CTM06860 - Corporation Tax: loss buying: transfer of trade: restriction of relief

CTA10/S676EB-EC

Where CTA10/PART14/CH2E applies, there are two restrictions on the successor company’s ability to use the losses of the transferred trade.

Restriction on relief against total profits

The restriction on relief against total profits at s676EB restricts the company’s ability to obtain relief for losses of the transferred trade under either of the following provisions:

  • Post-April 2017 trade losses carried forward against total profits (CTA10/S45A), or
  • Excess carried-forward non-decommissioning losses of oil and gas ring fence trades (CTA10/S303C).

Restriction on group relief for carried-forward losses

The second restriction, at s676EC, restricts the successor company’s ability to surrender losses carried forward under either of the above provisions (s45A and s303C) for group relief for carried-forward losses.

General application

The restrictions are not absolute. They apply only to losses incurred before the {change of company ownership} that has caused Chapter 2E to apply.

Losses incurred after this change are not restricted even if they are incurred before the trade itself is transferred.

In addition, the restrictions only prevent relief against profits that arise in the five year period following the end of the transferred company’s accounting period in which the change of ownership occurred. Profits that arise after this five year period are not affected.

Finally, the restriction does not prevent relief against any profits that can fairly and reasonably be attributed to the successor company carrying on the transferred trade.

The overall effect, broadly summarised, is therefore to prevent relief and group relief for

  • Carried-forward losses of the transferred trade,
  • Incurred before the change in ownership,

against

  • Profits of the following five years,
  • Except so far as those are profits of the same trade.

Exemption: relief against total profits

The restriction on relief against total profits does not apply if the transferred company, whose ownership has changed, and the successor company are related to one another both (s676EB(1)(c)):

  • Immediately before the change in ownership of the transferred company, and
  • At the time when the trade is transferred.

Exemption: group relief for carried-forward losses

A similar but not identical exemption applies for the restriction on group relief for carried-forward losses following the transfer of a trade (s676EC(5)).

The exemption is determined by looking at the relationship between two companies:

  • The transferred company, whose ownership has changed, and
  • A claimant company, whose profits could potentially be relieved by losses surrendered by the successor company.

The exemption applies if, immediately before the change in ownership, these two companies met the group relief group condition (CTA10/S188CE, S188FB, CTA10/PART5/CH5).

In these circumstances, the restriction is lifted with regard to the particular claimant company in question. That is, the successor company is not prevented by Chapter 2E from surrendering losses of the transferred trade to that company.

The successor company may still be restricted from surrendering losses of the transferred trade to other companies in the group.

This is because the exemption operates individually with reference to each potential claimant company.

For example:

  • Two companies, C and D, are acquired by group G on 1 January 2020.
  • Group G includes companies X, Y and Z.
  • Company C transfers a trade, T, to company X.

The situation meets the general conditions of Chapter 2E. Company X cannot surrender losses of trade T incurred before 1 January 2020 to companies Y and Z. However, companies C and D met the group condition immediately before 1 January 2020. As a result, the restriction does not prevent company X from surrendering losses of trade T to company D

Company X is also able to surrender losses of trade T to company C, the predecessor company. This is possible without any specific exemption.

The restriction on group relief for carried-forward losses in Chapter 2E only applies when the claimant company is another company, other than the predecessor company (CTA10/S676EC(1)(c)).

Note that the restriction in s676EC can apply when the predecessor company is a co-transferred company, as well as when the predecessor company and transferred company are one and the same. However, the restriction on relief against total profits under s676EB is concerned only with the relationship between the successor company and the transferred company.

Apportionment

Companies may need to apportion amounts in order to determine the amounts of losses restricted and profits affected. They should do so following the method set out in legislation for each of the following two periods: