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Cite as: 75 Tax Cas 632, [2002] STC 997, [2002] EWCA Civ 883

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		Neutral Citation Number: [2002] EWCA Civ 883
		Case No: A3/2001/1240

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(Sir Donald Rattee)

Royal Courts of Justice
Strand,
London, WC2A 2LL

20th June 2002

B e f o r e :

LORD JUSTICE PILL
LORD JUSTICE CHADWICK
and
LORD JUSTICE CLARKE
____________________

Between:

	MEPC Holdings Ltd	Appellant
	- and -
	Crispin Taylor (HM Inspector of Taxes)	Respondent

____________________

(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)

____________________

David Goldberg QC and Barrie Atkin (instructed by Landwells) for the Appellant
Timothy Brennan QC (instructed by the Solicitor of Inland Revenue) for the Respondent
____________________

HTML VERSION OF JUDGMENT
AS APPROVED BY THE COURT
____________________

Lord Justice Chadwick:

Corporation tax is a tax on the profits of a company – see section 6(1) of the Income and Corporation Taxes Act 1988. It is assessed and charged for any accounting period of the company on the full amount of the profits arising in the period – section 12(1) of that Act. “Profits” means income and chargeable gains – section 6(4) of the Act. In computing the corporation tax chargeable for any accounting period of a company any charges on income paid by the company in the accounting period shall be allowed as deductions against the total profits for the period – section 338(1) of the Act. “Charges on income” include payments of any description mentioned in section 338(3) of the Act – see section 338(2)(a). At the time of the assessment which has given rise to this appeal – that is to say, before the new provisions for the treatment of loan relationships were enacted in the Finance Act 1996 – charges on income included interest on borrowing.

The amount to be included in respect of chargeable gains in a company’s total profits for any accounting period shall be the total amount of chargeable gains accruing to the company in the accounting period after deducting (a) any allowable losses accruing to the company in the period, and (b) so far as they have not been allowed as a deduction from chargeable gains accruing in any previous accounting period, any allowable losses previously accruing to the company while it has been within the charge to corporation tax – see section 8(1) of the Taxation of Capital Gains Act 1992.

Chapter IV in Part X of the 1988 Act contains provisions for group relief; that is to say, relief from corporation tax which is available to one company (“the claimant company”) in respect of losses and other amounts eligible for relief which have been surrendered by another company (“the surrendering company”) in the same group. In that context, companies are in the same group if they meet the condition set out in section 413(3) of the Act. Section 402 of the 1988 Act sets out the circumstances in which a claim for group relief may be made. Section 403 of the Act identifies the losses and other amounts which, if surrendered by the surrendering company, may be set off for the purposes of corporation tax against the total profits of the claimant company. They include charges on income. Section 403(7) of the 1988 Act is in these terms:

“Subject to the provisions of this Chapter and section 494(4), if in any accounting period the surrendering company has paid any amount by way of charges on income, so much of that amount as exceeds its profits of the period may be set off for the purposes of corporation tax against the total profits of the claimant company for its corresponding period.”

The appellant company, MEPC Holdings Limited, is an investment company. In its accounting period ending on 30 September 1994 it had income of £300,000; and paid an amount of £48,644,400 by way of charges on income. That amount was, I think, interest on borrowing, but nothing turns on that. The chargeable gains accruing to the company in that accounting period were £6,040,284; but “the amount to be included in respect of chargeable gains in [its] total profits for [that] accounting period” was nil. That followed from the provisions of section 8(1) of the Taxation of Capital Gains Act 1992. The amount to be included in respect of chargeable gains for the accounting period ending on 30 September 1994 was the amount of chargeable gains accruing in that period after deducting not only “(a) any allowable losses accruing to the company in [that] period”, but also “(b) any allowable losses previously accruing to the company while it has been within the charge to corporation tax” in so far as not already allowed as a deduction in any previous accounting period. And the allowable losses which had accrued to the appellant company in earlier accounting periods (and not already allowed as a deduction against chargeable gains accruing in earlier periods) were £60,583,017.

At first sight, therefore, the profits of the appellant company in the accounting period ending 30 September 1994 for the purposes of section 403(7) of the 1988 Act were £300,000 – see section 6(4)(a) of that Act. And so the amount available, under the provisions of section 403(7), for set off against the against the total profits of a claimant company for its corresponding accounting period – that is to say, an accounting period of the claimant company which fell wholly or partly within the accounting period of the appellant company ending of 30 September 1994 (see section 408(1) of the 1988 Act) – was £48,344,400; that being the amount by which the amount (£48,644,400) which the appellant company had paid by way of charges on income exceeded its profits for the period (£300,000). But that would be to ignore the direction in section 403(8) of the Act. The subsection is in these terms:

“The surrendering company’s profit of the period shall be determined for the purposes of subsection (7) above without regard to any deduction falling to be made in respect of losses or allowances of any other period, or to expenses of management deductible only by virtue of section 75(3).”

If, as the Inland Revenue contend, that direction requires that, in determining the appellant company’s profits for the purposes of section 403(7) of the 1988 Act, there shall be left out of account the deduction from the chargeable gains accruing to the appellant company in the accounting period ending 30 September 1994 (£6,040,284) which would otherwise be made, under section 8(1)(b) of the 1992 Act, in respect of allowable losses (£60,583,017) accruing in earlier accounting periods, the appellant company’s profits for the accounting period ending 30 September 1994 for the purposes of section 403(7) of the 1988 Act are £6,340,284. That is the aggregate of income (£300,000) and chargeable gains (£6,040,284) in that period if chargeable gains are to be determined without making any deduction in respect of allowable losses accruing in earlier accounting periods. And, on that basis, the amount by which the amount paid by way of charges on income (£48,644,400) exceeds the appellant company’s profits of the period ending 30 September 1994 (£6,340,284) is £42,304,116.

On 25 May 1999 the Inspector of Taxes determined that the amount available for surrender by the appellant company by way of group relief for the accounting period ending on 30 September 1994 was £42,304,116. The company appealed from that determination to the Special Commissioners. The Commissioners (Mr T H K Everett and Dr A N Brice) allowed that appeal. They held that the amount to be included in the appellant company’s profits for the accounting period ending 30 September 1994 was nil (not £6,340,284). It followed that the amount available for surrender was £48,344,284.

The Inspector appealed to the High Court. Sir Donald Rattee, sitting as an additional judge in the Chancery Division, allowed the appeal; and declared that the amount available for surrender by the company, by way of group relief, in respect of the accounting period ending 30 September 1994 was £42,304,116. The company’s appeal from the order made by the judge on 4 May 2001 is now before this Court.

The decision of the Special Commissioners

The provisions in sections 403(7) and (8) of the 1988 Act must, of course, be construed in the context of section 403 as a whole. Subsections (1), (3) and (4) of the section are in these terms:

“(1) Subject to the provisions of this Chapter, if in any accounting period the surrendering company has incurred a loss, computed as for the purposes of section 393A(1), in carrying on a trade, the amount of the loss may be set off for the purposes of corporation tax against the total profits of the claimant company for its corresponding accounting period.

(2) ...

(3) Subject to the provisions of this Chapter, if for any accounting period any capital allowances fall to be made to the surrendering company which –

(a) are to be given by discharge or repayment of tax, and

(b) are to be available primarily against a specified class of income,

so much of the amount of those allowances (exclusive of any carried forward from an earlier period) as exceeds its income of the relevant class arising in that accounting period (before deduction of any losses of any other period or of any capital allowances) may be set off for the purposes of corporation tax against the total profits of the claimant company for its corresponding accounting period.

(4) Subject to the provisions of this Chapter, if for any accounting period the surrendering company (being an investment company) may under subsection (1) of section 75 deduct as expenses of management any amount disbursed for that accounting period, so much of that amount (exclusive of any amount deductible only by virtue of subsection (3) of that section) as exceeds the company’s profits for that accounting period may be set off for the purposes of corporation tax against the total profits of the claimant company (whether an investment company or not) for its corresponding accounting period.”

The Special Commissioners reached the conclusion which they did because they were persuaded that the words “losses” and “allowances” in the phrase “losses or allowances” in section 403(8) meant, and meant only, the “losses” referred to in section 403(1) and the “allowances” referred to in section 403(3) - that is to say, trading losses and capital allowances – so that that phrase did not include allowable losses which fell to be deducted under section 8(1) of the 1992 Act in determining the amount to be included in respect of chargeable gains in company’s total profits for the relevant accounting period. In particular, the expression “losses or allowances of any other period” in section 403(8) of the 1988 Act did not include “allowable losses previously accruing to the company” which fell to be deducted under section 8(1)(b) of the 1992 Act.

The decision in the High Court

The judge recognised that the “losses” referred to in section 403(1) of the 1988 Act, and the “allowances” referred to in section 403(3) of that Act, were losses and allowances which, themselves, could be the subject matter of a surrender; and that the “allowable losses” referred to in section 8(1) of the 1992 Act could not be surrendered. “Allowable losses” could be used only as a deduction from gains. But he was not persuaded that:

“... there is any rational justification for [the appellant company’s] contention that the policy of section 403(8) is to prevent a surrendering company’s surrender being increased in one accounting period by losses or allowances of a previous period of a type that could have been [but were not] surrendered in such earlier period.”

He preferred the Revenue’s argument that the policy of section 403(8) of the 1988 Act was to prevent the amount available for surrender being increased by taking account of losses of whatever nature incurred in an earlier period “when in particular the company surrendering them may not even have been a member of the relevant group.” But he founded his decision on what he regarded as the plain and obvious meaning of the words “any deduction falling to be made” which appear in section 403(8). As he put it:

“In my judgment the natural meaning of the words is: any deduction that would, apart from this subsection, fall to be made in the process of determining the surrendering company’s profits.”

and

“... [the] ordinary and natural meaning [of the words] ( is that, in computing the profits of the surrendering company for the purposes of section 403(7), no regard should be had to any deduction of any loss, including allowable loss, that would otherwise fall to be made in the course of computing those profits. In my judgment this means that no deduction can be made from a company’s chargeable gains in respect of allowable losses of a previous period.”

The submissions on this appeal

The Revenue submit that the judge was correct for the reasons that he gave. The language of section 403(8) of the 1988 Act is clear and unambiguous. Effect must be given to it.

It is pointed out that, whatever meaning is given to the phrase “losses or allowances” in section 403(8) of the 1988 Act, the effect of that section is that the relief from tax provided by group relief will not, or not necessarily, have the result that no more tax will be payable than would have been payable if the activities carried on by the group had been carried on by a single company. That is because section 403(8) plainly does prevent the deduction from the surrendering company’s profits (for the purposes of section 403(7)) of some losses and allowances which would otherwise be deductible. So, it is said, the assumption which underlies the appellant company’s approach to the group relief provisions – that those provisions are seeking to achieve, for a group taken as a whole, the same results as would be achieved if all the activities of the group were carried on in a single company – is not well founded. It is not the purpose of those provisions that a group should be treated for the purposes of corporation tax as if it were a single company. Group relief is deliberately restricted to losses and other amounts of the particular accounting period. If that were not so, the reliefs which could be surrendered for the purposes of group relief would be treated more generously in the hands of the claimant company than they would be in the hands of the surrendering company. A further indication of the intention to restrict group relief to the losses and other amounts of a particular accounting period is to be found in the anti-avoidance rules enacted in section 410 and section 413(7) and (8) of the 1988 Act and in schedule 18 to that Act. It is said that those rules are all directed to ensuring that the surrendering company and the claimant company are, truly, in the same group in the relevant accounting period. They are not aimed – as they would need to be if losses and other amounts carried forward or carried back from other accounting periods could be surrendered – at ensuring that the surrendering company and the claimant company were members of the same group in those other accounting periods also.

The appellant company advances two principal submissions. The first is that allowable losses are not a “deduction falling to be made” in the determination of “the surrendering company’s profits of the period”; and so allowable losses of a previous period are not a deduction which section 403(8) of the 1988 Act requires to be disregarded. As it is put in paragraph 11 of the skeleton argument prepared for use on this appeal:

“Allowable losses are not deducted from profits and they are not deducted in determining profits, but at an earlier stage of the process, the stage of working out net chargeable gains so that the deduction of allowable losses is not a deduction of the kind referred to in section 403(8).”

It is said, correctly, that section 403(8) does not specify when, or from what, the deduction “falling to be made” does fall to be made. It is said, also correctly, that the deduction must be a deduction “falling to be made” in the determination of the surrendering company’s “profits of the period”. And that, it is said, requires that the deduction must be a deduction “from the profits of the period” – that is to say, a deduction made “once profits of the period have been established”.

The second submission made on behalf of the appellant company is that allowable capital losses are not within the phrase “losses or allowances” in section 403(8) of the 1988 Act. As I have said, that submission was accepted by the Special Commissioners.

Whether allowable losses are a deduction falling to be made in the determination of profits?

For my part, I would accept that if the only deductions which section 403(8) of the 1988 Act requires to be disregarded were deductions falling to be made “from the profits of the period” – or “once profits of the period have been established” – then there would be much force in the contention that a deduction of allowable losses made for the purpose of determining “the amount to be included in respect of chargeable gains in a company’s total profits” for the relevant accounting period (as required by section 8(1) of the 1992 Act) was not a deduction “from the profits of the period” and so was not a deduction within the scope of section 403(8). But I am unable to accept the premise. I can see no reason why section 403(8) of the 1988 Act should be read as if the only deductions within its scope were deductions falling to be made “from the profits of the period” or “once profits for the period have been established”.

In my view the plain meaning and effect of the direction that the surrendering company’s profits of the period “shall be determined ( without regard to any deduction falling to be made” is that what is to be disregarded is a deduction which would otherwise fall to be made in determining the profits of the period. The answer to the question “from what do deductions fall to be made?” is “from whatever, under the relevant legislative provision, deductions do fall to be made in determining the profits of the period.” An allowable capital loss is, plainly, a deduction which falls to be made in determining the profits of the period – see section 6(4)(a) of the 1988 Act and section 8(1) of the 1992 Act. So, if an allowable loss is within the phrase “losses or allowances” for the purposes of section 403(8) of the 1988 Act, then – as it seems to me – it must follow that allowable losses “previously accruing to the company” within section 8(1)(b) of the 1992 Act are losses which section 403(8) of the 1988 Act requires to be disregarded.

The point made in paragraph 11 of the appellant company’s skeleton argument – which I have already set out – is re-iterated and expanded in paragraph 67, and in paragraphs 69 to 72. At the risk of repetition, but in order to avoid the risk of appearing to have approached the point with less deliberation than it is thought to deserve, I think it appropriate to set out those paragraphs also:

“67. The deduction of allowable losses is made in computing a sum of chargeable gains to be brought into the computation of profits: it is not made in computing or determining profits but at an earlier and distinct stage of the process. The profit [in this case] is never more than £300,000.

68. ...

69. The Company’s first submission is thus that what comes into the computation of the Company’s profits in respect of chargeable gains and into the profits themselves is a net figure of gains less allowable losses so that, where there are brought forward allowable losses, no deduction is made from, or in computing or determining, profits at all.

70. The point is that there is a difference between the determination of the chargeable gains to be brought into profits and profits: allowable losses are deducted from chargeable gains before the computation or determination of profit begins; they are not deducted from or in computing or determining profits at all.

71. Thus, where, as in this case, the allowable losses carried forward exceed the chargeable gain for the period, no figure for chargeable gains comes into the computation of profits at all.

72. It is not a case of something (a gain) coming in and something else (an allowable loss) then being deducted: it is a case of nothing at all being brought in, in the first place, into the profits or the computation of profits in respect of chargeable gains”

The point can, I think, be analysed schematically. “Profits” (P) means income (I) and chargeable gains (G) – section 6(4)(a) of the 1988 Act. The amount to be included as chargeable gains (G) in the formula P = I + G is the total amount of chargeable gains accruing to the company in the accounting period (G¹) after deducting (a) any allowable losses accruing to the company in the period (L¹) and (b) any previous unused allowable losses (L²) – section 8(1) of the 1992 Act. So G = G¹ – (L¹ + L²). But G cannot be less than nil; it can never be a negative amount. So it is not apt to treat the formula for computing profits as if it were P = I + G¹ – (L¹ + L²). It follows that L² cannot be treated as a deduction in computing or determining profits.

I accept that analysis, so far as it goes. But I do not accept the conclusion to which it is said to lead. The analysis is less than complete. A more complete analysis would recognise that, because G cannot be a negative amount, the relevant formula is not G = G¹ – (L¹ + L²). The relevant formula is G = G¹– L; where L is whichever is the less of G¹ and (L¹+ L²). The amount to be deducted in respect of allowable losses under section 8(1) of the 1992 Act is not – or not necessarily – the whole of the allowable losses accruing or previously accruing to the company; the amount to be deducted (L) is only so much of the whole of the allowable losses accruing or previously accruing (L¹ + L²) as does not exceed the total amount of chargeable gains accruing in the relevant accounting period (G¹). So, although it is not apt to treat the formula for computing profits as P = I + G¹ - (L¹ + L²), the more complete formula P = I + G¹ – L (where L is whichever is the less of G¹ and (L¹ + L²)) is valid.

The question, under this head of the appellant company’s submissions, is whether the deduction from the total amount of chargeable gains accruing in the relevant accounting period of allowable losses can properly be regarded as “any deduction falling to be made in respect of losses” in determining the surrendering company’s profits of the relevant accounting period. Subject to the distinct question whether allowable losses are “losses” in that context (to which I now turn), I would answer that first question in the affirmative.

Whether “losses or allowances” excludes allowable losses?

It is said that, while “losses” and “allowances” – at least in the sense of “trading losses” and “capital allowances” - are well recognised concepts in the context of computing the “income” element of “profits” for the purposes of corporation tax, those concepts have no place in the context of computing the “chargeable gains” element. At first sight that is a surprising submission, given that section 8(1) of the 1992 Act requires the deduction of allowable “losses” in the computation of the amount to be included in respect of chargeable gains in a company’s total profits. But that, it is said, is to be explained by the fact that “allowable losses” has a special meaning in relation to the computation of chargeable gains; that a “finding that an allowable loss exists is just the result of making a computation: the computation may be made using actual or notional disposal proceeds and actual or notional base costs and the result, if an allowable loss, may not be something which can properly be described as a loss at all” – see paragraph 89 of the appellant company’s skeleton argument.

Section 288(1) of the 1992 Act requires that “allowable loss” shall be construed in accordance with sections 8(2) and 16 of that Act. Section 8(2) provides that, for the purposes of corporation tax in respect of chargeable gains, “allowable loss” does not include a loss accruing to a company in such circumstances that if a gain accrued the company would be exempt from corporation tax in respect of it. Section 16(1) of the Act sets out the general rule that the amount of a loss accruing on the disposal of an asset shall be computed in the same way as the amount of a gain is computed. Section 16(2) is in these terms:

“Except as otherwise expressly provided, all the provisions of this Act which distinguish gains which are chargeable gains from those which are not, or which make part of a gain a chargeable gain, and part not, shall apply also to distinguish allowable losses from those which are not, and to make part of a loss an allowable loss, and part not; and references in this Act to an allowable loss shall be construed accordingly.”

Sections 16(3) and (4) of the 1992 Act identify particular cases in which losses accruing on the disposal of assets shall not be allowable assets.

The 1992 Act prescribes how the amount of a loss accruing on the disposal of an asset shall be computed; and distinguishes between losses which are allowable and those which are not. It seems to me reasonably plain that Parliament had in mind that, on the disposal of an asset, there would ordinarily be either a gain or a loss; intended that the amount of that gain or loss would be computed in a way which (in general) equated the transaction with a disposal at market value, but which allowed for inflation through indexation; and intended, further, that most (but not all) losses would be allowable against chargeable gains for the purpose of taxation. I accept, of course, that the effect of indexation – or “re-basing” under section 35(2) of the 1992 Act – may lead, in some circumstances, to a situation in which, although the monetary consideration received on the disposal of an asset is greater than the monetary consideration paid on the acquisition of that asset, there will be a “loss” for the purposes of section 16(1) of the Act. But that arises from the requirements in Part II of the Act as to the computation of gains and losses; it has nothing to do with the separate question whether the “loss” is an “allowable loss” for the purposes of the Act. And I find nothing artificial or notional in the concept that a loss has been suffered in circumstances where, although the monetary consideration received on disposal is greater than the monetary value paid on acquisition, the change in the value of money (as a result of inflation) has been such that the real value of the consideration received on disposal is less than the real value of the consideration paid on acquisition. I find no support in the legislation, or in the authorities to which we were referred, for the proposition that an allowable loss is not properly to be regarded as a loss at all; but rather as nothing more than the product of a computation made on an artificial or notional basis. In particular, I find no support in the 1992 Act for the proposition that Parliament intended that a loss which was an allowable loss under the provisions in sections 8 and 16 of that Act could not or would not be a loss for the purposes of section 403(8) of the 1988 Act.

That does not, of course, lead to the conclusion that a loss which is an allowable loss for the purposes of the 1992 Act must be a loss within the phrase “losses or allowances” in section 403(8) of the 1988 Act. It leads only to the conclusion that it may be. Whether or not a loss which is an allowable loss for the purposes of the 1992 Act is within the phrase “losses or allowances” in section 403(8) of the 1988 Act turns on the true construction of that subsection in the context of section 403 as a whole and the related provisions in Chapter IV of Part X of the Act.

The appellant company relies on the requirement in section 409(3) of the 1988 Act that:

“Where the one company is the surrendering company and the other company is the claimant company –(a) references in section 403 to accounting periods, to profits, and to losses, allowances, expenses of management or charges on income of the surrendering company shall be construed in accordance with subsection (2) above.”

Section 409 of the 1988 Act is directed to the position where a company joins or leaves a group. The basic rule is set out in section 409(1): group relief shall be given if, and only if, the surrendering company and the claimant company are members of the same group throughout the whole of the surrendering company’s accounting period to which the claim for group relief relates and throughout the whole of the corresponding accounting period of the claimant company. Section 409(2) is in these terms, so far as material:

“Where on any occasion two companies become or cease to be members of the same group, then, for the purposes specified in subsection (3) below, it shall be assumed as respects each company that -

(a) on that occasion (unless a true accounting period of the company begins or ends then) an accounting period of the company ends and a new one begins, the new accounting period to end with the end of the true accounting period (unless before then there is a further break under this subsection); and

(b) the losses or other amounts of the true accounting period are apportioned to the component accounting periods; and

(c) ...

and an apportionment under this subsection shall be on a time basis according to the respective lengths of the component accounting periods...”

The effect of section 409(2) of the 1988 Act, read in conjunction with section 409(3), is that, where on any occasion (the “break”) two companies become or cease to be members of the same group, and the one company is the surrendering company and the other company is the claimant company, section 403 has to be read as if (i) an accounting period of each company ends (and a new accounting period begins) on the break and (ii) the profits of each company of the true accounting period, and the losses, allowances, expenses of management or charges on income of the surrendering company of its true accounting period, are apportioned to the component accounting periods which arise on the break. So, in such a case, the loss incurred by the surrendering company in carrying on a trade (in the context of section 403(1) of the Act) is the amount treated as the loss incurred in the component accounting period – that is to say, the time-based proportion of the trading loss incurred by the surrendering company in its true accounting period. The capital allowances falling to be made to the surrendering company (in the context of section 403(3)) are the allowances treated as falling to be made in the component accounting period. And the expenses of management deductible by a surrendering company (being an investment company) under section 75(1) of the Act and the company’s profits (in the context of section 403(4)) are the expenses of management and the profits treated as such in respect of the component accounting period.

In particular, the amount paid by the surrendering company by way of charges on income, for the purposes of section 403(7) of the Act, is the amount treated as paid in the component accounting period – that is to say, a proportion of the amount actually paid in the true accounting period – and (in the same context) the amount of the profits of the surrendering company “of the period” is the amount treated as the profits of the component period – that is to say, a proportion of the profits of the true accounting period. But the apportionment directed by section 409(2) has no direct application to section 403(8) of the Act. Section 403(8) prescribes how “the surrendering company’s profits of the period” are to be determined for the purposes of section 403(7). The methodology, in a case to which section 409(2) applies, is to determine the surrendering company’s profits for its true accounting period – having regard to the requirement in section 403(8) that deductions to be made in respect of losses or allowances in respect of any other period are to be left out of account – and then to treat a time-based proportion of the profits so determined as the profits of the component accounting period for the purposes of section 403(7) of the Act.

It follows, in my view, that section 409 of the Act – and, in particular, section 409(3) – throws no light on the meaning of the phrase “losses or allowances” in section 403(8). I accept that the “losses” and “allowances” referred to in section 409(3) of the Act are trading losses (within section 403(1)) and capital allowances (within section 403(3)); but that is because losses and allowances within sections 403(1) and 403(3) are the only losses and allowances to which section 409(2) can apply. There is no occasion for any separate apportionment of the “losses or allowances” to which section 403(8) refers; the relevant apportionment in a case to which section 408(3) applies is an apportionment of “charges on income” and “profits of the period” in the context of section 403(7). I agree with the judge that, although the references in section 409(3)(a) to losses, allowances, expenses of management or charges on income are to losses and other amounts which could be surrendered under subsections (1), (3), (4) or (7) of section 403 of the Act (and so could not include allowable losses, which cannot be surrendered), it does not follow that, in the different context of subsection (8), “losses or allowances” means only losses or allowances that can be the subject matter of a surrender under those earlier subsections.

The Special Commissioners expressed themselves “at a loss to understand” how the words “losses or allowances” in section 403(8) could have a different meaning from the same words “losses, allowances, (” in section 409(3)(a) of the Act. The reason why the words may have a different meaning, as it seems to me, is that each phrase must be construed in its own context; and the context in which section 403(8) falls to be construed is not that to which section 409 of the Act is directed. And to hold, as the Special Commissioners did, that the phrase “losses or allowances” in section 403(8) – or in section 403(5) - must be confined to trading losses (within section 403(1)) and capital allowances (within section 403(3)) is to ignore Case VI losses allowable under section 396(1) of the Act. I can see no reason – and none has been advanced (save that it was suggested that Parliament had overlooked the point) - why “losses”, in the context of the restriction on group relief which section 403(5) and section 403(8) are plainly intended to impose, should not include Case VI losses – which are subject to a carry forward provision but which cannot themselves be surrendered by way of group relief.

I turn, therefore, to consider the structure of section 403 of the 1988 Act in order to see whether there is some identifiable policy which emerges from the section as a whole and which should be given effect in the interpretation of the phrase “losses or allowances” in section 403(8).

Section 403(1) of the Act provides for the surrender of a trading loss incurred by the surrendering company in any accounting period; and for the set off of that loss against the total profits of the claimant company for its corresponding accounting period. It is, I think, pertinent to note that the subsection does not allow the claimant company to set off against its profits in one accounting period a trading loss incurred by the surrendering company in a non-corresponding accounting period. That is in contrast with the position under section 393 of the Act in relation to the set off of trading losses incurred by the claimant company itself in earlier accounting periods against profits of subsequent accounting periods (carry forward); and, under section 393A, in relation to the set off of trading losses incurred by the claimant company in later accounting periods against profits of earlier accounting periods (carry back).

Section 403(3) of the Act provides for the surrender of so much of the amount of any capital allowances falling to be made to the surrendering company for any accounting period “(exclusive of any carried forward from an earlier period)”as exceeds its income of the relevant class arising in that accounting period “(before deduction of any losses of any other period or of any capital allowances)”; and for the set off of that amount against the total profits of the claimant company for its corresponding accounting period. Again, it is pertinent to note that, in contrast to the position where capital allowances fall to be made to the claimant company itself – as to which see section 145 of the Capital Allowances Act 1990 – there is no carry forward or carry back of capital allowances which are surrendered. Further, the amount of the capital allowances which can be surrendered is restricted to the excess over the surrendering company’s income of the relevant class before deduction of (i) any losses of any other period or (ii) any capital allowances – that is to say, capital allowances carried forward or carried back from any other period.

Section 403(4) of the Act must be read in conjunction with section 403(5) and with section 75. Section 75 provides, so far as material:

“(1) In computing for the purposes of corporation tax the total profits for any accounting period of an investment company resident in the United Kingdom there shall be deducted any sums disbursed as expenses of management (including commissions) for that period, except any such expenses as are deductible in computing profits apart form this section.

(2) ...

(3) Where in any accounting period of an investment company the expenses of management deductible under section (1) above, together with any charges on income paid in the accounting period wholly and exclusively for purposes of the company’s business, exceed the amount of the profits from which they are deductible –

(a) the excess shall be carried forward to the succeeding accounting period; and

(b) the amount so carried forward to the succeeding accounting period shall be treated for the purposes of this section, including any further application of this subsection, as if it had been disbursed as expenses of management for that accounting period (”

Section 403(4) provides that any amount which the surrendering company could deduct as expenses of management disbursed in an accounting period “exclusive of any amount deductible only by virtue of [section 75(3)]” as exceed the surrendering company’s profits for that period may be set off against the total profits of the claimant company (whether or not itself an investment company) for its corresponding period. It is to be noted that the carry forward provision in relation to expenses, contained in section 75(3), takes effect by treating the amount of the expenses carried forward as if they had been disbursed in the succeeding accounting period to which they have been carried forward. The words in parenthesis – “exclusive of any amount deductible only by virtue of [section 75(3)]” – have the effect of preventing expenses of management disbursed by the surrendering company in earlier accounting periods from being set off by the claimant company in a non-corresponding accounting period.

Section 403(5) of the 1988 Act is in terms which reflect those in section 403(8):

“The surrendering company’s profits of the period shall be determined for the purposes of subsection (4) above without any deduction under section 75 and without regard to any deduction falling to be made in respect of losses or allowances of any other period.”

The effect of section 403(5) is that not only are the expenses of management which may be surrendered restricted to those disbursed in the corresponding period (section 403(4)) but, in computing the amount which may be surrendered – that is to say, the amount by which expenses of management disbursed in the relevant accounting period exceeds the surrendering company’s profits of that period – the profits of the period must be determined without regard to expenses of management disbursed in earlier periods; and without regard to “any deduction falling to be made in respect of losses or allowances of any other period”. Plainly, the question which arises in the present case could equally arise in relation to a computation of profits for the purposes of section 403(5).

The common thread which runs through the provisions of section 403 to which I have referred is the restriction of what may be set off by the claimant company in its relevant accounting period to losses, allowances or expenses of management which have been incurred, fallen to be made or been disbursed by the surrendering company in its corresponding accounting period. Losses, allowances or expenses of management which have been incurred, fallen to be made or been disbursed in a non-corresponding accounting period cannot be surrendered or set off either directly or by being taken into account in the determination of the income of the surrendering company (for the purposes of subsection (3)) or in the determination of its profits (subsection (5)). In so far as it is possible to identify a policy which underlies those provisions, it is to restrict group relief to the particular accounting period. It may well be that the reason for that restriction is - as the Revenue suggest – the difficulty of formulating satisfactory anti-avoidance provisions to cover carry forward and carry back relief which could be allowed to the surrendering company in respect of an accounting period during no part of which the claimant company was a member of the group.

Be that as it may, the common thread persists in sections 403(7) and 403(8) of the Act. It was unnecessary to go further, in section 403(7), than to restrict the amount paid by way of charges on income to the amount paid in the corresponding accounting period; because section 338 of the 1988 Act – which gives the relief – contains no provision for carry forward or carry back. But the restriction, in section 403(8), in relation to the determination of the surrendering company’s profits, is consistent with the earlier provisions in section 403. In particular, the requirement that no regard shall be had to “expenses of management deductible only by virtue of section 75(3)” has the effect of excluding expenses of management disbursed in any earlier accounting period from the determination of the surrendering company’s profits for the relevant period in the same way as in section 403(5).

I find nothing in the structure of section 403 of the 1988 Act, taken as a whole, which suggests that the phrase “losses or allowances” in subsection (8) – or the same phrase in subsection (5) – is to be given a meaning which excludes allowable losses for the purposes of the 1992 Act. Indeed, there is, I think, some indication to the contrary. Section 403(3) provides for a special determination of the surrendering company’s “income of the relevant class”. That has to be determined before the deduction of “any losses of any other period or of any capital allowances”. It is plain that, in that context, “losses of any other period” cannot include allowable losses – because allowable losses have no part in the determination of “income of the relevant class”. It is equally plain that, in that context, “allowances” are “capital allowances” – the subsection so provides. But Parliament has not chosen, in subsections (5) and (8) of section 403, to provide, as it easily could have done, that in determining the surrendering company’s profits of the period “its income shall be determined without regard to any losses or capital allowances of any other period”. It has used the more general expression “its profits shall be determined ( without regard to any deduction falling to be made in respect of losses or allowances of any other period”. And it must be taken to have done so in the knowledge that, in the determination of profits it is necessary to include chargeable gains; and that in determining chargeable gains it is necessary to deduct allowable losses.

Conclusion

It follows that I can see no reason why the phrase “losses or allowances” in section 403(8) of the 1988 Act should be given a meaning which excludes allowable losses; and no reason why it should be held (in the context of that section) that allowable losses are not losses which fall to be deducted in determining the surrendering company’s profits of the relevant accounting period. In my view the judge was right to reach the conclusion which he did.

I would dismiss this appeal.

Lord Justice Clarke:

I agree.

Lord Justice Pill:

This appeal turns upon the construction of section 403, subsections (7) and (8) of the Income and Corporation Taxes Act 1988 (“the 1988 Act”). The subsections must of course be construed in the context of the section as a whole and with an acknowledgement that it is a part of a complex scheme of revenue control. The subsections provide:

“(7) Subject to the provisions of this Chapter and section 494(4), if in any accounting period the surrendering company has paid any amount by way of charges on income, so much of that amount as exceeds its profits of the period may be set off for the purposes of corporation tax against the total profits of the claimant company for its corresponding accounting period.

(8) The surrendering company’s profit of the period shall be determined for the purposes of subsection (7) above without regard to any deduction falling to be made in respect of losses or allowances of any other period, or to expenses of management deductible only by virtue of section 75(3).”

I gratefully adopt Chadwick LJ’s recital of the facts.

I make two general observation before posing the two questions raised by the appellant company. I too approach the questions of statutory construction which arise on the basis that it cannot be assumed that the relevant provisions are seeking to achieve the same results for a group of companies as would occur if all the activities of the group were carried on by a single company. There is nothing surprising about a scheme which provides group relief, that is a reduction in the tax disadvantages which would otherwise occur when a business operates through a group of companies rather than a single company, but provides it only on a restricted basis. A restriction of group relief to the losses and other amounts of the relevant accounting period safeguards the Revenue against arrangements between companies (not the present case) being made with the object of carried forward losses being surrendered as group relief by a set-off against the profits of the claimant company,

I also agree with Chadwick LJ that there is in section 403 of the 1988 Act a common thread that what may be set off by the claimant company in its relevant accounting period is restricted to amounts in the corresponding accounting period of the surrendering company.

The first question raised by the appellant company is whether, within the terms of section 403(8), a “deduction” has been made in respect of “any other period”. It is forcefully argued by Mr Goldberg QC on behalf of the company that what is included in the computation of the profits of a company which has chargeable gains and current or past allowable losses is not a gross figure of gains from which allowable losses are then deducted but a net figure, being the sum of chargeable gains net of allowable losses. The Taxation of Chargeable Gains Act 1992 (“the 1992 Act”), section 8(1), provides, insofar as is material:

“...the amount to be included in respect of chargeable gains in a company’s total profits for any accounting period shall be the total amount of chargeable gains accruing to the company in the accounting period after deducting...

(a) any allowable losses...”

There are two stages, it is submitted. First, net chargeable gains are calculated. That involves a deduction of allowable losses. Only then does the calculation of profits begin. The gain in this case never features as profit because the allowable losses brought forward exceed the chargeable gain. No “deduction” falls to be made in respect of another period within the meaning of subsection (8) because the chargeable gain is not a part of the “profits of the period” under subsection (7).

Moreover, “deduction” in subsection (8), it is submitted, must mean a deduction from something and linguistically can mean only a deduction from the “surrendering company’s profits of the period”, the entity identified in the opening words of the subsection. In the absence of profits, there can be no deduction.

Save as a general illustration of how corporation tax operates, reliance on section 8(1) of the 1992 Act is in my judgment misplaced. As Mr Brennan QC for the respondents points out, section 8(3) of the Act provides that capital gains tax principles are to be applied to the calculation of chargeable gains for corporation tax purposes except as otherwise provided by any other provision of the Corporation Tax Acts, which include the 1988 Act. He submits that section 403(8) of the 1988 Act does otherwise provide.

Subsections (7) and (8) of section 403 of the 1988 Act must plainly be read together. Subsection (8) provides expressly the way in which the profits identified in subsection (7) are to be determined. They are to be determined without regard to any deduction falling to be made in respect of any period other than the accounting period for which the claimant company is making the claim.

In my judgment section 403(8) does provide specifically and comprehensively the manner in which the surrendering company’s profits shall be determined. They shall be determined without regard to any deduction falling to be made in respect of losses of any other period. I acknowledge the argument that the expression “falling to be made” in the subsection does create the possibility of losses which are not deductible but in my judgment the intention and effect of the subsection is to prevent losses of any other period being taken into account in determining profits of the period. I cannot accept the two stage process advocated on behalf of the appellant company. Subject to deciding what are to be included in the “losses” contemplated in the subsection, the judge’s conclusion on the first question was in my view correct.

The second question raised by the appellant company is whether, if a deduction has been made in this case in respect of another period, it was a deduction of “losses or allowances” within the meaning of section 403(8). It is submitted that while the expression includes trading losses and capital allowances taken into account in computing income or profits (as in section 409(3)(a) of the 1988 Act) it does not include allowable losses which may be set only against chargeable gains.

Section 409 of the 1988 Act makes the detailed provision to be expected in a scheme for group relief to cover the situation in which a company joins or leaves a group and to provide for the apportionment of group relief. I agree with Chadwick LJ, for the reasons he gives, that the section throws no light on the meaning of the expression “losses or allowances” in section 403(8). Secondly, I agree that there is no justification for limiting the expression “losses or allowances” in the subsection to the trading losses identified in a specific context in section 403(1) and the capital allowances identified in section 403(3). Had such a limitation or qualification been intended, subsection (8) could and would have included the simple wording necessary to achieve that result.

Section 403(8) of the Act has the specific purpose of limiting the right to set-off conferred by section 403(7). It does so by the use of the words “losses or allowances”. Those words have, and were in context intended to have, a broad and general meaning. I see no justification for excluding allowable losses.

In this context I do not consider that a narrow or technical construction of subsection (8) was intended. Just as profits are to be determined in a manner which gives full effect to the words “without regard to any deductions ( of any other period” (the first question) so full effect is to be given to the word “losses” so as to include allowable losses (the second question).

I agree that the appeal should be dismissed.

Order: Appeal dismissed; appellant do pay the respondent’s costs; such costs agreed in the sum of £6,000; application for permission to appeal to the House of Lords to be considered and to be given in writing.

(Order does not form part of the approved judgment)