In HMRC v English Holdings (BVI) Limited [2017] UKUT 0842 TCC, the Upper Tribunal (UT) concluded that losses subject to corporation tax could be set against profits subject to income tax.
English Holdings (BVI) Limited (EH) was incorporated in the British Virgin Islands and resident outside the UK. It rented out a number of commercial properties in the UK, an activity managed from the main office, and traded in UK land via a permanent establishment (PE) in the UK.
Under the corporation tax rules, a trading loss can be set against total income of that or the previous year. Under the income tax rules, a trading loss can be set against general income of that or the previous year.
In the year ended 31 March 2011, the UK trade made a loss of £2 million, part of which EH set off against its UK rental profits of £1 million. HMRC challenged this treatment, arguing that it is “clear from the relevant legislation that the corporation tax and income tax regimes are intended to be separate” and losses under one could not, therefore, be set off against the other.
EH disagreed, and the First Tier Tribunal (FTT) held, that there was no reason they should not be able to set off the corporation tax loss against the profits chargeable to income tax. HMRC appealed.
HMRC’s main argument was that s3 of CTA2009 broadly separates corporation tax and income tax, whereas EH argued that it has the narrow effect of meaning income is not subject to both income tax and corporation tax. Under EH’s reading, there would be no reason to not permit the offset by the “wording of the statute or matter of policy or common sense”.
The UT held:
- The literal reading of s3 of CTA2009 only means that income is not subject to income tax if it is subject to corporation tax.
- It would have been trivial for a draftsman to extend the rules in the way argued for by HMRC if this was intended.
- There was no clear reason why parliament would have intended s3 to prevent losses being used as requested; indeed, the explanatory notes tend to support EH (insofar as they support either interpretation)
- Hence, HMRC’s appeal was dismissed.
EH also presented arguments that HMRC’s interpretation would violate the EU rules in respect of free movement of capital. While this was not relevant, given the ruling on the substantive point, the UT did comment on the EU law issues, again finding in favour of EH.
Comment:
It should be noted that s26 of ITTOIA does require the losses to be recalculated under income tax rules.
HMRC did not pursue this as an avoidance case – the UK rental business did not pass through the PE in order to take advantage of slightly lower income tax rates at the time, which was, presumably, viewed as acceptable planning.
From April 2020, companies letting property in the UK will be subject to corporation tax, not income tax, so the unusual circumstances needed for this ruling are even less likely to recur in future.
Links:
HMRC v English Holdings (BVI) Limited [2017] UKUT 0842 TCC
