Losses can be a valuable asset for a company because they can reduce corporation tax liability. There are several options for using losses in the UK tax code, including:
- setting them against current year profits
- carrying them back to a previous period
- carrying them forward or transferring them to another group company.
However, seemingly small details in the legislation can make significant differences to how losses can be relieved and therefore to overall tax liability. In a recent First-Tier Tribunal (FTT) case, Countryfield (Village) Homes Limited v HMRC , the issue at stake was the order in which losses should be carried back to previous periods.
The facts of the case related to the carry back of losses under a temporary extension to the law which allowed limited losses from accounting periods ending after 23 November 2008 and before 24 November 2010 to be carried back to the previous three years. The current law allows losses to be carried back to the 12 months prior to the chargeable accounting period in which they occurred only. It is therefore unlikely that the decision in this case will be specifically relevant to new loss claims, although it may be relevant where there is an ongoing dispute with HMRC as to the use of losses which arose in this period.
The taxpayer had made losses in all of the years for which the three year carry back was available (ie 2007, 2008 and 2009). It sought to carry back the losses of 2009 for the maximum period permitted of three years to offset profits in 2006 before carrying back the losses of 2008. This would have maximised its relief for the losses and resulted in a repayment of corporation tax paid for earlier periods. HMRC argued that the 2008 losses should be carried back first, which would have fully offset the profits of 2006 and therefore effectively prevented 2009 losses being carried back. The only option remaining for the 2009 losses would have been to carry them forward against future profits.
The FTT agreed with HMRC that the loss claims should be applied in chronological order, so that 2008 losses were carried back before 2009 losses. This was on the basis that the relevant legislation allowed carry back "subject to... any relief for an earlier loss", which was interpreted to mean that losses incurred earlier must be relieved before later losses.
In addition, the FTT found that the taxpayer had submitted a claim to carry back 2008 losses before it claimed to carry back 2009 losses and that the 2008 claim would therefore take precedence to the 2009 claim in any event. The taxpayer did not dispute that it had originally made the claims in this order but argued that the claims had been ineffective because HMRC implicitly rejected them by opening an enquiry into its 2005 and 2006 returns (the years to which the losses were being carried back). After the enquiry was opened, the taxpayer submitted new loss claims, making the 2009 claim before the 2008 claim, and argued that it was these later claims which were effective. The FTT disagreed, in part because the enquiry related not to the years where the losses were made but to the years to which they were carried back.
This case is an example of the precise approach applied by the courts when interpreting loss relief rules and the significant impact which this can have on tax liability. It also suggests that a taxpayer will not necessarily be able to revisit his loss relief claims even where HMRC has rejected them or opened an enquiry.