Oakwell Ltd - losses, a change of ownership and a change of trade
Oakwell Ltd has always prepared accounts to 31 March. It manufactures components at a single site. In May 2024 the founding shareholder sold 80% of the company to an unrelated investor. Between August and November 2024 the company ceased manufacturing, sold its plant, made most of its workforce redundant, and began distributing bought-in components instead. In the year to 31 March 2025 it made a trading loss of £200,000 and a chargeable gain of £150,000 on the sale of a warehouse that it had let to a third party. It has £500,000 of trading losses brought forward from the year to 31 March 2022. Profits in the year to 31 March 2024 were £260,000. The new owner expects profits of £180,000 a year for the next four years and asks whether the brought-forward losses can now be used.
1. Explain the effect of the change of ownership on the brought-forward trading losses and assess whether those losses are likely to be available.
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The rule
Under s.673 CTA 2010, trading losses carried forward cannot be deducted from total profits of any accounting period after the accounting period in which a change in ownership occurs if, within the three years before or after that change, there is a major change in the nature or conduct of the trade.
Application
The change of ownership occurred in May 2024, inside the year to 31 March 2025. The three-year window therefore covers May 2021 to May 2027. Within it, the company stopped manufacturing, disposed of its plant, made most of its workforce redundant and switched to distributing bought-in goods.
A move from manufacturing to distribution, coupled with the loss of the plant and most of the workforce, is exactly the kind of fundamental change HMRC treats as a major change in the nature or conduct of the trade. The losses are therefore at risk of being stranded.
What survives
The restriction bites only for periods after the accounting period in which the change occurs, so the £500,000 is still available against total profits of the year to 31 March 2025. That is the last chance to use it.
Assessment
On these facts the brought-forward losses will almost certainly be unavailable from 1 April 2025 onwards. The planning priority is to use as much as possible in the 2025 accounting period, and to consider whether the operational changes could have been delayed or hived into a new company so that the old trade, and its losses, continued unchanged.
2. Quantify the most tax-efficient use of the current year loss and the brought-forward losses for the year to 31 March 2025, and identify the tax saved.
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Oakwell has no associated companies, so its limits are £50,000 and £250,000.
Year to 31 March 2025
Total profits before loss relief are the chargeable gain of £150,000 (the trading activity produced a loss, so there are no trading profits). Brought-forward trading losses may be set against total profits, which include chargeable gains.
Tax on £150,000 without relief: £150,000 × 25% − (£250,000 − £150,000) × 3/200 = £37,500 − £1,500 = £36,000. Note the gain sits in the marginal relief band, so the saving is not simply 25%.
Applying £150,000 of the brought-forward losses reduces this to nil - a saving of £36,000. This is the right use, because those losses expire on 1 April 2025.
Year to 31 March 2024
Profits of £260,000 exceed the £250,000 upper limit, so the rate is 25%. The current year loss of £200,000 is not needed in 2025 (profits are already nil) and can be carried back twelve months under s.37(3)(b): tax on the remaining £60,000 = £15,000, against £65,000 originally - a saving of £50,000.
Total tax saved: £86,000. The remaining £350,000 of brought-forward losses are stranded.
There is no group relief available (Oakwell has no group companies) and no consortium. A claim to carry back should be made within the two-year time limit.
3. What should the new owner consider for the future, and what would you have advised differently with hindsight?
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With hindsight
The losses were a valuable asset that was destroyed by the way the transaction was structured. Alternatives:
- Delay the operational changes until more than three years after the change of ownership, so the s.673 window closes before the trade changes. This preserves the losses but delays the commercial plan.
- Carry out the new distribution trade in a newly incorporated company owned by the investor, leaving Oakwell to continue (or run down) its manufacturing trade with its losses intact. The losses could then be used against the run-off profits and any gains.
- Use the losses before completion - for example by accelerating chargeable gains (such as the warehouse) into the pre-sale period, which is exactly what happened here by luck rather than design.
- Check whether the warehouse could have been used in the trade so that roll-over relief into replacement premises was available; it was let to a third party, so relief was never possible.
For the future
Expected profits of £180,000 a year sit in the marginal relief band, giving an effective marginal rate of 26.5% on further profits. Priorities:
- Claim full expensing or the annual investment allowance on any new plant - a deduction is worth 26.5% at the margin here.
- Consider whether the investor's other companies make Oakwell an associated company. If so, the limits are divided and £180,000 could be taxed at a flat 25%.
- Review the group structure, transfer pricing if any overseas affiliates exist, and whether an R&D claim is available on the distribution model (unlikely).