UK: England and Wales: the scope of corporation tax relief for a predecessor company's losses

In 2009, Leekes Ltd acquired the entire share capital of another company, Coles of Bilston Ltd, with the Coles business being incorporated into that of Leekes. Coles had been loss making and Leekes was entitled under tax legislation to offset those losses against its trading income (see, now, section 944 of the Corporation Tax Act 2010).

The question for the Court of Appeal in a judgment given yesterday - Leekes Ltd v HM Revenue & Customs [2018] EWCA Civ 1185 - was whether these losses could be offset against (a) the trading income of the whole Leekes business or (b) the trading income derived from the business acquired from Coles. The court was unanimous in holding that it was (b). Lord Justice Henderson observed that this:

... is the only construction which the ordinary and natural meaning of the statutory language can bear, and it produces an obviously sensible result. If the construction advanced by Leekes [(a)] were correct, the result would be to place the successor company in a more favourable position than the predecessor, because it would enable the successor to utilise the accumulated losses of the predecessor against trading income derived from a business which the predecessor had never carried on. It is hard to think of any sensible reason why Parliament should have wished to confer such an advantage on the successor to a trade, and (had it done so) there would have been obvious potential for tax avoidance and the development of a thriving secondary market in corporate trading losses" (para. [28]).