Gascoine v Wharton (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 21 October 1996 |
| Date | 21 October 1996 |
| Court | Chancery Division |
Chancery Division.
Lindsay J.
Giles Goodfellow (instructed by Kinnell Irvin & Michell) for the taxpayer.
Michael Furness (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Reed (HMIT) v Young TAXTAXTAX(1986) 59 TC 196; [1983] BTC 430 (ChD); [1986] BTC 242 (HL)
MacKinlay (HMIT) v Arthur Young McClelland Moores & CoELRTAXTAX[1990] 2 AC 239; [1986] BTC 398 (ChD); [1989] BTC 587 (HL)
Income tax - Loss relief - Whether losses in early years computed on actual basis or by reference to basis period for assessing profits - Meaning of "sustains a loss in … [a] year of assessment" -Income and Corporation Taxes Act 1988 section 381 subsec-or-para (1)Income and Corporation Taxes 1988, s. 381(1)(a).
This was an appeal by the taxpayer against a decision of a special commissioner that where loss relief under the Income and Corporation Taxes Act 1988 section 381Income and Corporation Taxes Act 1988, s. 381 against a partner's other income in an earlier year was given pro tanto for the year of assessment in which a partnership commenced trading, the balance of the loss sustained in the first 12 months could not be relieved under that provision for the following year of assessment.
The taxpayer commenced the business of chartered surveyors in partnership with another person on 1 May 1990. In the year to 30 April 1991 the partnership sustained a loss of £24,561, of which half was allocated to the taxpayer. In the following year the partnership made a profit of £22,098, of which none was allocated to the taxpayer.
The taxpayer made a claim for loss relief under Income and Corporation Taxes Act 1988 section 381s. 381 for 1990-91, against other income of an earlier year, in the sum of £11,439 representing his half share of the loss as apportioned for the period from commencement to 5 April 1991. He made a similar claim for 1991-92 in respect of a balance of £842.
The inspector accepted the claim for loss relief for the year 1990-91, but refused the claim for 1991-92 on the ground that the words "in … the year of assessment" in Income and Corporation Taxes Act 1988 section 381 subsec-or-para (1)s. 381(1)(a) were to be taken literally to mean the year in which the losses occurred. On that basis there was no overall loss in the period 6 April 1991 to 5 April 1992. The words could not be read as meaning the preceding year basis used for calculating profits.
The taxpayer contended inter alia that by Income and Corporation Taxes Act 1988 section 382 subsec-or-para (4)s. 382(4) losses were to be computed in like manner as profits or gains accruing from a trade. Accordingly the statutory basis period for computing profits should also be used in ascertaining losses.
Held, dismissing the taxpayer's appeal:
There was no reason to depart from the literal application of the ordinary meaning of the words "in … the year of assessment" inIncome and Corporation Taxes Act 1988 section 381 subsec-or-para (1)s. 381(1)(a) of the 1988 Act as correct. That provision clearly stated that losses were to be computed for the actual year of assessment which could not be taken to mean the statutory basis period by reference to which profits were arrived at.
By an originating motion pursuant to the Taxes Management Act 1970 section 56ATaxes Management Act 1970, s. 56A (as substituted by SI 1994/1813SI 1994/1813 with effect from 1 September 1994), the taxpayer appealed to the High Court against the following decision of a special commissioner (Mr DA Shirley).
1. Mr DWH Gascoine ("the taxpayer") commenced the business of chartered surveyors and estate agents in partnership with one other person on 1 May 1990. He ceased to be a partner on 28 November 1995.
2. The firm made up its accounts to 30 April in each year.
3. The partnership profits/losses as adjusted for tax purposes have been agreed with the inspector as follows:
1 May 1990-30 April 1991 |
Loss |
£24,561 |
1 May 1991-30 April 1992 |
Profit |
£22,098 |
1 May 1992-30 April 1993 |
Profit |
£25,040 |
4. The taxpayer's share of the loss to 30 April 1991 is £12,281. The profits for the following two years were allocated entirely to the other partner.
5.(a) Pursuant to Income and Corporation Taxes Act 1988 section 61s. 61 of the Income and Corporation Taxes Act 1988 ("the Act"), the partnership profits chargeable to income tax were assessed for 1990-91 (6 April to 5 April) at nil (period 1 May 1990-5 April 1991) and for 1991-92 at nil (first 12 months to 30 April 1991).
(b) Pursuant to Income and Corporation Taxes Act 1988 section 60s. 60 of the Act the profits of the partnership chargeable to income tax were assessed for 1992-93 at nil (12 months to 30 April 1991), for 1993-94 at £22,098 (12 months to 30 April 1992) and for 1994-95 at £25,040 (12 months to 30 April 1993).
6. Capital allowances were claimed by the partnership but it is not necessary to notice them in this decision.
7. The taxpayer claimed relief for the losses of the year 1990-91 underIncome and Corporation Taxes Act 1988 section 381s. 381 of the 1988 Act (augmented by capital allowances under the provisions of Income and Corporation Taxes Act 1988 section 383s. 383) as follows:
|
Loss-period 1 May 1990-5 April 1991 (340/365 × 12281) |
£11,439 |
Capital allowances 1990-91 |
£2,863£14,302 |
The inspector has accepted this claim and has given relief in the sum of £14,302 which has been set against the taxpayer's other income for the year 1987-88.
8. Income and Corporation Taxes Act 1988 section 381 subsec-or-para (1)Section 381(1) provides, reading it shortly:
where an individual carrying on a trade sustains a loss in the trade in-
(a) the year of assessment in which it is first carried on by him; or
(b) any of the next three years of assessment;
he may … make a claim for relief under this section.
This applies in relation to a profession as it does to a trade and whether the individual is a partner in a firm or on his own. The relief is given from income tax on an amount of the claimant's income equal to the amount of the loss, being income for the three years of assessment last preceding that in which the loss is sustained, taking income for an earlier year before income for a later year. The loss for the year of assessment 1990-91 was arrived at by apportionment of the partnership's losses for its first 12 months pursuant to Income and Corporation Taxes Act 1988 section 72s. 72 of the Act since it was "necessary in order to arrive for the purposes of income tax at the profits or gains or losses of [a] year of assessment" (1990-91).
9. On 14 May 1993, the taxpayer claimed relief under Income and Corporation Taxes Act 1988 section 381s. 381 for 1991-92 in the first 12 months (£12,281) and the amount thereof relieved in his claim for 1990-91 (£11,439). The inspector rejected the claim on 27 April 1995. Taking the period 6 April 1991-5 April 1992, there was in fact no loss. The partnership made profits. The assessment for that year was nil by reason of the computation of the profits or gains chargeable to income tax under Income and Corporation Taxes Act 1988Case Ior Income and Corporation Taxes Act 1988II of Sch. Dbeing made on the profits or gains for one year from its first being set up (Income and Corporation Taxes Act 1988 section 61 subsec-or-para (3)s. 61(3)). The inspector accepts that, on a claim being made, the unrelieved loss can be carried forward to 1993-94 under the provisions of Income and Corporation Taxes Act 1988 section 385s. 385 and be set against the taxpayer's share of the profits of the firm for that year. Income and Corporation Taxes Act 1988 section 381Section 381, the inspector contends, gives relief for actual losses in the actual year of assessment computed by reference to the whole year of assessment with appropriate apportionments being made where the trader's accounting period is not coterminous with the end of a year of assessment.
10. Counsel for the taxpayer submits that the amount of the trading loss in the year of assessment 1991-92 is to be determined by reference to the basis period used for computing the amount of taxable profits for that year. That basis period is 1 May 1990-30 April 1991, the first 12 months of trading in which the loss of £24,561 was sustained. As the taxpayer has been given relief for £11,439 of his half share of the loss, his claim for 1991-92 is limited to £842.
Counsel points to s. Income and Corporation Taxes Act 1988 section 382 subsec-or-para (4)382(4) which provides that
For the purposes of Income and Corporation Taxes Act 1988 section 380 section 381sections 380 and 381, the amount of a loss sustained in a trade … profession or vocation shall be computed in like manner as the profits or gains arising or accruing from the trade, profession or vocation are computed under the provisions of the Income Tax Acts applicable to Income and Corporation Taxes Act 1988Case I or Income and Corporation Taxes Act 1988II of Schedule D.
Counsel compares this provision with the language in Income and Corporation Taxes Act 1988 section 61 subsec-or-para (3)s. 61(3), which establishes the basis period for 1991-92:
Where the trade, profession or vocation has been set up and commenced within the year preceding the year of assessment, the computation of the profits or gains chargeable to income tax under Income and Corporation Taxes Act 1988Case I or Income and Corporation Taxes Act 1988Case II of Schedule D shall be made on the profits or gains for one year from its first being set up.
So counsel submits...
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