Corporation tax - group relief - accrued allowable losses not to be disregarded when calculating surplus charges available for surrender to another company

Taylor (HM Inspector of Taxes) v MEPC Holdings Ltd: HL (Lord Nicholls of Birkenhead, Lord Slynn of Hadley, Lord Hoffmann, Lord Millett and Lord Walker of Gestinghthorpe): 18 December 2003

The taxpayer was a member of a group of investment companies.

It intended to surrender its surplus charges on income to other companies in the group by way of group relief pursuant to sections 402 and 403 of the Income and Corporation Taxes Act 1988.

It made disposals of property that realised chargeable gains of more than 6 million but had accrued allowable losses from earlier accounting periods of more than 60.5 million which, pursuant to section 8(1) of the Taxation of Chargeable Gains Act 1992, could be deducted against chargeable gains realised in the current accounting period.

In reliance on section 403(8) of the 1988 Act, which provided that the surrendering company's profits of the period should be determined 'without regard to any deduction falling to be made in respect of losses or allowances of any other period', the Inland Revenue refused to allow the taxpayer to deduct any brought forward allowable losses against the chargeable gain of 6 million.

The special commissioners allowed the taxpayer's appeal but the High Court and the Court of Appeal supported the Revenue's interpretation of section 403(8).

The taxpayer appealed.

David Goldberg QC and Barrie Akin (instructed by Landwell) for the taxpayer; Timothy Brennan QC and David Ewart (instructed by the Solicitor, Inland Revenue) for the Revenue.

Held, allowing the appeal, that profits for the purpose of corporation tax consisted of two component parts, 'income' which was computed and assessed according to income tax principles and 'chargeable gains', which were computed and assessed according to capital gains tax principles; that the reliefs which might be surrendered under section 403 of the 1988 Act by way of group relief were all reliefs against corporation tax on the income element of profits; that the tax on chargeable gains was not, like income tax, an annual tax as the charge was imposed on the balance of a running account, which started when the company first came within the charge to corporation tax; that the deduction of allowable losses was part of the primary calculation of the amount brought into charge; that the most natural reading of the words in section 403(8) was that the deductions to be disregarded were those which the legislation required to be made from what would otherwise be the profits, that is reliefs; that 'allowable losses' were not deducted from profits, but they were deducted as part of the computation of chargeable gains that formed one element of profits; that such use of language reinforced the impression that 'losses' meant losses allowed by way of relief against profits and not losses, such as allowable losses, deducted in the computation of profits (WLR).

UK subsidiaries of holding companies resident outside EU prohibited from making group income elections - prohibition infringing non-discrimination provisions of double taxation agreements - non-discrimination provisions not given effect in domestic law in respect of advance corporation tax

NEC Semi-Conductors Ltd and others v Inland Revenue Comrs: ChD (Mr Justice Park): 24 November 2003

The claimants, which were resident in the UK, were subsidiaries of holding companies resident outside the EU.

As a result they were prohibited from making a group income election under section 247 of the Income and Corporation Taxes Act 1988, which would have exempted them from paying advance corporation tax (ACT).

The claimants brought an action in restitution against the Inland Revenue, seeking repayment of ACT on the ground, among other things, that the rule infringed the non-discrimination provisions of the double taxation agreements between the UK and the states in which the holding companies were resident, and that those provisions took effect in domestic law in the context of ACT by section 788(3)(a).

Graham Aaronson QC, David Cavender and Paul Farmer (instructed by Dorsey & Whitney) for the claimants; Ian Glick QC, David Ewart and Kelyn Bacon (instructed by the Solicitor, Inland Revenue) for the Revenue.

Held, giving judgment for the Revenue, that the rule in section 247 was contrary to the relevant non-discrimination articles; that section 788(3)(a) gave effect in domestic law to provisions in double taxation agreements in so far as they provided relief from corporation tax in respect of income and chargeable gains; but that ACT, although a species of corporation tax, was not corporation tax in respect of income or chargeable gains; and that, accordingly, the claimants had no right to make group income elections because the particular provision of the non-discrimination article on which they relied was not part of UK law.