Revenue and Customs Commissioners v English Holdings (BVI) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 December 2017 |
| Neutral Citation | [2017] UKUT 842 (TCC) |
| Date | 14 December 2017 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2017] UKUT 0842 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mrs Justice Rose, Chamber President, Judge Tim Herrington
David Yates, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the appellants
Michael Firth instructed by Brian White Limited appeared for the respondent
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 dismissed.
The Upper-Tribunal (UT) upheld the decision of the First-tier Tribunal in English Holdings (BVI) Ltd [2016] TC 05189 that the taxpayer could offset a loss arising from a trade carried on through a permanent establishment in the UK (which would have been subject to corporation tax if profitable) against profits chargeable to income tax from a lettings trade not carried on through the PE.
The taxpayer 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 letting 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.
The taxpayer 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. If this was not correct and the legislation does prevent the taxpayer from setting off the loss from the PE trade against the income from letting business, then that is only because it was non-UK resident. If English Holdings were UK resident then the letting business would be taxed under the corporation tax regime because a UK resident company is chargeable to corporation tax on all its profits wherever arising (CTA 2009, s. 5(1)). This disadvantageous treatment amounts to a restriction on the free movement of capital contrary to the Treaty on the Functioning of the European Union (TFEU), art. 63.
HMRC argued that the corporation tax loss could not be offset under ITA 2007, s. 64 because the 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). If this was not correct, TFEU, art. 63 did not apply because:
- Any question of EU law is governed exclusively by art. 47 of the EU Council Decision of 27 November 2001 (the OCT Decision) in the sense that if a restriction on the free movement of capital is not prohibited by art. 47 of the OCT Decision (which only prohibits a very limited class of restrictions of which the present restriction was not one) then there is no need to consider whether it is prohibited by art. 63 TFEU.
- The taxpayer's complaint is in relation to legislation primarily concerned with freedom of establishment which, unlike the restriction on the free movement of capital, does not apply to third countries such as the BVI.
- There was no breach of EU law since HMRC are entitled to rely on TFEU, art. 64 which provides an exemption from art. 63 in relation to the application to third countries of any restrictions which existed on 31 December 1993 under national or EU law adopted in respect of the movement of capital to or from third countries involving direct investment, including in real estate.
The UT upheld the decision of the FTT 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, 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:
- 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
- the loss had no basis period under ITA 2007, s. 61 so there was no loss to which s. 64 could apply.
The UT upheld the decision of the FTT 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. In relation to the second matter, 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. The UT however upheld the decision of the FTT 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.
In relation to the matters of EU law, the FTT had not expressed an opinion. The UT found in favour of the taxpayer in relation to items (1) and (2) above. In relation to item (3) however, there were insufficient findings of fact by the FTT to enable a decision to be made. In light of the findings on the relevant points of UK law, it was not necessary to determine this point conclusively.
In this appeal 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 UT upheld the decision of the FTT 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.
[1] This is an appeal brought by the Appellants, HMRC, against the decision of the First-tier Tribunal (Judge Mosedale) dated 20 June 2016 ([2016] TC 05189). In that decision Judge Mosedale allowed the appeal of the Respondent (“English Holdings”) against a closure notice that had refused English Holdings' claim for loss relief under section 64 of the Income Tax Act 2007. The appeal raises an issue about the interrelation of corporation tax and income tax in respect of a non-UK resident company where part of the company's business falls within the corporation tax regime and part of its business falls within the income tax regime. Judge Mosedale gave permission to appeal in a decision dated 6 September 2016.
[2] The facts are as set out in the FTT's judgment and were not in dispute.
- English Holdings is a company registered in the British Virgin Islands and is not resident in the UK.
- At the relevant time, it had a permanent establishment (PE) in the UK through which it carried on the activity of trading in land situated in the United Kingdom (the PE trade). If it had made profits on the PE trade, English Holdings would have been chargeable to corporation tax on those profits. In the year to 31 March 2011, the PE trade made a loss of over £2 million.
- In addition to that trade, English Holdings owned a number of investment properties in the UK on which it earned rental income (the letting business). This letting business was not carried out through a PE and so any profits were chargeable to income tax. In the tax year ended 5 April 2010 the letting business made profits of over £1 million which HMRC consider resulted in an income tax liability of just over £200,000.
[3] The issue in this appeal is the apparently straightforward one of whether English Holdings is able to set off the loss incurred in the PE trade against the profits arising from the letting business with the effect of cancelling the income tax that would otherwise be charged on the letting business profits. English Holdings say that there is no reason why they should not be able to do so and Judge Mosedale agreed. HMRC argue that it is clear from the relevant legislation that the corporation tax and income tax regimes are intended to be separate so that losses incurred under one regime cannot be used to offset profits subject to the other.
[4] The provisions governing the imposition of the charge to corporation tax and the charge to income tax are spread over a number of different statutes. For income tax, the main statute is the Income Tax Act 2007 (“ITA 2007”). Section 1 ITA 2007 helpfully sets out an overview of the Income Tax Acts. For our purposes, these are the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) which deals with, amongst other things, the taxation of employment income; the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”) which deals with the...
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