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Merging Limited Companies

Is it legal to merge Companies to offset loss?

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I have a client that has 3 limited companies, all pubs, all same shareholders and directors. One of the pubs has made a massive loss. Is it legal to put the other 2 companies into the company with the loss to try claw back or would this be seen as tax avoidance?

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By Paul Crowley
29th Jun 2022 20:12

A kneejerk reaction?
Assuming March or earlier,loss can go back for last year and prior, balance carried forward.
Is loss bigger than three years worth of profits?

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By moboffsol
29th Jun 2022 20:29

Yes its a very substantial loss, with high creditors. The directors are willing to dissolve the 2 profitable companies paying outstanding taxes and then moving forward trade from the company with losses
This way the creditors could be paid also. Carrying the losses back wasn't considered. I said I would find out if it could be done.

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Replying to moboffsol:
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By David Ex
29th Jun 2022 20:35

moboffsol wrote:

Carrying the losses back wasn't considered. I said I would find out if it could be done.

The companies really need to take some advice. It sounds a precarious situation and so they need to best advice possible.

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By Duggimon
30th Jun 2022 09:47

There's nothing illegal about transferring the trading businesses all into one company, but it's complicated and if you're asking about that aspect I would seek some outside help on the transactions and taxes involved in doing so.

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Lisa Thomas
By Lisa Thomas - Insolvency Practitioner
30th Jun 2022 14:04

Will the business that made the loss be able to trade out of insolvency?

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Replying to Insolvency Practitioner:
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By moboffsol
30th Jun 2022 20:25

Insolvency Practitioner wrote:

Will the business that made the loss be able to trade out of insolvency?


The Company has always paid the taxes by borrowing from the other 2 companies mentioned, so no taxes are outstanding. The main creditors are the directors and intercompany loans. There is also a loan from the brewery which will be paid from the impending sale of the lease which will just about cover this loan.
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By moboffsol
30th Jun 2022 14:24

No, the Company held in the Ltd Company has had to cease trading unfortunately, despite much time and effort being put into it, it just wouldn't work, therefore it is left with significant amounts owed to the directors and intercompany loans from the other 2 Companies.

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By Tax Dragon
30th Jun 2022 15:20

I thought you meant CT avoidance (using the losses).

You mean: is it avoidance to channel the money in the good companies through the debts owed to the directors in the bad company so it can be taken out tax free? Yes.

But if you think merging two good companies into a third bad one is difficult*, you should try merging two threads. (More irony?)

https://www.accountingweb.co.uk/any-answers/merging-limited-companies

* Never mind the tax mess - is it even legal?

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By moboffsol
30th Jun 2022 16:01

Is there any need for sarcasm? (always get one).
I have no idea how 2 threads were created, I certainly didn't create 2.
No, not at all to take money out tax free. That is no one's intention. They merely want to begin trading the profitable Companies through the bad Company, which unfortunately has had to cease trading, despite every effort to keep it going. The idea is, if they start trading the profitable Companies through the bad Company rather than fold it making a huge loss, the other 2 Companies (who are actually creditors via intercompany loans, along with the directors) can at least claw some of the losses back via CT relief.

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Replying to moboffsol:
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By Paul Crowley
30th Jun 2022 20:39

You did create two by pressing one of the buttons twice.
It is common recurring problem with questions and replies usually because the site does not have consistent spead of reaction.
See the yellow go blue and it looks like not pressed. Move the cursor and if button goes back to yellow then true it was not pressed
If it stays blue but nothing happens then it is slow and a second press creates two postings
A double click and you have two postings
Recently we had three identical Blogs from the same person

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By Tax Dragon
30th Jun 2022 16:08

Any sarcasm was aimed at Aweb's apparent inability to merge threads (so while it might not be strictly necessary, I don't see why you have taken umbrage).

How long ago did bad company cease trading?

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Replying to Tax Dragon:
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By Tax Dragon
30th Jun 2022 16:12

Actually that doesn't matter - cessation terminates the accounting period.

@OP - did you consider terminal loss relief? Or have there always been losses?

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By moboffsol
30th Jun 2022 18:04

My sincere apologies and thank you so much for trying to advise in this messy situation. It ceased trading at the end of May. There as always been losses. The Directors spent £1,000's on renovations, twice! in the hope it would turn a corner, but sadly no matter what they tried, they couldn't even break even, sometimes losing £12K a month. In the end they realised they would lose less by closing. They are in the process of selling the lease but that won't touch the surface.

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By Tax Dragon
30th Jun 2022 19:58

Help? Yes. Advise? Not in the way I use that word.

Though I would say that, if the only reason you are entering into a commercial transaction is tax, and you wouldn't contemplate (let alone do) it but for tax, then you really do need to step back and ask yourself whether it's the right thing to do. Dogs and tails and all that.

Also:
a) you need to be dead certain that the tax advantage you think is there really is there;
b) if there's any anti-avoidance that might be in point and that tests motive, you're gonna fail that test.

Your a) is using the loss. That can only work if the trade(s) you are thinking of importing into badco will stand in the shoes of the old trade to the extent that they can be considered one and the same - i.e. it wasn't a cessation, it was a hiatus. In your shoes (assuming you are the advisor) I might start the tax analysis with a review of case law that might inform a conclusion on that point.

Of course, as well as the tax analysis, your client will need to establish whether it's legal (IANAIP... but Lisa is). And that the landlords/brewers/other suppliers don't mind an insolvent company taking on the leases etc. And that the licensing can be sorted. And all the other gubbins that'll need to be done can in fact be done.

That is, if they're serious about this.

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