A special commissioner decided that a company which acquired a site for residential development by separating the site from the business carried on there, through a series of connected transactions finalised within a 90-minute period, was not entitled to carry forward losses incurred on the transfer of the trade to another company.

Facts

HG Ltd was a company which carried on a garage business at premises in York (‘the site’). P was a property developer who wished to purchase the site for residential redevelopment. However he was not interested in the garage business. Therefore an arrangement was made to separate the business from the site.

P proposed that his company would purchase the entire share capital of HG Ltd, subject to contract. It was proposed that prior to completion of the share purchase the business assets and liabilities of HG Ltd would be transferred to HY Ltd, a newly formed subsidiary. On the following day HG Ltd transferred its trade to HY Ltd which then sold its trade with trading assets and liabilities to the taxpayer. It was said that the arrangements provided for HG Ltd to continue to run the trade as the undisclosed agent of HY Ltd and the taxpayer successively.

The taxpayer subsequently claimed relief under ICTA 1988, s. 343. It claimed the trading losses of HY Ltd on the transfer of the trade from HY Ltd to it. Those trading losses had been incurred by HG Ltd. The Revenue contended that s. 343 required HY Ltd to carry on the trade of HG Ltd, in the sense that it could result in profits or losses being realised and recognised for tax purposes. The mere ownership of business assets did not constitute carrying on the trade. During the period in question HY Ltd did nothing. Whilst there was no prior agreement by HG Ltd to sell HY Ltd to the taxpayer when HY Ltd was under its ownership, on the facts the sale to the taxpayer was the most likely outcome. The reality was that the parties expected that the business would be sold on to the taxpayer. In those circumstances the parties were not contemplating that HY Ltd would carry on the trade for the short period pending the conclusion of the various transactions.

Issue

Whether the taxpayer was entitled to relief under ICTA 1988, s. 343 by carrying forward the trading losses incurred by HG Ltd, on the transfer of the trade from HY Ltd to it.

Decision

The special commissioner (Michael Tildesley) (dismissing the appeal) said that, as a matter of principle, if HY Ltd carried on the trade in question, the appeal succeeded; if it did not carry on the trade, the appeal failed.

The taxpayer's case depended upon the fact that the garage continued with its business whilst the various transactions took place. On the two key issues the taxpayer failed to prove its case: first there was insufficient evidence that the purported agency arrangements had been made. From the taxpayer's perspective the existence of that agency was critical as it explained why HY Ltd had assumed no formal trappings of carrying on a trade. Secondly the taxpayer failed to show that at the relevant time there were possibilities apart from the sale of the business to the taxpayer. On the evidence at the commencement of the various transactions the parties involved knew that the sale of the garage business to the taxpayer was by far the most likely outcome. The mere fact that the employees continued with their jobs was insufficient on its own to establish that HY Ltd carried on the trade. Accordingly the taxpayer had failed to show, on the balance of probabilities, that HY Ltd carried on the trade during the 90-minute period. The mere ownership of the trade could not constitute carrying on the trade for the purposes of ICTA 1988, s. 343.

The conclusion that HY Ltd did not carry on the trade was given added force when examined against the whole evidence. The short duration of the ownership of the trade by HY Ltd, together with the absence of any negotiations about the terms of its acquisition by a third party, added to the sense of inevitability of the eventual sale to the taxpayer and generated a perception that the parties did not expect HY Ltd to carry on the trade for so short a time period. Further, there was no evidence of any trading activity undertaken by HY Ltd. It had incurred no expenditure and no receipts, and did not enter into transactions during the 90-minute period. Having regard to all the circumstances, HY Ltd did not carry on the garage trade acquired from HG Ltd within the meaning of s. 343 of ICTA 1988.

(2008) Sp C 689.
Decision released 10 June 2008.