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Query T16,008, 'Trading or not?', published with replies in Taxation, 23 May 2002 at pages 222 to 223.
Synopsis
Query T16,008, 'Trading or not?', published with replies in Taxation, 23 May 2002 at pages 222 to 223.
Synopsis
The Inspector of Taxes refused capital gains tax loss relief in respect of shares that had been subscribed for in a company that had been struck off. The company had rented premises and incurred costs on telephone, printing, supplies and salary over a twelve-month period, but failed to obtain any orders for its database marketing services and consequently had to cease trading with accumulated losses in excess of £23,000.
The Inspector argued that these costs were pre-trading expenditure and the company had not in fact traded.
Advice given
'JWG' suggested that the qualifying trading company definitions of section 576(5), Taxes Act 1988 (starting with the requirement that the company must not be an 'excluded company' and going on to say that it must be a company 'whose business consists wholly or mainly of the carrying on of a trade') would be superseded by section 576(4A) and (4B), Taxes Act 1988 if the shares were issued after 6 April 1998. These sections give relief where a company is an 'eligible trading company'. This definition is linked to the enterprise investment scheme and section 293, Taxes Act 1988, whereby a qualifying trading company must exist for the purpose of carrying on a trade. This argument was supported by the assertion of 'M.C.N.' that 'purposes override performance, as makes sense where the law aims to encourage new enterprises'.
Conclusion
The querist, 'Strapped', has advised us as follows.
'At first, the Inspector continued to resist our client's claim under section 574, Taxes Act 1988 on the basis (he maintained) that the company never actually traded. However, having drawn his attention to the Inspector's Manual, at paragraph 6982, as suggested by 'JWG' and endorsed by 'M.C.N.', our client's claim for loss relief was accepted. It was sufficient to demonstrate that the "purpose" of the company was to trade.'
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