A company can have its tax losses wiped out when it is taken over. Longstanding tax rules apply when there is a change in ownership of a company with trading losses carried forward and within a three year period either side of the date of change there is a major change in the nature of the trade or scale of trading activities become small but are then revived.
This provision is triggered by the superimposition of a new holding company, even though there’s no real change in those who ultimately control the company. From 1 April 2014 the loss denial provisions will not apply at all when a new holding company is put in place above the top of the group by a share for share transaction. There are a number of detailed tests that must be satisfied for this disregard.
Similar provisions apply to deny carry forward relief for tax reliefs of companies carrying on investment business. Restriction of these reliefs can be triggered by a “significant” increase in the company’s capital within three years of the change of ownership. From 1 April 2014 the criteria for this trigger will be that the increase in capital must exceed both more than £1m and 125% of the company’s existing capital. (Until 31 March the trigger is an increase of either £1m or the amount of the company’s existing capital. Say the investment company had capital of £100k, a subscription of £500k would trigger the restriction under the current rules but not under the new rules.)
Many would say that the rules were not intended to catch these circumstances. We see these changes as sensible relaxations.