Taylor (Her Majesty's Inspector of Taxes) (Respondent) v. MEPC Holdings Limited (Appellants)

When calculating surrenderable charges on income under section 403(8) of the Income and Corporation Taxes Act 1988, allowable capital losses brought forward from an earlier period remain part of the primary computation of chargeable gains. They are not deductions in respect of losses which must be disregarded.

The deductions excluded by section 403(8) are reliefs made from what would otherwise be profits. Allowable capital losses instead determine the amount of chargeable gains forming one component of profits. This construction accords with the policy and language of the subsection and with the separation between the income and chargeable-gains elements of corporation tax.

MEPC Holdings Ltd had income profits of £300,000 and charges on income exceeding £48 million. It sought to surrender the surplus charges to other companies in its group as group relief. Although property disposals produced gains exceeding £6 million, allowable capital losses brought forward under section 8(1)(b) of the Taxation of Chargeable Gains Act 1992 reduced the chargeable-gains component of its profits to nil.

The Special Commissioners accepted MEPC's calculation. Rattee J reversed that decision in [2002] STC 430, and the Court of Appeal dismissed MEPC's appeal in [2002] EWCA Civ 883; [2002] STC 997. The central issue was whether section 403(8) of the Income and Corporation Taxes Act 1988 required brought-forward allowable capital losses to be disregarded when determining the profits against which charges on income were measured.

1. Appeal allowed unanimously. Lord Hoffmann delivered the leading speech. Lord Nicholls, Lord Slynn, Lord Millett and Lord Walker agreed with his reasons. The decision of the Special Commissioners was restored.

2. Per Lord Hoffmann, allowable capital losses deducted under section 8(1) of the Taxation of Chargeable Gains Act 1992 form part of the primary calculation of the chargeable gains brought into charge. The tax is imposed on the balance of a running account of gains and allowable losses, including losses from earlier accounting periods. That deduction is not a relief from an amount which would otherwise be taxable.

3. Per Lord Hoffmann, section 403(8) of the Income and Corporation Taxes Act 1988 requires specified reliefs relating to other periods to be left out when calculating the profits against which charges on income are measured. Its purpose is to prevent reliefs carried forward from earlier periods, such as trading-loss relief, capital allowances and management expenses, from artificially increasing the excess charges available for surrender.

4. The natural meaning of a deduction “in respect of losses or allowances” is a deduction which legislation makes from what would otherwise be profits. Allowable capital losses are different: they are deducted when computing chargeable gains, which are themselves only one component of profits. The separate wording used for management expenses reinforced that distinction.

5. Per Lord Hoffmann, group relief under section 403 concerns reliefs operating against the income element of corporation-tax profits. The computation of chargeable gains is separate. It would be anomalous for the limitation upon surrenderable group relief to operate by reversing a deduction made within that distinct computation.

6. Accordingly, “losses” in section 403(8) does not include allowable capital losses brought forward under section 8(1)(b) of the 1992 Act. MEPC's construction was correct, and its brought-forward allowable losses remained effective when calculating its profits for section 403(7).

1. House of Lords: In [2003] UKHL 70, unanimously allowed MEPC's appeal and restored the Special Commissioners' decision.
2. Court of Appeal: Pill, Chadwick and Clarke LJJ accepted the Revenue's construction and upheld Rattee J's decision: [2002] EWCA Civ 883; [2002] STC 997.
3. High Court: Rattee J reversed the Special Commissioners: [2002] STC 430.
4. Special Commissioners: Accepted MEPC's construction of section 403(8) of the Income and Corporation Taxes Act 1988.