The recent First-tier Tribunal case of Amah v Revenue & Customs [2014] UKFTT 1084 (TC) highlights a problem when a loss making trade changes in a significant way. The same problem can arise when a trading company changes ownership. Losses can only be carried forward against future profits of the same trade, so it is important to be aware of what is regarded as a change in the nature of a trade.
Mr Amah is an optician. Until 2009 he ran his own optician’s business, as a franchisee of Dolland & Aitchison. He closed his shop in 2009 and began working as a locum in other opticians’ practices.
HMRC said he could not carry forward losses from his days as a franchisee against his income as a locum, and the tribunal backed them up. HMRC put forward various arguments, all of which the tribunal accepted:
- Running an optician’s practice is a trade, whereas working as a locum is a professional activity. This is a rare example of the distinction implied in the tax legislation’s description of income tax on ‘the profits of any trade, profession or vocation’ being of real significance; and
- The change in activity involved a change of customer – as an optician, Mr Amah’s customers were the general public who he supplied with glasses and other optical aids; as a locum, his customers were the opticians who he worked for.
The same trade?
If you make losses in a trade (or a profession or vocation), then for income tax purposes you can carry those losses forward against future profits you make in the same trade. This applies only for as long as you carry on the same trade, and Mr Amah’s case shows how important it is to be aware of what is regarded as a change in a trade.
The distinction between a trade and a profession is quite an unusual problem, but the change of customers is much more common as a reason for a trade to be treated as having changed. This need not mean simply a geographic change - it refers to a change in the type of customer. A common example is a change from wholesaling to retailing.
Another common example of a change in a trade is a different supply process. A good example is the case of a brewery (Gordon & Blair Ltd v CIR, CS 1962, 40 TC 358), which stopped brewing its own beer and instead bought it in bulk and sold it on. This was held to be a change in the trade sufficient to prevent losses being brought forward from the old brewing days.
In the case of an individual, when he ceases to trade there is no future income from his trade to set brought forward losses against, but in a limited company it is possible for the shares in the company to change ownership but the trade to continue.
The anti-avoidance rules for losses when a company changes ownership are complex, but one aspect involves a ‘major change in the nature or conduct of’ the trade concerned. If this takes place within three years either side of the change of ownership, any losses brought forward are disallowed.
The legislation goes on to define a major change as including: ‘a major change in the type of property dealt in, or services or facilities provided in, the trade, or a major change in customers, outlets or markets of the trade’.
Practical Tip:
A change in the nature of your trading activity can mean you lose your losses – if this is likely to happen, take professional advice to see if it is possible to use them up, for example by carrying them back to the three previous tax years, or by engineering a balancing charge through capital allowances.
