Taylor (Inspector of Taxes) v MEPC Holdings Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 27 September 2000 |
| Date | 27 September 2000 |
| Court | Special Commissioners (UK) |
special commissioners decision
MR TGK EVERETT
Corporation tax - Group relief - Determination of profits of surrendering company - Whether allowable losses of preceding accounting periods should be deducted from a realised chargeable gain - Meaning of "profits" - Meaning of "losses or allowances" - Income and Corporation Taxes Act 1988 section 403 subsec-or-para (7) section 403 subsec-or-para (8)Income and Corporation Taxes Act 1988, ss. 403(7), (8)
MR TGK EVERETT:
1. MEPC Holdings Ltd ("the Company") appeals against a determination made by the Inland Revenue on 25 May 1999 that the amount available for surrender by the Company by way of group relief for the accounting period ending on 30 September 1994 was £42,304,116.00. The Company was of the view that the amount should be £48,344,400.00 and that it should not be reduced by realised chargeable gains of £6,040,284.00 which were more than offset by allowable losses brought forward from previous accounting periods.
2. We were informed that three other companies wished to argue a similar point and that this was a test case.
3. The facts were not disputed. The Company is an investment company and at all material times was within the charge to corporation tax and was a member of a group relief group. Other companies in the group had made valid claims in respect of the amounts eligible for relief surrendered by the Company. In its accounting period ending on 30 September 1994 the Company made profits of £300,000 and had charges on income of £48,644,400. Thus charges on income exceeded profits by £48,344,400. In the same accounting period the Company realised chargeable gains of £6,040,284 Allowable losses brought forward from past periods amounted to £60,583,017 and thus very substantially exceeded the chargeable gains.
4. Income and Corporation Taxes Act 1988 part X chapter IVChapter IV (Income and Corporation Taxes Act 1988 section 402ss. 402-413) of Income and Corporation Taxes Act 1988 part XPt. X of the Income and Corporation Taxes Act 1988 ("the 1988 Act") contains provisions about group relief. Income and Corporation Taxes Act 1988 section 402Section 402 provides that, in certain circumstances, relief for trading losses and other amounts eligible for relief from corporation tax may be surrendered by one company (the surrendering company) and allowed to another company who makes a claim (the claimant company) where both companies are members of the same group.
5. Income and Corporation Taxes Act 1988 section 403Section 403 describes the amounts eligible for relief which may be surrendered. The subsections of direct relevance to this appeal are Income and Corporation Taxes Act 1988 section 403 subsec-or-para (7) section 403 subsec-or-para (8)subs. (7) and (8). At the relevant time those subsections provided:
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(7) 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 accounting period.
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(8) The surrendering company's profits 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).
6. The issue for determination in the appeal was whether, in determining the Company's profits for the purposes of Income and Corporation Taxes Act 1988 section 403 subsec-or-para (7)s. 403(7), the result of Income and Corporation Taxes Act 1988 section 403 subsec-or-para (8)s. 403(8) was that the amount to be included in profits in respect of chargeable gains was £nil being the net amount of the realised chargeable gain less the allowable losses brought forward (as argued by the Company) or whether the amount to be included in profits in respect of chargeable gains was the realised chargeable gain with no deduction for the allowable losses brought forward (as argued by the Inland Revenue).
7. In this decision we use the phrase "allowable losses" to mean losses which may be set against chargeable gains.
8. The Company raised three main arguments. First it said that the meaning of the word "profits" in Income and Corporation Taxes Act 1988 section 403 subsec-or-para (7) section 403 subsec-or-para (8)ss. 403(7) and (8) meant the inclusion of a net figure for chargeable gains less allowable losses. Secondly it said that the meaning of the words "losses or allowances" in Income and Corporation Taxes Act 1988 section 403 subsec-or-para (8)s. 403(8) meant trading losses or capital allowances and not allowable losses. And finally it said that it was the intention of the legislation that group relief was not available for brought forward losses and allowances in those cases where the surrendering company had had the option of surrendering them in previous years and had not done so; such an option was not available for allowable losses.
9. The Inland Revenue argued that the intention of the legislation was that the only amounts which could be deducted in calculating profits were amounts which could be deducted in the year of surrender and to take into account brought forward allowable losses would be to defeat that intention.
10. In considering the arguments of the parties we have first looked at the words of the legislation and we begin by considering the meaning of the word "profits" as used in Income and Corporation Taxes Act 1988 section 403 subsec-or-para (7) section 403 subsec-or-para (8)ss. 403(7) and (8). The questions raised by the arguments of the parties about the meaning of these words were:
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(1) Do "profits" for the purposes of Income and Corporation Taxes Act 1988 section 403 subsec-or-para (7) section 403 subsec-or-para (8)section 403(7) and (8) include chargeable gains without any deduction of allowable losses? and
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(2) If so, does the same argument apply to trading losses, capital allowances and management expenses?
11. We then consider the meaning of the words "losses or allowances" inIncome and Corporation Taxes Act 1988 section 403 subsec-or-para (8)s. 403(8). The questions raised by the arguments of the parties about the meaning of those words were:
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(3) What meaning of the words "losses or allowances" emerges from a consideration of the context of Income and Corporation Taxes Act 1988 section 403section 403 as a whole?
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(4) What meaning of the words "losses or allowances" emerges from a consideration of other provisions of the 1988 Act?
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(5) What meaning of the word "losses" emerges from the capital gains tax legislation?
12. Finally, we consider the intention of the legislation and here the question raised by the arguments of the parties was:
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(6) What is the relevance of the intention of the legislation?
13. Mr Goldberg QC also put forward a number of other arguments which were not challenged by Mr Brennan. We therefore do not consider these but Mr Goldberg's skeleton argument (which runs to 32 pages) will be available should this decision be appealed.
14. We consider each of the questions separately.
15. The first question is whether, for the purposes of Income and Corporation Taxes Act 1988 section 403 subsec-or-para (7) section 403 subsec-or-para (8)section 403(7) and (8), the word "profits" includes chargeable gains without any deduction of allowable losses.
16. Subsections (7) and (8) of s. 403 refer to the surrendering company's profits. In considering this question references were made to the word profits in Income and Corporation Taxes Act 1988 section 6 section 8 section 9ss. 6, 8 and 9 of the 1988 Act and in Taxation of Chargeable Gains Act 1992 section 8 subsec-or-para (1)s. 8(1) of the Taxation of Chargeable Gains Act 1992 ("the 1992 Act").
17. Income and Corporation Taxes Act 1988 section 6Section 6 of the 1988 Act contains provisions relating to the charge to corporation tax. The relevant parts of s. 6 provide:
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(1) Corporation tax shall be charged on profits of companies…
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(4) In this section…
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(a) "profits" means income and chargeable gains.
18. Income and Corporation Taxes Act 1988 section 8Section 8 of the 1988 Act contains provisions relating to the general scheme of corporation tax and s. 8(1) provides:
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(1) … a company shall be chargeable to corporation tax on all its profits wherever arising.
19. Income and Corporation Taxes Act 1988 section 9Section 9 of the 1988 Act contains provisions relating to the computation of income and s. 9(3) provides:
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(3) Accordingly, for the purposes of corporation tax, income shall be computed … under the like Schedules and Cases as apply for the purposes of income tax, and in accordance with the provisions applicable to those Schedules and Cases, but … the amounts so computed for the several sources of income, if more than one, together with any amount to be included in respect of chargeable gains, shall be aggregated to arrive at the total profits.
20. Taxation of Chargeable Gains Act 1992 section 8Section 8 of the 1992 Act contains provisions that a company's total profits should include chargeable gains. Section 8(1) provides:
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(1) … 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 the chargeable gains accruing to the Company in the...
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