English Holdings - UT allows set-off of corporation tax loss against general income
In English Holdings Ltd v HMRC  UKFTT 0346 (TC), the Upper Tribunal (UT) has upheld a decision of the First-tier Tribunal (FTT) which allowed an appeal by a non-UK resident company against a decision of HMRC refusing its claim to set off losses arising in its UK permanent establishment (PE) against profits earned by its UK property rental business.Background
English Holdings Limited (EHL) is a company registered in the British Virgin Islands and is non UK resident. It trades in UK land through a PE in the UK.
Any profits made through the PE would be subject to corporation tax by virtue of sections 5(3) and 19, Corporation Taxes Act 2009 (CTA), but it in fact made a loss in excess of £2m.
EHL also owned a number of investment properties in the UK, from which it earned rental income. This letting business was not carried on through a PE, so that it was within the charge to UK income tax on any profits arising from the business under section 264, Income Tax (Trading and Other Income) Act 2005. In 2009/10, the letting business made a profit of over £1m.
EHL made a claim to set-off the loss incurred by its UK PE against the profits of its letting business. The effect of the set-off would be to reduce its income tax liability to nil.
HMRC rejected the claim and EHL appealed.
The appeal was allowed.
The issue before the FTT was whether a corporation tax loss could be set-off against an income tax profit.
EHL relied on section 64, Income Tax Act 2007 (ITA), which provides:
"64 Deduction of losses from general income
(1) A person may make a claim for trade loss relief against general income if the person –
(a) carries on a trade in a tax year, and
(b) makes a loss in the trade in the tax year (‘the loss making year’)."
HMRC accepted EHL had 'carried on a trade' and made a loss in the relevant year. However, it did not accept that the relief was available due to section 5, ITA, which provides:
"5 Income tax and companies
Section 3 CTA 2009 disapplies the provisions of the Income Tax Acts relating to the charge to income tax in relation to income of a company … if—
(a) the company is UK resident, or
(b) the company is not UK resident and the income is within its chargeable profits as defined by section 19 of the Act (profits attributable to its permanent establishment in the United Kingdom)".
HMRC argued that section 3, CTA, disapplied the income tax provisions, including the calculation of losses, if profits from the trade were chargeable to corporation tax.
The FTT was not persuaded by HMRC's argument. Although the legislation limits the scope of the charges to tax in circumstance where profits are taxed, the provisions relied on make no mention of losses. The FTT held that on a literal interpretation of the legislation, the loss relief provisions contained in section 64 ITA, could be utilised by EHL to set-off the corporation tax loss against the profits of its letting business.
HMRC's appeal was dismissed.
HMRC maintained its argument that section 3, CTA, has the broad effect of separating the corporation tax regime from the income tax regime so that where a trade is within the corporation tax regime then its profits and losses are dealt with exclusively under the corporation tax regime and cannot fall within the income tax regime, either for the purpose of being taxed as income if the trade makes a profit or for the purpose of claiming loss relief if the trade makes a loss.
The UT rejected this argument. In the view of the UT, there is nothing in section 64, ITA, which limits the trade in which the loss is made to a trade which, if profitable, is chargeable to income tax. Section 3, CTA, only disapplies those provisions of the ITA which apply to the income of a non-resident company where the income is within its chargeable profits as defined by section 19, CTA. Further, there was no obvious reason why Parliament would have intended that taxpayers would be unable to set a loss from one trade against the profit from another.
The UT held that on a proper construction of the relevant provisions of ITA and CTA, EHL was entitled, pursuant to section 64, ITA, to set-off the losses incurred in its PE trade against the profits of its letting business.
This case raises some interesting questions regarding the interaction between income tax and corporation tax. The tax tribunals have in recent years frequently adopted a purposive approach to the interpretation of tax legislation, often in the context of appeals by taxpayers who have participated in tax planning arrangements. It is interesting to note that on this occasion they chose not to adopt such an approach when interpreting the relevant legislation.
It remains to be seen whether HMRC will seek to appeal to the Court of Appeal, but as UK property income of non-resident companies will be charged to corporation tax, rather than income tax, from April 2020, it may feel there is no need to appeal the decision.
A copy of the decision can be viewed here.