ACCA Advanced Taxation (ATX) Practice Exam

How is a loss treated in a company that experiences a major change in nature or conduct of trade within five years of ownership change?

1. Losses can be carried forward indefinitely

2. Losses cannot be carried forward past the date of ownership change

3. Losses are fully deductible without restrictions

4. Losses may only offset future capital gains

The correct answer is: Losses cannot be carried forward past the date of ownership change

When a company experiences a major change in the nature or conduct of its trade within five years following a change in ownership, the treatment of any losses is subject to specific provisions in tax law. In this case, the correct approach is that losses cannot be carried forward past the date of ownership change. This restriction is in place to prevent the carry-forward of losses by a new set of owners who may not have been involved in the previous operations of the business that generated those losses. The rationale behind this is to mitigate the potential for tax avoidance through loss trafficking, where a company could acquire another company merely to benefit from its tax losses. By disallowing the carry-forward of these losses when an ownership change occurs in conjunction with a significant change in the nature of the business, tax legislation ensures that the losses are retained only within the context of the original ownership and activities that generated them. Consequently, if a significant shift in business operations occurs, the company is essentially starting afresh with regard to its ability to utilize any accumulated losses for tax relief, making this principle an essential consideration for tax compliance and planning in such scenarios.