Contentious Losses

The Revenue's appeal was allowed by the High Court in Taylor v MEPC Holdings Ltd.

AN INVESTMENT COMPANY appealed against a Revenue determination concerning the amount of excess charges on income available for surrender by way of group relief in a particular accounting period. It was held that, in computing the excess of charges over profits, capital gains should not be reduced by allowable losses brought forward.

Background

MEPC Holdings was an investment company, and member of a group relief group for corporation tax. 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. So charges exceeded profits by £48,344,400. MEPC also realised chargeable gains of £6,040,284 in that period, but allowable losses from past periods exceeded the chargeable gains.

The Revenue argued that the amount available for surrender by MEPC by way of group relief for that period was £42,304,116, whereas the company claimed that it should be £48,344,400, i.e., that the chargeable gain of £6,040,284 should not reduce it. The company claimed that the gain was offset by the allowable losses brought forward from earlier periods.

The Special Commissioners allowed MEPC's appeal, so the Revenue appealed to the High Court.

(Timothy Brennan QC for the Revenue; David Goldberg QC for MEPC.)

Decision in Chancery Division

Sir Donald Rattee described the facts as 'refreshingly simple and uncontroversial', and used the Special Commissioner's version of the facts when he summarised them in his judgment. He said that the solution lay on the proper construction of section 403(7) and (8), Taxes Act 1988. It should be noted that paragraph 29 of Schedule 5 to the Finance Act 1998 inserted into Taxes Act 1988 sections 403, 403ZA, 403ZB, 403ZC, 403ZD and 403ZE in place of old section 403. References in this case report are to the old section 403.

Section 403 relates to the amounts which may be surrendered by way of group relief. Sir Donald said that his decision would rest on whether the effect of section 403(8) was that in computing the profits of the surrendering company for the purposes of section 403(7), allowable capital losses of that company from earlier periods could not be taken into account. Section 403(8) required the profits for the period to be determined without regard to 'losses or allowances of any other period'.

Counsel for the Revenue said the 'natural construction' of the words of section 403(8) meant that any deduction which would otherwise be used in computing profits cannot be used in computing the profits of the surrendering company. Thus a deduction for brought forward losses which would normally be made under section 8(1)(b), Taxation of Chargeable Gains Act 1992 in computing the chargeable gain to be included in a company's profits for corporation tax purposes must not be made in computing the profits for section 403(7). For MEPC, this effectively prevented the deduction of any part of the company's allowable losses from previous periods from its chargeable gains of £6,040,284.

Counsel for MEPC said that section 403(8) did not allow trading losses from past years to be deducted from the current year's profits. However, the company wished to make the deduction from chargeable gains that would otherwise be included in the profits. The true figure for profits could only be reached after net chargeable gains less allowable losses have been calculated.

Sir Donald disagreed with MEPC: section 403(8) said that for the purposes of section 403(7), profits had to be determined without any deduction falling to be made in respect of losses of any other period. In his opinion the natural meaning of the words in section 403(8) was that 'any deduction that would, apart from this subsection, fall to be made in the process of determining the surrendering company's profits'.

Counsel for MEPC also argued that the words 'losses and allowances' in section 403(8) did not include allowable capital losses which could only be deducted from chargeable gains. Only trading losses and capital allowances were within section 403(8). Sir Donald disagreed, saying that losses in section 403(8) meant losses allowed under Taxes Act 1988. It made no sense to accept that wherever referred to in section 403, losses meant only trading losses.

Sir Donald concluded that the amount for surrender was as contended by the Revenue, £42,304,116, and allowed the Revenue's appeal.

Decision for the Revenue

(Reported at [2002] STC 430.)

Issue: 3873 / Categories: