The First-tier Tribunal have held in the case of Bloomsbury Verlag GmbH v HMRC  UKFTT 660 (14 December 2015) that the four year time limit does not apply to corporation tax self-assessment returns and that trading losses can be carried forward despite not being included in a return because they are part of the calculation of taxable profits in the return of a subsequent year.
In this case, a German incorporated company became resident in the UK for CT purposes in 2003 but did not notify its chargeability until 31 March 2010, more than five years later. The company prepared returns identifying losses for 2003 and 2004 and taxable profits for 2005 and 2007 but HMRC only issued notices for 2004 onwards and did not include 2003. The company however filed returns for 2003-2009 inclusive within the time limit and the computations submitted offset losses in 2003 and 2004 against taxable profits in 2005 and 2007.
HMRC initially rejected the returns for 2003, 2004 and 2005 and opened an enquiry into 2007. While not disputing the quantum of losses, they took the view that the company had not established its entitlement to the trading losses as required by FA 1998, Schedule 18 and that they therefore did not “exist” to be carried forward. The returns for 2003, 2004 and 2005 were out of time and therefore invalid given the four year time limit in paragraph 46 of Schedule 18.
The company appealed on the basis the carry-forward of its 2003 and 2004 losses should have been automatically offset against the 2005 and 2007 periods to reduce taxable profits to nil.
The FTT invited written submissions from both parties following the Upper Tribunal decision in R (Higgs) v HMRC . In that case, it was ruled that the four year time limit on making income tax and CGT “assessments” applies only to HMRC assessments. While income tax and corporation tax are not the same where they shared similar features there would need to be some reason why the four year limit as ruled in Higgs should not apply to corporation tax.
The FTT concluded that paragraph 88 FA 1998 Schedule 18 operated to determine for later periods the amount of the 2004 trading losses and they should automatically be taken into account in reducing the company’s taxable profits for later periods. They also thought that nothing prevented the 2003 losses being set off in 2005 given there was no requirement to claim the losses or to have them determined in an earlier year. The fact that they relate to a year in which HMRC did not require the company to submit a return does not appear to prevent it establishing the existence of the losses and their availability for set off. The four year time-limit only applied to HMRC assessments.
The FTT allowed the company’s appeal reducing the 2005 and 2007 taxable profits and penalties to zero.
Why this matters
This decision will be relevant to any company in a similar position where it is possible to argue the automatic carry-forward of trading losses. It should however be noted that the draft Finance Bill 2016 includes provisions which overturn the earlier income tax ruling, imposing a four year time limit. It would not be surprising to see similar rules introduced for CT purposes.
For further information in relation to this case and corporation tax losses, please contact the TaxDesk on 0845 4900 509 and ask for Martin Mann.