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bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 4075
Experience:  FCCA FCMA CGMA ACIS
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If a newly trading company buys a company that has not traded

Customer Question

If a newly trading company buys a company that has not traded for ten years but has losses carried forward would it inherit the losses o to set against future profits or would HMRC time bar it? Both companies are in the same trade
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.

Hello, I'm Keith and happy to help you with your question. Trading losses may be brought forward and used to offset trading profits in the same trading environment. HMRC wording is that they may be used against profits from the 'same trade.' There is no time limit involved. I am aware of a company which has been steadily using up losses year by year from many years before. HMRC also advise that there is no need to claim such losses, they will be applied automatically when you make the annual CT600 return. However, I would suggest, as always, that you keep an eye as to what they are doing. This answer assumes that the new company bought in has not been made part of a company group.

Customer: replied 3 years ago.

So it can't be grouped ?


 


Company A purchases Company B.


Company A is trading as a licensed Bar/restaurant which Company B used to do.


 


Company B has large brought forward losses supported by a ditrector's guarantee but has not traded for ten or so years


 


How does Company A "absorb" those losses to take advantage of the tax loss situation if not allowed to group does it just buy the shares and thereby aquire the losses

Expert:  bigduckontax replied 3 years ago.
Yes, indeed it can be grouped.

Companies within a group may move losses up, down and sideways through the group as convenient. This can, of course, reduce CT liabilities to nil. Merely buying in a company does not bring it into the group, this should be done formally. If you group your companies clearing losses can be much enhanced. Company groups can attract additional costs as some even small or medium sized groups attract audit which would not be required were they operated independently. However turnover must be above 6.5M or balance sheet total 7.25M to be caught by the audit regime.

Is that a more attractive answer to your difficulties?
Customer: replied 3 years ago.

Sorry still not getting my head round it!


If company A pays shareholders of Company B an agreed price then Company A inherits the brought forward loss and the Directors loan Account.


 


How does company A get rid of the Directors loan and utilise the tax


loss


 


company B's Director does not require repayment of the loan

Expert:  bigduckontax replied 3 years ago.
Sorry to be so long in responding to your follow up question. I was in bed asleep and I am answering this from New York where we are 5 hours behind GMT.

To mop up the losses sitting in Company B, B invoices A for services. A pays B. This reduces the profit in A for Corporation Tax (CT) and effectively moves the profit to B. B has losses which absorb the profit and the whole shooting match gets the benefit of the brought forward losses. The same process is done to recover the loans. This is only doing on a small scale what the big companies do to avoid CT, except they do it through offshore companies located in low tax regimes eg Jersey.

If you operate A and B as a group you can avoid all this caper. Company A makes a profit for CT, but meets it by simply transferring losses from B to A. Simple, as the Mercat in the TV advert would say! As I told you group companies can juggle losses and profits up down and sideways, forward and in certain circumstances back too.