In Bloomsbury Verlag GmbH v HMRC  UKFTT 660 (TC),the First-tier Tribunal (Tax and Chancery) (FTT) has held that the four-year time limit does not apply to corporation tax self-assessment returns and that trading losses can be carried forward even though they were not included in a return.
Bloomsbury Publishing Plc, a UK resident company acquired Bloomsbury Verlag GmbH (the Appellant), whichwas incorporated in Germany, in 2003. Though it was not clear to the Appellant at the time, following its acquisition, it became UK resident and was obliged to notify HMRC of its chargeability to Corporation Tax under paragraph 2, Schedule 18, Finance Act 1998. The Appellant did not immediately appreciate its obligations to notify HMRC of its chargeability to Corporation Tax and this was not done until 31 March 2010.
In that notification the Appellant informed HMRC that it was in the process of preparing returns and computations for the accounting periods ending 31 December 2003 to 2009. The Appellant provided HMRC with a summary of the position for those years explaining that for 2003, 2004, 2006 and 2009, it had sustained trading losses but had made profits in 2005, 2007 and 2008. The majority of the losses were incurred during 2003 and 2004 and far exceeded the profits made in 2005, 2007 and 2008.
As required under paragraph 3, Schedule 18, Finance Act 1998, HMRC issued notices requiring the Appellant to file returns for accounting periods 2004 to 2009, but not 2003. HMRC later attempted to withdraw its request for 2004 and 2005, indicating that these had been issued "in error". The Appellant submitted its returns for all years including a return for 2003 on what it described as a "voluntary" basis. HMRC rejected the returns the Appellant filed for 2003, 2004 and 2005 on the basis that they were late given the four year time limit contained in paragraph 46, Schedule 18, Finance Act 1998. HMRC also disputed the availability of the 2003 and 2004 losses. It opened an enquiry into the 2007 return and issued a discovery assessment and a closure notice for the accounting periods ended 31 December 2005 and 2007, respectively, charging tax and penalties.
The Appellant appealed to the FTT.
The FTT's decision
During the hearing, HMRC indicated that it did, in fact, have a power to require a taxpayer to provide a return for any period. This ran contrary to the argument that the 2004 and 2005 notices had been issued in "error" as HMRC contended but HMRC's broader point was that this right could not be found to circumvent the time limitations on self-assessment contained in paragraph 46, Schedule 18, Finance Act 1998. It was argued that whether HMRC could request a return or not, the taxpayer could not utilise its losses.
As a point of principle, the Appellant argued that it was not open to HMRC simply to deny the trading losses it had incurred in 2003 and 2004. The fact that they had not been included in a self-assessment return was irrelevant to the analysis of what constituted a loss in section 393, Income and Corporation Taxes Act 1988 (since rewritten to Corporation Tax Act 2010). HMRC rejected this analysis, arguing that losses had to be assessed in the same way as profits and that this could only be done through a valid return. Since, HMRC argued, the Appellant was out of time to file returns for 2003 and 2004, those losses did not "exist" to carry forward to later years.
HMRC further contended that in raising the discovery assessment for 2005, it was not obliged to consider the losses which it accepted had been suffered in the preceding two years when determining whether there was any "loss of tax" to the Exchequer.
The FTT was not persuaded that taxpayers had any right under the statute to make a "voluntary" return as the Appellant had done for 2003. Rather, the legislation provided HMRC with a discretion to issue a notice to deliver a return. That discretion was not, however, to be exercised in an unfair or arbitrary manner. However, in relation to 2004, the FTT found that the return provided by the Appellant, in response to HMRC's notice to deliver, was valid. The FTT rejected HMRC's argument that the four year time limit contained in paragraph 46(1) applied to a self-assessment delivered in response to a notice. In its view, paragraph 46 applied only to an assessment made by HMRC.
In relation to 2004, the FTT said that there was no requirement for the Appellant to include an assessment in its return (as proscribed by paragraph 7, Schedule 18, Finance Act 1998) because no amount of tax was due for this year. The FTT concluded, contrary to HMRC's submissions, that losses were not assessable since an assessment is only required for determining whether tax is payable, or whether a liability is nil. The assessment, per se, is not concerned with the computation of losses but rather the extent of any resultant tax liability. The Appellant was therefore able to use its 2004 losses to set against its profits in 2005 and 2007.
In relation to 2003, although the FTT said that the Appellant could not issue a "voluntary" return, it agreed with the Appellant's argument that it was entitled to utilise losses incurred in 2003 by operation of section 393, Income and Corporation Taxes Act 1988. Box 4 on the 2005 and 2007 returns indicated the level of the trading losses the Appellant had brought forward to offset against income. It did not matter that they were not included in a previous return. The fact that HMRC did not issue a notice requiring a return to be made for this period was irrelevant.
The remarkable aspect of this case is the length to which HMRC was prepared to go to ensure that the correct tax treatment was not available to the taxpayer. It is difficult to escape the conclusion that the narrow construction which HMRC unsuccessfully attempted to apply to the reading of the legislation was influenced by its desire to increase the tax yield.
The FTT was not impressed with HMRC's arguments which, had they succeeded, would have denied the Appellant a statutory relief to which it was entitled.
As counsel for the Appellant put it: "HMRC’s attempt to restrict the use of the trading losses by reference to the provisions of Schedule 18 confused the procedure for assessing and collecting tax with the computational requirements of the Corporation Tax Acts. Schedule 18 was designed to operate on the basis that taxpayers should always pay the correct amount of tax properly computed."
HMRC would do well to remember that its function is to ensure the collection of the correct amount of tax rather than the maximum amount of tax. It remains to be seen whether HMRC will appeal this decision or seek to change the law. We would not be surprised if HMRC went down the latter route.