Taylor (Inspector of Taxes) v MEPC Holdings Ltd

Factual and Procedural Background

The Appellant, an investment company within a corporate group, sought to surrender surplus “charges on income” to fellow group members as group relief for corporation tax purposes. For its accounting period ending 30 September 1994 the Appellant:

• Made income profits of £300,000;
• Paid charges on income of £48,644,400; and
• Realised chargeable gains of £6,040,284 while holding £60,583,017 of allowable capital losses brought forward.

The Inspector of Taxes determined that only £42,304,116 was available for surrender, treating the gross chargeable gains as part of the Appellant’s profits and excluding the carried-forward losses. The Appellant contended that the allowable losses fully offset the gains, leaving profits of £300,000 and a surrenderable amount of £48,344,400.

The Special Commissioners allowed the Appellant’s appeal (1999 decision). The Crown appealed:

• High Court (Chancery Division) – 9 May 2001: decision reversed in favour of the Crown.
• Court of Appeal – 20 June 2002: High Court upheld.
• House of Lords – 18 December 2003: decision of Special Commissioners restored, allowing the Appellant’s appeal.

Legal Issues Presented

1. Whether, for the purposes of calculating the surrenderable excess of “charges on income” under section 403(7) Income and Corporation Taxes Act 1988, section 403(8) requires the Appellant’s profits to be determined without deducting allowable capital losses from previous periods.
2. Consequently, whether the chargeable gains realised in the relevant accounting period must be taken gross (as the Crown argued) or net of carried-forward allowable losses (as the Appellant argued) when computing profits.

Arguments of the Parties

Appellant's Arguments

• “Profits” in section 403(7) mean income plus net chargeable gains; allowable capital losses are deducted earlier in the computation under section 8(1) Taxation of Chargeable Gains Act 1992, so no further “deduction” is made from profits.
• The phrase “losses or allowances” in section 403(8) refers only to trading losses and capital allowances, not to allowable capital losses.
• The legislative intent of section 403(8) is to prevent companies from inflating a current-period surrender by using earlier-period reliefs that could have been surrendered previously; allowable losses could never have been surrendered and therefore fall outside the restriction.

Defendant's Arguments

• The plain wording of section 403(8) excludes all deductions for losses or allowances of other periods, including allowable capital losses, when determining profits for the surrender calculation.
• The policy of group relief confines surrenderable amounts to reliefs originating in the same accounting period, preventing the use of carried-forward deductions to enlarge a surrender.
• Allowable losses are “losses” within the ordinary meaning of that term and therefore must be ignored under section 403(8).

Table of Precedents Cited

Court's Reasoning and Analysis

The House of Lords focused on the statutory context and wording of section 403:

• Section 403(8) aims to prevent a surrendering company from enlarging its relief for charges on income by importing reliefs from other periods; it targets deductions from profits granted by way of specific reliefs.
• “Allowable losses” under the Taxation of Chargeable Gains Act 1992 are part of the primary computation of chargeable gains, not a separate relief deducted from profits. They therefore fall outside the mischief addressed by section 403(8).
• The linguistic contrast in section 403(8) between “deduction … in respect of losses or allowances” and “expenses of management deductible only by virtue of section 75(3)” supports treating losses/allowances as reliefs that reduce profits, whereas allowable capital losses are adjustments made before profits are calculated.
• All group-relief provisions concern the income component of profits; it would be anomalous if the limitation in section 403(8) operated by reference to a deduction made solely in the computation of chargeable gains.
• Reading “losses” in section 403(8) to include allowable capital losses would undermine the internal symmetry of section 403 and conflict with Parliament’s apparent intention.

Holding and Implications

Appeal ALLOWED. The House of Lords reinstated the Special Commissioners’ decision. Allowable capital losses brought forward may be set against chargeable gains when determining the surrendering company’s profits for section 403(7) purposes; they are not disallowed by section 403(8).

Implications: the ruling confirms that section 403(8) targets only reliefs deducted from profits (such as trading losses, capital allowances and management expenses) and does not restrict statutory computations of chargeable gains. Groups may therefore offset carried-forward allowable capital losses before calculating surplus charges on income available for surrender; no new broader precedent was created beyond the specific interpretive point.