CTM06390 - Corporation Tax: loss-buying: trading activities becoming small or negligible

CTA10/S673 (3) was designed to prevent the carry forward of trading losses in cases where a company’s trade was dying or had, for all practical purposes died, but it was difficult to persuade tribunals to find it had actually ceased and become a dormant shell.

This difficulty arose because such companies could claim that they were still holding themselves out for business as argued in Kirk & Randall Ltd v Dunn (1924) 8TC663 and Robroyston Brickworks Ltd v CIR (1976) 51TC230. A company would be bought in that state and new activities introduced to it in such a way that it could be argued that the original trade had been revived.

CTA10/S673 (3) applies where, when the ownership of a company changed, the scale of its trading activities had become small or negligible. It does not apply where a considerable revival of a trade took place before the change in ownership.

The deterrent effect of CTA10/S673 (3)) means that cases of this kind are now uncommon. Where consideration is being given to invoking CTA10/S673 (3) consideration should also be given to the possibility of arguing that the trade had ceased.

COVID-19

Where a company was required to temporarily close some or all of its business premises (or it was economically unviable for them to remain open) as a direct result of following Government guidance and regulations during the COVID-19 pandemic (i.e. as a result of a national lockdown or local restrictions), HMRC will not consider that the trade has become small or negligible as a result of these closures, provided that the company intends to and does continue trading at its normal level as soon as the Government restriction is lifted.

However, if a significant number of the company’s business premises remain closed for any reason after the restriction is no longer in force, then the trade may have become small or negligible and this will be determined on the facts of each case.

The COVID-19 pandemic is an exceptional and unprecedented event and, therefore, this guidance only applies where closures have been mandated (or it was uneconomic to remain open) as a result of local restrictions or national lockdown measures. This guidance, therefore, does not apply to any other closures or changes to trading for any other reason. These will be considered on their own facts when determining whether a trade has become small or negligible.