A corporation tax (CT) loss can be offset against profits subject to income tax (and also profits subject to CT)

A corporation tax (CT) loss can be offset against profits subject to income tax (and also profits subject to CT)

Mon 08 Jan 2018

The Upper Tribunal (UT) has held that it is possible for a non-UK resident landlord of UK property (English Holdings (BVI) Ltd), which also had a UK PE undertaking a trade, to offset the loss of the PE’s trade (subject to corporation tax) against the profits of the non-resident landlord business (subject to income tax).  The corporation tax loss would need to be recomputed using income tax principles for this purpose.  In addition the UT held that there was nothing to prevent the use of the PE’s loss for both income tax and corporation tax purposes.  This confirms the earlier FTT decision in this case.

Although not necessary for the purposes of deciding the case, the case summary also includes an analysis of some points of EU law.  The UT held that the freedom of movement of capital did apply to UK overseas territories, and in the circumstances of this case, if the domestic legislation had prevented the use of the loss in the way claimed, it would be a restriction on the movement of capital and therefore contrary to EU law.

The UT also held that whereas the EU freedom of establishment principle might apply to the losses of the trade, and the EU freedom of movement of capital principle might apply to investment in real estate , the possible application of the establishment principle to the loss, did not preclude consideration of the movement of capital principle in relation to the real estate business. The UT did not, however, have enough evidence to conclude decisively on whether the investment met the conditions to be covered by the EU principle of freedom of movement of capital.

Implications

This case may be of particular relevance to non-UK resident businesses subject to both income tax and corporation tax. This could arise where the there is a UK PE subject to corporation tax, and another business carried on by the non-UK resident company subject to income tax.  Examples where a non-UK resident may be subject to income tax include its activities as a non-resident landlord of UK property (see SI 1995/2902 and HMRC guidance at INTM370010, although this activity will be brought within the scope of UK corporation tax from April 2020) and where there is intellectual property income subject to a miscellaneous income charge (ITTOIA 2005 s577).  There is no equivalent of the corporate group relief rules for income tax purposes, so achieving offset may be more difficult where the loss is incurred in a group entity different to the one which has the income tax liability.

For a further discussion of the UK tax implications of non-UK resident businesses undertaking business activity in the UK, please get in touch with a member of the Mazars international or corporate tax teams.

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