Introduction Overview Overview Section 674: Disallowance of trading losses
2088.This section restricts relief for trading losses in cases in which this Chapter applies. It is based on sections 768 and 768A of ICTA.
2089.Subsection (1) restricts relief under sections 37 and 42(relief for trade losses). It is aimed at the abuse known as “profits buying” or “loss capacity buying” whereby a trading company with large profits is sold to new owners who feed new activities into the trade which result in heavy initial losses for which early relief would not otherwise be available. The price paid to the old owners would reflect the tax benefit expected to accrue to the new owners.
2090.Subsection (2) restricts relief under section 45(carry forward of trade loss against subsequent trade profits).
2091.Section 768(1) of ICTA refers to “relief … given under section 393 [of that Act] by setting a loss incurred by the company … against any income or other profits …”. But section 393 of ICTA only gives relief for losses against “trading income” (as defined in section 393(8) of that Act). The reference to “other profits” is a missed consequential amendment. The words should have been omitted when FA1991 replaced section 393(2) of ICTA with section 393A of ICTA. Subsection (2) of this section therefore omits the reference to “other profits”.
2092.Section 768(3) of ICTA provides:
“The apportionment under subsection (2) above shall be on a time basis according to the respective lengths of those parts except that if it appears that that method would work unreasonably or unjustly such other method shall be used as appears just and reasonable. (emphasis added)”
2093.Subsection (5) omits the first instance of “appears” in section 768(3) of ICTA for the sake of consistency with sections 685(3) and 702, which are based on paragraphs 8 and 17 respectively of Schedule 28A to ICTA, and sections 704(7) and 705(7), which are based on section 768D(4) of ICTA. It also omits the second instance of “appears” in section 768(3) of ICTA to sharpen the drafting.