Taxes Consolidation Act 1997 section 401

Change in ownership of company: disallowance of trading losses

Section 401 counters the tax-avoidance practice known as "loss buying" by denying carry-forward relief for trading losses, certain capital allowances, and interest limitation spare capacity where there is a change in company ownership combined with a major change in trade activities, or where ownership changes while the trade is near dormant.

• Loss buying typically involves acquiring a near-dormant company with accumulated unused losses and then offsetting those losses against the acquirer's profits; section 401 blocks this by restricting loss carry-forward where a change of ownership coincides with a major change in trade or with the trade being small or negligible.
• A "major change" in the nature or conduct of a trade includes a change in the type of goods, property, services or facilities provided, or a change in customers, outlets or markets; the change may be gradual but must be major within the three-year window.
• Where the rules apply, the accounting period in which ownership changes is split into two deemed periods — one ending with the change and one beginning immediately after — with profits and losses apportioned on a time basis, or on a just and reasonable basis if time apportionment would be unreasonable.
• Balancing charges on assets taken over are restricted where loss relief has been denied; detailed rules on what constitutes a change of ownership are set out in Schedule 9, and an assessment may be made within four years of the relevant change.

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