The UT held that a company was entitled to claim income tax relief for its PE’s trading losses against its non-PE letting income.
The Upper Tribunal (UT) has agreed with the decision of the First-tier Tribunal (FTT) that a non-UK resident company was entitled to claim income tax relief for trading losses generated by its UK permanent establishment (PE) against letting income from its UK property rental business, even though any trading profit made by the PE would have been chargeable to corporation tax rather than income tax.
The UT agreed with the FTT that section 3 CTA 2009 only disapplied the parts of the Income Tax Acts that related to income tax on ‘profits’, which therefore could not also apply to losses. Further, the purpose of section 47 of CTA 2009 was simply to make it clear that the rules in that and later chapters of the legislation should be used to calculate the losses, and this said nothing about the provisions governing the use of the loss once it has been calculated.
The UT also rejected HMRC’s purposive construction arguments that Parliament had intended the corporate and income tax regimes to operate fully independently of each other, finding that there was no general principle which would demand the scope of application of the separate taxes to be mutually exclusive. There was also no clear reason why Parliament should have intended to prevent a company in the anomalous position of having two businesses, one subject to income tax and one subject to corporation tax, from being able to set a corporation tax loss off against general income.
Despite finding for the company on the domestic law points, the UT also considered at length whether HMRC’s interpretation of the legislation would have breached EU rules on free movement of capital, and found that it would have done so. In this connection the Tribunal held that a Council Decision on the status of overseas countries and territories did not override the treaty provisions on free movement of capital and that property giving rise to letting income was not automatically to be regarded as a direct investment for the purposes of the treaty.
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