.png)
.png)
We act for a subsidiary of a United States company and have done so since 1977. The company operates in the environmental pollution control field, providing engineered pollution control solutions for the elements of water, air and noise. During the late 1980s considerable losses, exceeding £1 million, were incurred and the company decided to take on no further major contracts until market conditions improved.
We act for a subsidiary of a United States company and have done so since 1977. The company operates in the environmental pollution control field, providing engineered pollution control solutions for the elements of water, air and noise. During the late 1980s considerable losses, exceeding £1 million, were incurred and the company decided to take on no further major contracts until market conditions improved. It still maintained a presence in the United Kingdom, however, supplying spares to existing customers and, in the last couple of years, has begun to take on contracts in the pollution control field once more.
About two years ago the Revenue accepted the losses being carried forward, but a new Inspector has since decided that he would seek to prevent those losses going forward against any future profits on the basis that the trade had ceased. After initial losses, the company is now making profits on these new major contracts and taking on staff at all levels to cope with future business. We believe and have argued that section 393, Taxes Act 1988 entitles the company to use the losses which were generated up until the 1980s; we have pointed out that in fact the engineers who were working with the company in the late 1980s are still with the company.
Do readers have any ideas as to the next move we should make?
(Query T15,936) – Hardy.
This is a familiar enough scenario of a new Inspector trying to make an impact. I would imagine he or she has very little experience of dealing with subsidiary or multi-faceted companies. Whilst it is true to say that a company may well operate separate trades and have to accept the non-utilisation of losses brought forward, I consider that every case should be considered on its own merits according to fact and degree.
In this case, the client has evidently carried out on-site projects in the past, and is doing so again now in view of the recently-improved economic climate. However, I would contend that implementing, modifying and designing on site is not a separate and distinct trade from that of supplying spares to the same customers, especially when basically the same staff are used. Many such commercial contracts require guaranteed after-sales attention and availability of spares. If those assurances are not on offer from the outset, the customer would not have agreed to go ahead in the first place.
Thus, the fact that new installation contracts were not sought or completed for a period merely represents a lull in large-scale work, the volume and commercial viability of which is bound to reflect general economic conditions. Analogies could easily be made with aviation manufacturers or shipyards, where guaranteed maintenance and supply of spares is an essential factor in awarding contracts.
I suggest the Inspector is referred to the Revenue's Large Business Unit, for up-to-date internal advice on what exactly is now deemed to constitute separate trades. Local tax offices generally lack experience in this sector, frequently having portfolios of only small and medium-sized companies.
Determination, and strategy as outlined, should enable the querist's case to prevail. Do not give up; if necessary be willing to use these arguments at a Commissioner's hearing! – GJF.
The argument does not revolve around section 393, Taxes Act 1988 but around the question of whether or not the trade ceased or continued. If the trade ceased, losses cannot be carried forward even if a new trade is set up again. If a trade was suspended but did not cease, the losses can be carried forward. The two cases that the Inland Revenue is likely to look at are Kirk & Randall Ltd v Dunn 8 TC 663 and Goff v Osborne & Co (Sheffield) Ltd 34 TC 441.
Kirk & Randall involved a company that closed its premises in 1913. Between then and 1920 it had neither plant nor premises but continued to make attempts to gain contracts. The Commissioners decided that the trade had ceased, but the High Court overturned the decision and decided that trade had continued.
The Osborne case concerned a company whose premises were compulsorily acquired in 1939. It ceased trading and told the Inland Revenue that it would be wound up. It remained dormant for several years but was not struck off. It acquired new premises and started trading in 1944. The Commissioners decided that trading had continued, but the High Court decided that trading had ceased and restarted.
Both cases also saw a change in ownership.
'Hardy' needs to show that there has been no decision to cease trading but merely to suspend the taking on of contracts until conditions improved and that the supply of spares was done through the United Kingdom company. If it was done through the United States company, there might be an added complication because it would add further strength to the Revenue's argument that the United Kingdom entity did not trade but the United States company took over the trade. We do not have enough information to comment on how successful 'Hardy' might be.
I should add that we are not told whether there has been any change in ownership sufficient to bring section 768, Taxes Act 1988 into play. – JWG.
Extract from reply by 'M.C.N.':
The classic authority for continuity of loss relief is Kirk & Randall Ltd v Dunn 8 TC 663 where construction activities were precluded by wartime conditions. 'Hardy's' client would be in a stronger position if it continued throughout to occupy United Kingdom premises, although in Robroyston Brickworks Ltd v Commissioners of Inland Revenue [1976] STC 329 premises were closed and brick manufacture discontinued for a few months until resumed at a new location.
Variations in the scale of business operations conducted in an intellectual, rather than a physical, medium do not make a stop and start (see Edmunds v Coleman [1997] STC 1406).
