English Holdings
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 June 2016 |
| Neutral Citation | [2016] UKFTT 436 (TC) |
| Date | 20 June 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Barbara Mosedale
Mr M Firth, Counsel, appeared for the appellant
Mr D Yates, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Whether loss arising in trade any profits of which would have been subject to corporation tax could be set against profits subject to income tax – Appeal against assessment allowed – Penalty – Whether reasonable excuse – Appeal dismissed.
The First-tier Tribunal (FTT) has allowed English Holdings (BVI)'s appeal against HMRC's refusal of its claim to offset a loss arising from a trade carried on through a permanent establishment (PE) in the UK (which would have been subject to corporation tax if profitable) against profits arising from a lettings trade, chargeable to income tax as not carried on through a PE, finding that there was no requirement in the Income Tax Act 2007 (ITA 2007), s. 64 that for a loss to be offset against general income it had to arise in a trade which was charged to income tax and no purposive reading was possible so as to block the appellant's claim. However, the FTT dismissed the company's appeal against the tax geared late filing penalty on the basis that had a correct return been filed on time it would have disclosed a liability to tax because the loss relief was not available until the following period.
English Holdings (the appellant) was a BVI company which traded in UK land through a permanent establishment (PE) in the UK. In the year to 31 March 2011 it made a trading loss of over £2m, which, had it been a profit, would have been subject to corporation tax. The company also owned a UK letting business in respect of which it made a £1m profit for the year ended 31 March 2010 and which profit was subject to income tax (rather than corporation tax) because the letting activity was not carried on through a PE. The company claimed to offset its £2m PE trading loss against its £1m profit on non-PE trading activities, in other words, to offset its corporation tax loss against its income tax profit. HMRC rejected the claim and assessed the company to income tax and raised a late filing penalty of £40k. The company appealed to the FTT.
The company argued that ITA 2007, s. 64 provided for a claim for trade loss relief to be made against general income and that it was entitled to trade loss relief against its general income being its income subject to income tax. HMRC argued that the corporation tax loss could not be offset under ITA 2007, s. 64 because the Corporation Tax Act 2009 (CTA 2009), s. 3 and ITA 2007, s. 5 disapplied the income tax provisions where a non-resident company's income was chargeable profits under CTA 2009, s. 19 (which included trading income arising through or from a PE).
The FTT noted that CTA 2009, s. 3 and ITA 2007, s. 5 referred to income and not to losses so whilst ITA 2007, s. 64 would be disapplied in respect of income falling within CTA 2009, s. 19, in this case there was no such income; the appellant's only income was not caught by CTA 2009, s. 19 because it did not arise through a PE and even if CTA 2009, s. 3 and ITA 2007, s. 5 could be read as referring to income or losses, for ITA 2007, s. 64 to be disapplied, the losses would have to be chargeable within CTA 2009, s. 19 and that section also only referred to income or gains and not to losses. On a literal reading, therefore, theoretically, a taxpayer could offset against its trading profits subject to income tax a loss incurred in a trade, which if profitable, would have been subject to corporation tax.
HMRC advanced two further arguments that even if the loss could fall within ITA 2007, s. 64, it would be nil because:
1) The Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), s. 26 (calculation of losses) was disapplied by ITA 2007, s. 5 and CTA 2009, s. 3 which meant the losses could not be calculated so must be nil, or
2) the loss had no basis period under ITA 2007, s. 61 so there was no loss to which s. 64 could apply.
The FTT rejected both these arguments finding that ITTOIA 2005, s. 26 was not excluded so far as the losses were concerned because CTA 2009, s. 3, on the face of it applied only to income and could not be taken as applying to losses because a) it did not say so, and b) it defined the income as being that within s. 19, which also referred only to income and not to losses and secondly, it was not possible for a loss not to have a basis period; there was always a basis period, either a special basis period under ITTOIA 2005, s. 199–202 or the default period under ITTOIA 2005, s. 198(1).
HMRC further argued that a purposive reading of the legislation would also deny the loss relief, however, the FTT noted that HMRC had not suggested any alternative reading of the words used in ITA 2007, s. 64 and only where there was at least two meanings that the statutory language was reasonably capable of bearing could resort be had to Parliament's intentions in order to choose between them. The Tribunal could not effectively amend legislation by giving it a reading it could not reasonably bear in order to fit with Parliament's presumed intention (Pepper (HMIT) v Hart TAX[1992] BTC 591 and Chilcott v R & C Commrs TAX[2011] BTC 1).
Nevertheless, for completeness, considering a purposive interpretation, the FTT concluded that the legislation either ought to be read as preventing a taxpayer claiming relief for the same loss twice or to prevent the possibility of claiming a corporation tax loss against income tax profits because otherwise, the legislation did not prevent the loss from being claimed twice. There appeared to be no obvious reason why Parliament would have intended taxpayer's in the appellant's situation to be unable to set a loss from one trade against a profit from another trade, although every reason to suppose they did not intend any taxpayer to get relief twice for the same loss but if a purposive interpretation were possible, it could equally be achieved by a purposive reading of ITA 2007, s. 63 (elimination of double taxation) as of ITA 2007, s. 64. In any event, the FTT concluded that it was not possible to give a purposive reading to any of the provisions so as to block the appellant's claim and the appeal was, therefore, allowed.
Considering the penalty raised under the Taxes Management Act 1970 (TMA 1970), s. 93, the appellant had accepted that it had filed its tax return late by more than 12 months and HMRC had shown that this was far from the first late return submitted by the appellant. The penalty was charged at 20%, calculated as 100% reduced by 20% for disclosure, 40% for cooperation and 20% for seriousness. Although the appellant accepted its £200 penalty for late filing, it disputed the penalty of 20% of the tax assessed. The FTT found that whilst it had accepted the entitlement to the loss claim, the appellant remained liable to pay the assessment for the previous year and was entitled to have that tax back later. If the tax return had been filed on time, it would have shown a liability of £203k because the appellant was not entitled to relief until the next period and, therefore, under TMA 1970, s. 93(5), the £203k was the maximum possible penalty. The FTT further concluded that the appellant did not have a reasonable excuse for failing to file the return on time; it had offered no explanation and in failing to find the cause for the failure to file on time, the FTT could not find that it had a reasonable excuse for that failure.
As for any reduction in the amount of the penalty, the FTT noted that it had been reduced by the maximum amount for disclosure and cooperation and half reduced for seriousness, which seemed right given there was a substantial amount of tax at stake and a pattern of late or non filing. Accordingly, the FTT could see no grounds to interfere with the penalty and dismissed the appeal against it.
In this case a BVI company claimed to offset a loss arising on a trade carried on through a permanent establishment (principally, a corporation tax loss) against income tax profits of a trade not carried on through a PE (and, therefore, subject to income tax, not corporation tax). The FTT has allowed the claim finding that ITA 2007, s. 64 did not restrict loss relief to income tax losses only and no purposive reading could be applied so as to block the company's claim. However, as the company had filed its return late, which, had it been filed on time would have shown a liability to tax (albeit refunded in the next period), the FTT dismissed the appeal against the late filing penalty finding that it was properly due based on the liability that ought to have been declared on the return.
[1] The facts were not in dispute and are as follows. The appellant (English Holdings) is a company registered in the British Virgin Isles (BVI). It is not resident in the UK. At the relevant time, it had a permanent establishment (PE) in the UK through which it carried out its activity of trading in land situated in the UK. Had it made profits on this trade, the company would have been chargeable to corporation tax on those profits (see s5 and 19 CTA – paragraphs 16 & 46). In the year to 31 March 2011, however, it made a trading loss of over £2 million.
[2] In addition to this trade, the appellant owned a number of investment properties in the UK on which it earned rental income. This letting business was not carried on through a PE with the result that the appellant was within the charge to UK income tax on the profits arising from this letting business. In the tax year (ended 31/3/10) the appellant made of profit of £1,015,219.73 on its investment properties which HMRC consider resulted in an income tax liability on the company for that year of £203,043.95.
[3] The company claimed in its (late filed) tax return for 2009/10 to set off its loss arising out of the...
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