Chapter 26 Change in ownership of a company

Question 1

26.1 Introduction

Answer 1

Anti-avoidance rules exist to prevent a company carrying forward its trading losses where there has been a change in its ownership and the new owners has bought the company to utilize the losses brought forward.

Question 2

26.3 Change in Ownership

Answer 2

If within a period of three years, a single person acquires more than 50% of the share capital of the company, or two or more persons acquire at least 5% each and taken together this exceed 50%, then there has been a change in ownership.
For the purposes of post 1 April 2017 losses carried forward, there is also a change in ownership if, as a result of a company acquiring shares in one company, that company becomes a member of the same group as another company.

Question 3

26.4 Major change in nature or conduct of trade

Answer 3

The period under review is a five-year period beginning no more than three years before the change in ownership. No major change in the nature or conduct of the trade carried on by the company must have happened in that period. If a major change does occur the anti-avoidance provisions apply.
HMRC look at the facts in each individual case to constitute a major change. HMRC guidance include changes as new technology, new management techniques, improvements in efficiency of the company and rationalization.

Question 4

26.5 Small or Negligible trades

Answer 4

The anti-avoidance rules apply where the company’s trade was small and negligible immediately before the change in ownership, and the trade undergoes a considerable revival in any period following the change of ownership

Question 5

26.6 Effect of the anti-avoidance provisions

Answer 5

A brick wall is put up from the date of the change in ownership which blocks trading losses from being carried forward after the date of the change in ownership. This also means any losses made after the change cannot be carried back.

Question 6

26.7 Major change in nature or conduct of business

Answer 6

Even if there is not a change in the conduct of trade, there still may be a restriction in the use of carried forward post 1 April 2017 losses if there has been a major change in the business of the company. This ensures the carry forward losses is not available against the changed business. A major change in the business of a company extends the scope to include:
• A major change in the nature or conduct of any trade or business carried on by the company
• A major change in the scale of any trade or business carried on by the company
• Beginning or ceasing to carry on a particular trade or business
This means the trade losses brought forward which arose before the change in ownership cannot be used against affected profits. Affected profits are those which arise before the fifth anniversary of the end of the accounting period in which the change of ownership took place.
The rule also applies to brought forward non-trading deficits on loan relationships, IFAs, property and excess management expenses in investment companies. The period in which the change occurs depends on the type of loss being carried forward:
• For a trading loss, it is a five-year period that begins no more than three years before the change in ownership
• For other types of losses and amounts, it is the eight-year period that begins three years before the change in ownership
Then the carrying forward of those losses is blocked for the five years after the change in ownership, the losses are only blocked for five years.