Taylor (Inspector of Taxes) v MEPC Holdings Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Chadwick,Lord Justice Clarke,Lord Justice Pill |
| Judgment Date | 20 June 2002 |
| Neutral Citation | [2002] EWCA Civ 883 |
| Docket Number | Case No: A3/2001/1240 |
| Court | Court of Appeal (Civil Division) |
| Date | 20 June 2002 |
[2002] EWCA Civ 883
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(Sir Donald Rattee)
Royal Courts of Justice
Strand,
London, WC2A 2LL
Lord Justice Pill
Lord Justice Chadwick and
Lord Justice Clarke
Case No: A3/2001/1240
David Goldberg QC and Barrie Atkin (instructed by Landwells) for the Appellant
Timothy Brennan QC (instructed by the Solicitor of Inland Revenue) for the Respondent
Corporation tax is a tax on the profits of a company—see section 6(1) of the Income and Corporation Taxes Act 1988. It is assessed and charged for any accounting period of the company on the full amount of the profits arising in the period—section 12(1) of that Act. "Profits" means income and chargeable gains—section 6(4) of the Act. In computing the corporation tax chargeable for any accounting period of a company any charges on income paid by the company in the accounting period shall be allowed as deductions against the total profits for the period—section 338(1) of the Act. "Charges on income" include payments of any description mentioned in section 338(3) of the Act—see section 338(2)(a). At the time of the assessment which has given rise to this appeal—that is to say, before the new provisions for the treatment of loan relationships were enacted in the Finance Act 1996—charges on income included interest on borrowing.
The amount to be included in respect of chargeable gains in a company's total profits for any accounting period shall be the total amount of chargeable gains accruing to the company in the accounting period after deducting (a) any allowable losses accruing to the company in the period, and (b) so far as they have not been allowed as a deduction from chargeable gains accruing in any previous accounting period, any allowable losses previously accruing to the company while it has been within the charge to corporation tax—see section 8(1) of the Taxation of Capital Gains Act 1992.
Chapter IV in Part X of the 1988 Act contains provisions for group relief; that is to say, relief from corporation tax which is available to one company ("the claimant company") in respect of losses and other amounts eligible for relief which have been surrendered by another company ("the surrendering company") in the same group. In that context, companies are in the same group if they meet the condition set out in section 413(3) of the Act. Section 402 of the 1988 Act sets out the circumstances in which a claim for group relief may be made. Section 403 of the Act identifies the losses and other amounts which, if surrendered by the surrendering company, may be set off for the purposes of corporation tax against the total profits of the claimant company. They include charges on income. Section 403(7) of the 1988 Act is in these terms:
"Subject to the provisions of this Chapter and section 494(4), if in any accounting period the surrendering company has paid any amount by way of charges on income, so much of that amount as exceeds its profits of the period may be set off for the purposes of corporation tax against the total profits of the claimant company for its corresponding period."
The appellant company, MEPC Holdings Limited, is an investment company. In its accounting period ending on 30 September 1994 it had income of £300,000; and paid an amount of £48,644,400 by way of charges on income. That amount was, I think, interest on borrowing, but nothing turns on that. The chargeable gains accruing to the company in that accounting period were £6,040,284; but "the amount to be included in respect of chargeable gains in [its] total profits for [that] accounting period" was nil. That followed from the provisions of section 8(1) of the Taxation of Capital Gains Act 1992. The amount to be included in respect of chargeable gains for the accounting period ending on 30 September 1994 was the amount of chargeable gains accruing in that period after deducting not only "(a) any allowable losses accruing to the company in [that] period", but also "(b) any allowable losses previously accruing to the company while it has been within the charge to corporation tax" in so far as not already allowed as a deduction in any previous accounting period. And the allowable losses which had accrued to the appellant company in earlier accounting periods (and not already allowed as a deduction against chargeable gains accruing in earlier periods) were £60,583,017.
At first sight, therefore, the profits of the appellant company in the accounting period ending 30 September 1994 for the purposes of section 403(7) of the 1988 Act were £300,000—see section 6(4)(a) of that Act. And so the amount available, under the provisions of section 403(7), for set off against the against the total profits of a claimant company for its corresponding accounting period—that is to say, an accounting period of the claimant company which fell wholly or partly within the accounting period of the appellant company ending of 30 September 1994 (see section 408(1) of the 1988 Act)—was £48,344,400; that being the amount by which the amount (£48,644,400) which the appellant company had paid by way of charges on income exceeded its profits for the period (£300,000). But that would be to ignore the direction in section 403(8) of the Act. The subsection is in these terms:
"The surrendering company's profit of the period shall be determined for the purposes of subsection (7) above without regard to any deduction falling to be made in respect of losses or allowances of any other period, or to expenses of management deductible only by virtue of section 75(3)."
If, as the Inland Revenue contend, that direction requires that, in determining the appellant company's profits for the purposes of section 403(7) of the 1988 Act, there shall be left out of account the deduction from the chargeable gains accruing to the appellant company in the accounting period ending 30 September 1994 (£6,040,284) which would otherwise be made, under section 8(1)(b) of the 1992 Act, in respect of allowable losses (£60,583,017) accruing in earlier accounting periods, the appellant company's profits for the accounting period ending 30 September 1994 for the purposes of section 403(7) of the 1988 Act are £6,340,284. That is the aggregate of income (£300,000) and chargeable gains (£6,040,284) in that period if chargeable gains are to be determined without making any deduction in respect of allowable losses accruing in earlier accounting periods. And, on that basis, the amount by which the amount paid by way of charges on income (£48,644,400) exceeds the appellant company's profits of the period ending 30 September 1994 (£6,340,284) is £42,304,116.
On 25 May 1999 the Inspector of Taxes determined that the amount available for surrender by the appellant company by way of group relief for the accounting period ending on 30 September 1994 was £42,304,116. The company appealed from that determination to the Special Commissioners. The Commissioners (Mr T H K Everett and Dr A N Brice) allowed that appeal. They held that the amount to be included in the appellant company's profits for the accounting period ending 30 September 1994 was nil (not £6,340,284). It followed that the amount available for surrender was £48,344,284.
The Inspector appealed to the High Court. Sir Donald Rattee, sitting as an additional judge in the Chancery Division, allowed the appeal; and declared that the amount available for surrender by the company, by way of group relief, in respect of the accounting period ending 30 September 1994 was £42,304,116. The company's appeal from the order made by the judge on 4 May 2001 is now before this Court.
The decision of the Special Commissioners
The provisions in sections 403(7) and (8) of the 1988 Act must, of course, be construed in the context of section 403 as a whole. Subsections (1), (3) and (4) of the section are in these terms:
"(1) Subject to the provisions of this Chapter, if in any accounting period the surrendering company has incurred a loss, computed as for the purposes of section 393A(1), in carrying on a trade, the amount of the loss may be set off for the purposes of corporation tax against the total profits of the claimant company for its corresponding accounting period.
(2) …
(3) Subject to the provisions of this Chapter, if for any accounting period any capital allowances fall to be made to the surrendering company which —
(a) are to be given by discharge or repayment of tax, and
(b) are to be available primarily against a specified class of income,
so much of the amount of those allowances (exclusive of any carried forward from an earlier period) as exceeds its income of the relevant class arising in that accounting period (before deduction of any losses of any other period or of any capital allowances) may be set off for the purposes of corporation tax against the total profits of the claimant company for its corresponding accounting period.
(4) Subject to the provisions of this Chapter, if for any accounting period the surrendering company (being an investment company) may under subsection (1) of section 75 deduct as expenses of management any amount disbursed for that accounting period, so much of that amount (exclusive of any amount deductible only by virtue of subsection (3) of that section) as exceeds the company's profits for that accounting period may be set off for the purposes of corporation tax against the total profits of the claimant company (whether an investment company or not) for its corresponding accounting period."
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