Tax Case - The Common Thread

RICHARD CURTIS reports

A COMPANY HAD excess charges on income which it wished to surrender by way of group relief. However, it had capital gains for the year, but argued that these should be left out of account as they were extinguished by losses brought forward. It was held that when computing group relief, no account is to be taken of any losses or allowances, including capital losses, in respect of previous years.

The background to this case was set out in the report of the High Court's decision (in favour of the Inland Revenue) in Taxation, 5 September 2002 at page 629. Basically, the question was whether, in calculating group relief, capital losses in a previous year could be brought forward and set against capital gains in the current year, reducing them to nil and thus increasing the amount of charges on income available for set off against other group profits.

(David Goldberg QC and Barrie Akin for the company; Timothy Brennan QC for the Revenue.)

Lord Justice Chadwick commenced his judgment with a return to first principles.

• Corporation tax is a charge on 'profits'.

• Profits means income and chargeable gains.

• Charges on income are allowable as deductions.

• The amount of chargeable gains to be included in profits for any period shall be the total amount accruing for that period, less any losses of the period and any losses brought forward.

These strands are drawn together in what was section 403, Taxes Act 1988 (before its subdivision). Section 403(7) states that: 'if in any accounting period the surrendering company has paid any amount by way of charges on income, so much of that amount as exceeds its profits of the period may be set off for the purposes of corporation tax against the total profits of the claimant company for its corresponding accounting period.' (See now

The critical phrase above seems to be 'its profits of the period'; what were these?

MEPC argued that, as its chargeable gains for the period of £6 million were reduced to nil by capital losses available to be brought forward from previous periods of £60 million, the only profit was its income of £300,000. MEPC had paid charges of £48,600,000 and so the charges available for group relief were £48,300,000. In support of this argument, it relied heavily on

The Revenue's argument was based on what was then section 403(8) (now effectively

So the 'refreshingly simple' case comes down to the conflict between sections 8 and 403.

Did section 8 act in priority so that the 'allowable (capital) losses' had already been taken into account in arriving at 'profit' for the period, so that it was only trading losses and capital allowances that needed to be left out of account (MEPC's argument as upheld by the Special Commissioners)?

Alternatively, did section 403 have priority in considering group relief so that all brought forward losses, both income and capital, had to be ignored (the Revenue's argument as upheld by the High Court)?

An extra dimension was added to the arguments by a consideration of group relief. The judge saw MEPC's approach to group relief as being that the provisions were aiming to achieve a similar result as if all of the activities of the group were being undertaken by a single company. However, the judge agreed with the Revenue's view that this was not the case. The provisions deliberately restricted the relief available and support for this was seen in the anti-avoidance provisions of

Lord Justice Chadwick saw 'a common thread' running through section 403, which was that losses, allowances and expenses of management, incurred, fallen to be made, or disbursed in a non-corresponding accounting period, cannot be set off either directly or by being taken into account in the determination of the income of the surrendering company. 'In so far as it is possible to identify a policy which underlies those provisions, it is to restrict group relief to the particular accounting period'.

(Reported at