The FTT held that a company was entitled to claim income tax relief for its PE’s trading losses against its non-PE letting income.
The taxpayer in this case is a company registered in the British Virgin Islands. In the year to 31 March 2011 it traded in land situated in the UK through a permanent establishment (PE), and generated trading losses of over £2 million. It also earned rental income on investment properties in the UK, which was not carried on through a PE, and therefore was within the charge to UK income tax on the profits from this business. The company initially made a claim in its 2009/10 return to set off its trading losses from the PE against the profits from the non-PE activities, but has now agreed with HMRC that they should have made a standalone claim for tax relief outside a return under Sch 1B TMA 1970. The First-tier Tribunal (FTT) decision relates both to HMRC’s rejection of the company’s claim for relief and penalty for late filing.
In relation to the claim for loss relief, the FTT surprisingly found that the company was indeed entitled to claim income tax relief for its trading loss against its letting income, even though a trading profit would have been chargeable to corporation tax rather than income tax. Moreover, this would mean that there would be nothing to stop the company, in principle, from also obtaining corporation tax relief in respect of the same loss. The FTT’s conclusion on this front may well be appealed by HMRC.
Regarding the penalty for late filing of the income tax return, although the company claimed the loss relief in the return, it was agreed that it should have made, and it subsequently did make, a standalone claim. The appeal taken to the FTT related to HMRC’s decision on this standalone claim. The claim is given effect in the year of loss (2010/11), so the tax liability for 2009/10 stood even though in the Tribunal’s view it subsequently fell to be repaid by virtue of the claim. The company had no reasonable excuse for failing to file on time, so the FTT held that the penalty stood.
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