 Trade hive-down followed by a sale

Consider how these rules apply to the following situation:


We assume this is a loss making trade. When Newco is sold, it takes the trading losses with it:

  • The losses are transferred following the hivedown under section 944(3). This is on the basis that Newco is a subsidiary of V. No restrictions apply at this point;
  • The “major change” rules apply on the sale to P. This follows from section 674(2) which is the section that bites on this type of transaction. One needs to see what Newco has been doing for the three year period before the sale and what it is going to be doing during the following  three years ;
  • But Newco hasn’t been doing anything before the sale. Newco didn’t even exist. Section 676 says that for the purpose of applying the “major change” test, Newco stands in V’s shoes. This deals with the argument that it is impossible to apply the test due to the fact that there isn’t a relevant three year period before the sale;
  • In other words, when applying the test we have to see what V has been doing in the relevant three year period before the sale, and what Newco is going to do three years afterwards.

What happens if Newco transfers the trade intra-group?


Shortly after acquiring Newco, P arranges for the latter to transfer the trade to a new subsidiary Q. As Newco and Q are in the same ownership, Q inherits the trading losses under section 944(3). What is the position if Q were to make major changes? For example:

  • Could Q subsequently buy in assets from other group members – assets that generate sufficient profits to utilise against the losses from the Newco trade?
  • Could Q even buy a profit-making trade from elsewhere in the group, and merge it with Newco’s?

Until now, the losses might still have been available, even if the new operation did constitute a major change to the Newco trade.

Pre-Budget section 676 does on the face of it, say that Q stands in Newco’s shoes, and points back to section 674(2) which would prevent Q from using the losses. But section 674(2) only applies where there has been a change in ownership – and Q has never moved– it has always been in P’s group. The fact that Newco has changed hands is no longer relevant – Newco cannot be disqualified from using the losses because it no longer has any.

How has this loophole been closed?

There is a new section 676(4) that applies if the trade, together with the losses are transferred to another company after the change of ownership, and where this second transfer is within the family. In other words, it applies to the trade transfer between Newco and Q.

In these circumstances, we have a similar case of Newco  standing in Q’s shoes, just as Newco stood in V’s shoes. In determining whether the sale of Newco triggers the “major change” rules, we now have to look, not only at what V has been doing in the past three years, but also at what Newco and Q are going to be doing in the following three.

Before clarifying what this means, it is important to state what this does NOT mean.

Although Newco and Q are treated as one person, this section does not deem there to have been a change in ownership in Q. Such a provision would work equally well – since Q now has the losses, we just apply the major change rules to Q.  However, the results would be strikingly different. For example:

  • Suppose Newco is sold in 2013. So far, the “major change” rules apply to the period 2010 to 2016. After 2016, we are in the safe zone, and P can do whatever it wants to do with the business.
  • Now suppose in 2015, with one year to go, Newco transfers the trade to Q. If this is a deemed change in ownership for Q, the major change rules are triggered from this point. So we now have a period 2012-2018 to consider. In other words, the safe zone has receded by two years.

But that isn’t how it works.

Broadly, the legislation retains the fact that Newco is the company that has changed ownership, and it is therefore Newco that is the subject of section 674(2).

The new section 674(4) states that for the purpose of determining whether the losses are available, either to Newco or to Q as a successor, the “major change” rules apply:

“as if references to a trade carried on by the company [Newco] included the trade as carried on by the successor company [Q] or by any successor of that company.

In other words, the focus of the rules is on Newco, “the company” that has changed ownership 1. This is the company that is liable to lose the trading losses. Newco stands in Q’s shoes, but Q doesn’t stand in Newco’s.

The key question is:

“Can Newco retain its trading losses after the change of ownership?”

And to answer this question we need to ask: “What is its trade?” In the scenario that we have described, we answer this by:

  • Pretending that for the previous three years, Newco was carrying on V’s trade – even though Newco only came into existence shortly before the sale to P – this was already caught by section 676;
  • Following Budget 2013, we also pretend that during the following three years, Newco, carries on Q’s trade as well as its own. This doesn’t pose a problem if Q is also newly incorporated and nothing major is done after the trade transfer. But if Q has another trade, or buys in another trade, or does anything else that might rock the boat, the Newco losses may be disallowed.


The new restrictions on trading losses, together with the new rules on capital allowance buying may make it harder for buyers to benefit from a target company’s tax assets. But why should losses and an unused capital allowance pool be treated differently from any other type of business asset?

One can understand a tightening of the rules where there is a tax avoidance motive, but not where the transaction proceeds from purely commercial grounds. These new rules would affect transactions such as the Vodafone takeover of Cable and Wireless Worldwide (see the BBC article here). Ocado the online grocer, has also been in the news as a potential takeover target  (see the article in The Independent) – this company has tax losses, having never made a profit. How valuable are those tax losses now?


HMRC Technical Note – Corporation Tax – “loss loophole closure” Rules


  1. See   CTA 2010 s 673(1)(a).
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Satwaki Chanda

Satwaki Chanda

Satwaki Chanda is a tax lawyer with a First Class degree in Mathematics. Called to the Bar in 1992, he is the Editor of Tax Notes.
Satwaki Chanda

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