A taxpayer with two trades, one subject to corporation tax and the other subject to income tax, can set a corporation tax loss against an income tax profit.
The Appellant (English Holdings) was a company registered in the BVI. At the relevant time, English Holdings had a permanent establishment (“PE”) in the UK which was trading in land situated outside the UK, the profits of which would have been subject to corporation tax. In the year ending 31 March 2011, however, it made a trading loss of over £2m.
English Holdings also owned a number of investment properties on which it earned rental income. Since the letting business was not carried on through a PE, the profits from this business were subject to UK income tax. In the tax year ending 31 March 2010, the investment properties brought in a profit of over £1m which resulted in an income tax liability of £203,043.95.
The principal question for the Tribunal was whether the Appellant could set off losses arising out of the trading activities of its PE against its profit on its non-PE trading activities. The effect was to reduce the income tax liability of the rental business from £203,043.94 to zero. The Appellant based its claim on s64 Income Tax Act 2007 (ITA) which makes provision for trade loss relief against general income if a person carries on a trade and makes a loss.
HMRC argued that s64 does not extend to a loss which, had it been a profit, would have been subject to corporation tax. This was based on s5 ITA which disapplies provisions of the ITA relating to the charge of income tax in relation to income of a company if “the company is non-UK resident and the income is within its chargeable profits as defined by section 19 of that Act”. HMRC further argued that, in any event, the legislation should be read purposively, primarily on the basis of differences in policy behind corporation tax and income tax on losses.
The Tribunal disagreed and allowed the appeal. In the first place it held that the word ‘income’ did not include losses so that the exception did not apply. Even if ‘income’ were to be read as meaning ‘income and losses’, HMRC would still have to show that the losses were within the company’s chargeable profits as defined by s19. However, this could not be so since s19 refers only to ‘gains’ as opposed to ‘losses’. Finally a purposive construction was not possible because the wording of the legislation was clear. In any event, there was no obvious reason why Parliament would have intended that taxpayers would be unable to set a loss from one trade against a profit from another.
