Leekes Ltd v HM Revenue & Customs, [2018] EWCA Civ 1185

The taxpayer (Leekes) carried on a trade of running department stores (three in Wales and one in Wiltshire) and acquired for nominal consideration all the shares of another company (Coles) that carried on a similar trade from three furniture stores and a distribution centre in the West Midlands. Coles distributed all its assets to Leekes, and all three Coles stores were re-branded under the Leekes name and continued to trade as before. At issue was whether the losses sustained in the hands of Leekes from its continued operation of the former Coles stores could be deducted from its income from operating its other stores. S. 343(3) of the Income and Corporation Taxes Act 1988 provided that Leekes (viewed as the successor) could deduct any amount for which the predecessor (Coles) would have been entitled to relief if it had continued to carry on the trade.

After discussing Bell v National Provincial Bank, and in finding that such relief was unavailable, Henderson LJ stated (at paras. 27-28):

The successor is entitled to relief "for any amount for which the predecessor would have been entitled to relief if it had continued to carry on the trade". This wording introduces a further hypothesis, namely that the predecessor (here Coles) had itself continued to carry on the trade. In this context, the words "the trade" can only refer to the trade previously carried on by Coles. They cannot refer to the enlarged trade carried on by Leekes, because that trade had never been carried on by Coles, and Coles cannot therefore be deemed to have continued to carry it on. The hypothesis thus requires the former trade of Coles to be identified in the hands of Leekes, as a component of the enlarged trade, and confines the availability of relief to any trading income which Leekes may derive from the former Coles trade. In other words, it is necessary to ascribe a deemed continuity to the former trade of Coles, although it now forms part of the merged business carried on by Leekes, and relief may only be obtained if and to the extent that Leekes then derives trading income from the former Coles trade.

This ...construction of section 343(3) ... is the only construction which the ordinary and natural meaning of the statutory language can bear, and it produces an obviously sensible result. If the construction advanced by Leekes were correct, the result would be to place the successor company in a more favourable position than the predecessor, because it would enable the successor to utilise the accumulated losses of the predecessor against trading income derived from a business which the predecessor had never carried on. ...

A British taxpayer (Leekes) carrying on a retail trade through four stores acquired, for nominal consideration, all the shares of another company (Coles) carrying on a similar retail trade through three stores, and then effectively wound-up Coles so as to carry on the operations of the three former Coles’ stores directly. At issue was whether a provision which provided that Leekes (viewed as the successor to the Coles’ trade) could deduct any amount for which the predecessor (Coles) would have been entitled to relief if it had continued to carry on the trade, permitted Leekes to deduct its losses from continuing to carry on the three former Coles’ stores from its profits from operating its four “old” stores.

In finding that such relief was unavailable, Henderson LJ stated (at para. 27):

[T]he words "the trade" can only refer to the trade previously carried on by Coles. They cannot refer to the enlarged trade carried on by Leekes, because that trade had never been carried on by Coles, and Coles cannot therefore be deemed to have continued to carry it on. … [I]t is necessary to ascribe a deemed continuity to the former trade of Coles, although it now forms part of the merged business carried on by Leekes, and relief may only be obtained if and to the extent that Leekes then derives trading income from the former Coles trade.