On 20 June 2016, the First-tier Tribunal1 held that a loss incurred by a UK permanent establishment of a non-UK resident company could be offset against that company’s profits subject to UK income tax.

The appellant was a BVI-incorporated company trading (in UK land) in the UK through a permanent establishment here. Had it made a profit from that trade, it would have been subject to UK corporation tax. As it happened, the company made a trading loss of over £2m for the period in question.

At the same time, the company also owned UK investment properties from which it received rental income subject to UK income tax (as the letting business was not carried out through the PE). The company sought to offset its PE trading loss against its non-PE rental income, to reduce its UK income tax liability to nil. HMRC rejected this claim.

The Tribunal agreed with the appellant company that, on a literal reading of the relevant legislation, it was entitled to set off PE trading losses against profit subject to income tax. There was no need for a purposive reading of the legislation as the drafting was clear.