Graham Davis – a sole trader – incorporated USL Securities Limited (USL) and sought to claim loss relief under s. 86 ITA 2007 to offset losses generated in his sole trade from income he derived from USL. The FTT found no loss relief was available, as no trade had transferred to USL.
From July 2002 to November 2007, Davis carried on a sole trade of providing finance for second hand car sales. He had just one customer – Dickinson. Davis provided funds to Dickinson, who acquired second-hand cars, either for cash or in part exchange. When the car was subsequently sold, Dickinson would repay the loan for buying the car and share the profit on sale with Davis.
However, Dickinson defaulted on contractual arrangements with Davis on several occasions over a number of years; he either did not pay Davis either the capital or profit, or only paid partially.
The final transactions in Davis’ sole trade were with Dickinson in November 2007. Davis ultimately pursued Dickinson for the various defaults (which caused the sole trade to generate losses) and instructed solicitors in December 2010.
This dispute concluded in 2010/11, when a decision was made in Davis’ favour for an amount of almost £146,000, which was ultimately not paid as Dickinson had become insolvent.
USL was incorporated in September 2005 and started to trade in October 2005.
Davis subscribed for 100 shares at £1 per share, paid in cash, at incorporation. The shares were not issued to Davis in consideration for the transfer of a trade to USL. Further, at the time of incorporation, no physical assets were transferred from Davis to USL.
The trade carried on by USL also related to the purchase and sale of second-hand cars, but USL bought the cars directly. The cars were then sold on to consumers by a range of third-party garages. When the car was sold, USL received the original purchase price of the car and a share of the profit made on the sale.
Dickinson was never a customer of USL.
Loss Relief Denied
Under section 86, Income Tax Act 2007 a person who transfers a trade to a company can, provided various conditions are met, set off carried forward trade losses from the original trade against income derived from the company.
HMRC issued Davis closure notices for 2016/17 and 2017/18, refusing the claims in his returns to offset losses made in his sole trade against income derived from USL, per section 86 ITA 2007. Davis appealed [TC08566].
For various reasons, the FTT concluded that the loss relief was not available.
Firstly, the FTT found no trade was transferred from Davis to USL.
While Davis’ adviser argued that what had transferred from Davis to USL was the right to carry on the business, the FTT found this line of argument was not supported by the facts or evidence. Even if such an argument did hold, the FTT was not convinced that on its own the transfer of such a right without more; for example a customer list or right to use a trading name, could be treated as a transfer of a trade.
In addition, Davis continued to operate his existing trade, being the second-hand car financing activities with Dickinson, for two years after USL was incorporated.
Attention was also drawn to the condition in section 86(1)(c) ITA 2007, which requires that “the consideration for the transfer is wholly or mainly the allotment of shares to the individual or individuals”.
Davis’ adviser conceded that the shares were subscribed for in cash by Davis and were not issued in consideration for the transfer of the trade. As the FTT noted, this point was fundamental – it is a necessary condition to access loss relief under section 86, and on its own would have defeated Davis’ appeal, even if the FTT had found that a trade had transferred.
The appeal was dismissed.
HMRC also tried to argue that the trade carried on by USL was sufficiently different so as to amount to a different trade. The FTT did not agree with HMRC, finding that (if the trade had transferred from Davis to USL – as ultimately it had not) the trade of both Davis and USL was that of providing finance relating to second hand cars, which were ultimately sold by third parties on their forecourts.