Buying a company that is making a loss?

Another important announcement in the March Budget was the proposed relaxation in the rules for setting off a company’s losses against the profits of future periods. These proposed changes that will allow set off against profits of any source are currently being consulted on and, if enacted, will apply to losses arising from 1 April 2017 onwards. Until then the set off of losses remains restricted, particularly when there is a change in the ownership of the company.
Currently, where there is both a change in the ownership of a company and also a major change in the nature or conduct of the trade carried on by that company within a 3 year period, the carry forward of trading losses is denied from the date of the change ownership. This measure is clearly designed to restrict the utilization of losses following a company sale.

HMRC take a great deal of interest in the way in which the trade is carried on during the run up to the sale and also post sale and have recently reissued detailed guidance as to how they interpret the rules based on previously decided cases.

For example, changes to improve company efficiency and rationalizing the product range are not viewed as major changes. However, changing the customer base or market sector being supplied may be seen as a major change, thereby blocking the carry forward of trading losses against future profits.

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