In this case, HMRC were appealing against a decision of the First-tier Tribunal, which allowed the taxpayer's claim to set off losses generated in a business subject to corporation tax against profits subject to income tax. The taxpayer was a BVI company and not resident in the UK for tax purposes, although it maintained a permanent establishment (PE) in the UK through which it carried on a trade in land in the UK. Any profits generated by the PE from that trade would have been subject to corporation tax in the UK. However, the PE was loss-making. In addition to the PE's trade, the taxpayer also held a number of properties in the UK directly from which it generated rental income. As the letting business was not carried on through a UK PE, the profits from the letting business were subject to income tax. The taxpayer was claiming loss relief by setting off the loss generated in the PE trade against the profits generated by the letting business.
HMRC argued that, as the corporation tax and income tax regimes were entirely separate, the taxpayer was not entitled to set the losses of the PE trade against the profits of the letting business. The Upper-tier Tribunal rejected this argument and agreed with the First-tier tribunal that the losses from the PE trade could be set off against the letting business's profits (although, before set-off against the profits of the letting business subject to income tax, the losses of the PE trade had to be calculated under the income tax rules). The judgment states that the draftsman of the relevant legislation could have expressly restricted losses generated under the corporation tax regime from being used to relieve profits that fall within the income tax regime, as it has done for other instances of sideways relief for losses, but it had not done so. Further, the Tribunal identified instances in which companies subject to income tax (by way of withholding tax, for example) are able to deduct this from a corporation tax liability, which did not support HMRC's contention that income tax and corporation tax must be interpreted so as to be mutually exclusive.
HMRC argued that, if it was possible to use losses generated by the PE trade against profits subject to income tax from the letting business, there was no rule that prevented that same loss being set against future profits from the PE trade, thereby allowing them to be double counted. Although no firm conclusion was reached on this issue, it was not considered sufficient to undermine the taxpayer's case. The Tribunal also found that HMRC's view of the legislation may have breached the EU right to free movement of capital.
The facts of this case are unusual and, given the government's plans to extend corporation tax to non-resident companies, it is unlikely to have a direct impact on many taxpayers in the future. However, it does provide an interesting view of the interaction between the corporation tax and income tax regimes.
