Revenue Note for Guidance

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Revenue Note for Guidance

401 Change in ownership of company: disallowance of trading losses


This section contains provisions to counter the tax-avoidance device known as “loss-buying”. The effect of the section is to deny carry-forward relief for the unrelieved trading losses, total spare capacity (resulting from interest limitation rules under Part 35D) and certain capital allowances of a company where, in association with a change in ownership of the company, there is a major change in the activities of its trade or, at the time of the change of ownership, the company’s trade is near dormant.


Major change in company trade

(1) As examples of what would constitute a major change in the nature or conduct of a company’s trade the section sets out 2 types of change. The first is a change in the type of goods, services or facilities dealt in or provided, and the second is a change in customers, outlets or markets. It should be noted that this is not an exhaustive exposition of what constitutes such a change. The section applies even if the change is the result of a gradual process which began outside the 3-year period mentioned. However, it remains necessary to show that the change which took place within the 3-year period was of itself a major change.


(2) Relief for losses, total spare capacity carried forward under section 835AAE and certain capital allowances are not to be available where either of 2 sets of circumstances apply. In the first case, there must within a period 3 years be both a change in the ownership of the company and a major change in the nature or conduct of a trade carried on by it. In the second case, the change in ownership must take place at a time when the scale of the activities in the trade has become small or negligible and before there has been any considerable revival.


(2) Where either set of circumstances applies, losses incurred in an accounting period beginning before the change in ownership are not to be available for relief by set-off against income or other profits of an accounting period ending after the change. Neither is relief in respect of unabsorbed losses and capital allowances carried forward in relation to income tax and corporation profits tax (that is, losses and capital allowances which arose in periods before the introduction of corporation tax) to be given against the corporation tax payable for an accounting period ending after the change. Additionally, no relief is to be granted in an accounting period after the change of ownership for total spare capacity arising under section 835AAE in an accounting period beginning before the change in ownership.

Company reconstructions

(4) Company reconstructions within section 400 are brought within the scope of this section by looking through the reconstruction and regarding the trade carried on both before and after the reconstruction as one continuous trade. Hence, the disallowance of losses extends to losses incurred both before and after the reconstruction and the comparison to be made in determining whether the activities of the trade have become small or negligible may extend into the period before the reconstruction.


(3) The accounting period in which the change of ownership takes place is divided into 2 separate accounting periods, namely, one ending with the change of ownership and the other commencing immediately after the change of ownership. The profits or losses are to be apportioned to the 2 new accounting periods on a time basis. If apportionment on this basis does not prove just or reasonable (either to the Revenue or to the company) provision is made for an alternative “just and reasonable” basis to be adopted. Any dispute about such an apportionment is to be determined by the Appeal Commissioners.

Balancing charges

(5) The “loss buyer” who takes over an asset along with a trade will not have to bear a balancing charge on the disposal of the asset, except to the extent that capital allowances given in respect of it before the change of ownership have effectively reduced profits which arose before the change. Where both loss relief and capital allowances were available to offset these profits, it is to be assumed that capital allowances have been used in priority to losses.

Time limits

(6) Time limits for assessment purposes are provided. An assessment may be made within 4* years from the latest of the circumstances which determines that a change in the nature or conduct of a trade has taken place. The time limit is needed because an assessment might be required to withdraw relief for trading losses given after the change of ownership and before a subsequent major change in the nature or conduct of the trade which made that change of ownership effective to cut off the trading losses.

Schedule 9

(7) Schedule 9 is applied for the purposes of supplementing the section.


* in relation to assessments made on or after 1 January 2005 – 10 years for assessments made before that date.

Relevant Date: Finance Act 2021