In Graham Davis v HMRC [2022] TC08566, a sole trader's claim to have incorporated their business failed. No trade had actually been transferred. This meant that a claim for losses of the sole trade business to be relieved against income derived from the company failed.

  • From July 2002, Mr Davis carried on a Sole trade business which provided finance for second-hand car sales.
    • The business had only one customer, known as Dickinson.
    • Mr Davis provided funds to Dickinson, who acquired second-hand cars. When the cars were subsequently sold, Dickinson repaid the loan and the parties shared the profit on the sales.
  • Dickinson occasionally defaulted and failed to pay either the capital or profit element, or would only partially pay. Between 2002 and 2007 there were 30 to 70 transactions a year and up to 10 defaults a year.
    • These defaults meant that the sole trade business was Loss-making. Ultimately, Mr Davis won a civil claim against Dickinson, but no funds were received as Dickinson was declared bankrupt.
  • Mr Davis Incorporated a company, USL Securities Limited (USL), in September 2005.
  • USL started trading in October 2005. Its trade consisted of buying cars directly and selling them to consumers via third-party garages.
    • Dickinson was never a customer of USL.
  • Mr Davis argued that he had Transferred the right to carry on his sole trade business to USL in 2005.
    • Dickinson did not transfer as a customer from the sole trade to USL as Mr Davis stated that he had been advised by solicitors that it would complicate matters as there were outstanding debts that needed to be pursued.
  • In 2016-17 and 2017-18, Mr Davis claimed Relief for his sole trade losses against his income received from USL, under s.86 ITA 2007.
  • HMRC denied the loss relief claims. Mr Davis Appealed to the First Tier Tribunal (FTT).

S.86 ITA 2007 allows the losses of a former unincorporated business to be carried forward and relieved against income derived from a company where the:

  • Trade has been transferred to that company.
  • Consideration for the transfer is wholly or mainly the allotment of shares.
  • Company continues to carry on the trade and the shares are still held by the individual.

The FTT found that:

  • No trade was transferred from Mr Davis to USL.
    • No physical assets were transferred.
    • The facts and evidence did not support the argument that the right to carry on the business had been transferred to the company.
    • In any case, the transfer of such a right without more, such as a customer list or the right to use a trading name, was unlikely to amount to the transfer of a trade.
  • The entirety of Mr Davis’s sole trade business of second-hand car financing with Dickinson continued to operate for two years after USL was incorporated.
  • The shares in USL were subscribed for in cash by Mr Davis and were not issued in consideration for the transfer of the trade.

The appeal was dismissed.

The FTT noted that the trade carried on by USL was not sufficiently different to the sole trade business to be treated as a different trade. Both trades provided finance relating to second-hand cars which were sold by third parties on their forecourts.

Useful guides on this topic

Losses, trade losses and sideways relief
How can trade losses be utilised? What are the restrictions?

Losses (sideways): Restriction for uncommercial trades
What are the restrictions to sideways loss relief? When do they apply? What is an uncommercial trade?

A guide to incorporation: Start here
This section of the site provides guidance and checklists to assist in forming a new company together with the incorporation of an existing business.

How to start a company
How do you go about creating a company? What do you need to do start a company? A practical guide on how to form (incorporate) a private limited company covering the key points that you need to consider.

Incorporation checklist
This checklist covers how to incorporate an existing business.

Incorporating an existing business
How to transfer an existing sole trader's business by incorporation into a company.

Cessation followed by incorporation
This guide explains the tax and accounting treatment of a sole trader or partnership business in its final period before incorporation.

External link

Graham Davis v HMRC [2022] TC08566

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