SECTION 343 REFERENCES

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SECTION 343 - REFERENCES

• The legislation (s 337(1), 343, 344)
• ST D6.101
• RM CTM06000
• Cases Rolls Royce (Motors) Ltd v Bamford 51 TC
  319, Falmer Jeans Ltd v Rodin 63 TC 55

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Company beginning or ceasing to carry on trade
S337(1) Where a company begins or ceases
(a)   to carry on a trade, or (b)   to be within
the charge to corporation tax in respect of a
trade, the companys income shall be computed as
if that were the commencement or, as the case may
be, the discontinuance of the trade, whether or
not the trade is in fact commenced or
discontinued.
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SECTION 343

• Has its origins in anti avoidance legislation
  (brought in to prevent abuse of the cessation and
  commencement provisions at a time when companies
  were liable to income tax)
• Application is therefore mandatory rather than
  elective
• Very valuable tool in company reconstructions -
  facilitates the transfer of trades between
  companies

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343 Company reconstructions without a change of
ownership (1) Where, on a company (the
predecessor) ceasing to carry on a trade,
another company (the successor) begins to carry
it on, and (a) on or at any time within two
years after that event the trade or an interest
amounting to not less than a three-fourths share
in it belongs to the same persons as the trade or
such an interest belonged to at some time within
a year before that event and (b) the trade is
not, within the period taken for the comparison
under paragraph (a) above, carried on otherwise
than by a company which is within the charge to
tax in respect of it then the Corporation Tax
Acts shall have effect subject to subsections (2)
to (6) below.
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CommentarySimon's Direct Tax Service D6.101
D7.5226.Statement of Practice SP 10/91para
9Where a trade is split into separate trades,
and this section applies to any such separate
trade, the split may not by itself be regarded
for corporation tax purposes as a major change
in the nature or conduct of a trade or
business.Press releases etcCCAB TR500 10-3-83
(writing down allowance apportioned on a time
basis where transfer of a trade occurs part way
through an accounting period FYA to company
incurring expenditure balancing adjustments are
not apportioned where part of a trade is
transferred CA pool is apportioned on a just and
reasonable basis).
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HMRC ManualsCapital allowances manual CA 15400
(application of this section to capital
allowances).Company Taxation Manual
CTM0600506280 (details regarding company
reconstructions with worked examples).CTM34610
and 34620 (limitations of loss relief and other
reliefs for dual resident companies).CTM34760
(group reorganisations of dual resident
companies).CTM41330 (transfer of trade of
unincorporated association).Simon's Tax Casess
343(1), (8), (9), Falmer Jeans Ltd v Rodin 1990
STC 270.s 343(3), Rolls-Royce Motors Ltd v
Bamford 1976 STC 162.DefinitionsApportionment
, s 834(4) the Board, s 832(1) the Capital
Allowances Acts, s 832(1) company, s 832(1),
(2) the Corporation Tax Acts, s 831(1)(a)
trade, s 6(4).
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Cross referencesTMA 1970 s 58(3)(b) proceedings
under sub-s (10) of this section to be in
Northern Ireland if the place given by certain
rules in relation to the parties to the
proceedings is in Northern Ireland)TA 1988 s
70(1) (in accordance with this section,
corporation tax to be computed under Schedule D
Cases I to VI on the full amount of profits or
gains or income arising in an accounting period,
subject only to authorised deduction).TA 1988 s
344 (supplemental provisions).TA 1988 s 768(5)
(change in ownership of company disallowance of
trading losses).TA 1988 Sch 24, para 8 (transfer
of trade between resident companies and
controlled foreign companies).FA 1994 Sch 24 para
15 (modification of this section in respect of
trading losses as it applies to railway
privatisations).
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SECTION 343THE CONDITIONS

• A company ceases to carry on a trade and another
  company starts to carry it on, and
• Within two years after that event at least 75 of
  the trade belongs to the same persons who owned
  it at some time in the year before that event,
  and
• Between these two times the trade has been
  carried on only by a company liable to
  corporation tax

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SECTION 343THE EFFECT

• The trade is not treated as discontinued (thus
  nullifying s 337)
• The successor company gets the same capital
  allowances (and charges) as the predecessor would
  have got
• The successor gets the same loss carry forward
  (subject to the relevant liability test)

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344 (2) For the purposes of section 343, a trade
or interest in a trade which belongs to a company
engaged in carrying it on may be regarded (a)
as belonging to the persons owning the ordinary
share capital of the company and as belonging to
them in proportion to the amount of their
holdings of that capital, or (b) in the case of
a company which is a subsidiary company, as
belonging to a company which is its parent
company, or as belonging to the persons owning
the ordinary share capital of that parent
company, and as belonging to them in proportion
to the amount of their holdings of that capital
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OWNERSHIPS344(2),(3) and (4)

• trade treated as belonging to the ordinary
  shareholders
• construed as beneficial ownership
• relatives treated as a single person
• relative means husband, wife, ancestor, lineal
  descendant, brother or sister

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TRADE TRANSFER
1 YEAR
2 YEARS
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RELEVANT LIABILITY TESTs343(4)

• Introduced to prevent a deduction being given for
  liabilities which were not being taken over
• The losses available for carryforward are reduced
  by the excess of liabilities of the predecessor
  which are not transferred to the successor (the
  relevant liabilities) over any assets not
  transferred by the predecessor to the successor
  (the relevant assets)

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RELEVANT ASSETSs344(5)

• assets owned by the predecessor company
  immediately before cessation of trade which were
  not transferred to the successor, and
• the consideration given by the successor to the
  predecessor
• note that the assumption of liabilities is not
  treated as consideration
• assets are valued at market value (s344(7))

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RELEVANT LIABILITIES

• excludes share capital, reserves and loan stock
• but that exclusion is disapplied where the share
  capital etc arose from the conversion of another
  liability within 12 months of the transfer of
  trade (s344(9))
• watch liabilities due by the predecessor to the
  successor - you cannot transfer a liability to
  yourself!

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Astral Ltd is in financial trouble after
sustaining heavy losses and agrees to sell its
business to Celestial Ltd. Celestial Ltd is
unwilling to take over the bank loan and the
creditors. So it is arranged that Astral Ltd sets
up a wholly owned subsidiary, Borealis Ltd, and
transfers to it its leasehold premises, plant,
goodwill, stock and employees for 450,000, which
is left on loan account. Astral Ltd retains its
cash on hand and at bank and the debtors. The
unused losses at that date are 1,200,000. Two
weeks after Borealis Ltd began to carry on the
trade, Celestial Ltd buys its shares for 1 and
enables Borealis Ltd to repay the loan of
450,000.
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Astral Ltd's balance sheet on the day it ceased
to carry on the trade stood as follows.
Tangible assets 100,000 Stocks
250,000 Debtors 500,000 Cash
5,000 855,000 Creditors
(1,500,000) Bank loan (500,000)
(2,000,000) (1,145,000)
Share capital 10,000 Profit
loss a/c (1,155,000)
(1,145,000) transferred to Borealis
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Liabilities retained Creditors 1,500,000
Bank loan 500,000 RELEVANT
LIABILITIES 2,000,000 Less
assets retained Debtors 500,000 Cash
5,000 505,000
505,000 Plus consideration
450,000 RELEVANT ASSETS
(955,000) RESTRICTION 1,045,000
Borealis Ltd is only entitled to losses
of 155,000, that is, 1,200,000 minus
1,045,000.
19
A Ltd and S Ltd are two wholly-owned subsidiaries
of K Ltd. All are within the charge to
corporation tax, although A Ltd has accumulated
trading losses brought forward and unrelieved of
240,000 and has not paid tax for several years.
As part of a group reorganisation, A Ltd's trade
is transferred to S Ltd on 31 October 2001. A
Ltd's balance sheet, which approximates market
values, immediately before the transfer is as
follows.
Share capital 120,000 Property 108,000 Debenture
60,000 Plant 24,000 Group loan
12,000 Stock 156,000 Trade creditors 360,000 Trad
e debtors 144,000 Bank overdraft 72,000
624,000 Deficit on reserves
(192,000) 432,000
432,000
20
Book values represent the approximate open market
values of assets. S Ltd takes over the stock and
plant to continue the trade, paying 180,000 to A
Ltd and taking over 18,000 of trade creditors
relating to stock. A Ltd is to collect
outstanding debts and pay remaining creditors. A
Ltd's relevant assets are
Freehold property (108,000
60,000) 48,000 Trade debtors
144,000 Consideration from S Ltd
180,000 372,000 A Ltd's
relevant liabilities are
Bank overdraft 72,000 Group
loan 12,000 Trade creditors (360,000
18,000) 342,000
426,000
21
Tax losses transferable with trade 240,000
(426,000 372,000) 186,000
22
ROLLS ROYCE V BAMFORD

• RR Ltd originally manufactured cars but range of
  activities had expanded
• Prior to receivership there were six divisions of
  which Aero Engine was the largest
• Receiver transferred four divisions (including
  Aero) to RR 1971 (a government owned co.) in May
  71 and the other two to RR Motors (a 100 sub) in
  June
• RR Motors claimed to carry forward all of the
  losses from the original six divisions

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ROLLS ROYCE

• Activities had always been assessed as a single
  trade
• Commissioners held that the trade carried on by
  RR Motors was too different from the original
  overall activity to be regarded as the same trade
• Court agreed with the commissioners
• Receiver did not help matters by referring to
  dealing with the separate businesses

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FALMER JEANS V RODIN

• FMs, a manufacturing company, sole customer
  (and sole supplier of cloth) was a fellow group
  company (FJ)
• The manufacturing company (FM) charged for its
  services on cost plus basis
• Trade and assets of FM were transferred to FJ
• FJ claimed the losses previously incurred by FM

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FALMER JEANS

• Revenue (and the special commissioner) refused
  the loss carryforward on the basis that since FJ
  had fully integrated FMs activities with its own
  it could not be said to be carrying on FMs trade
• The court disagreed and allowed the losses - s
  343(8) was held to be an extension of subsection
  (1) and to apply where activities of the
  predecessor (not amounting to the full trade)
  were taken over as part of the successors trade