Company Tax Decisions Proved Unwise By Subsequent Events

All forms of tax planning need to be carried out with great care. However, even when care is taken, unforeseen results can sometimes occur, as a recent tax case shows. The outcome was that a company’s successful claims for more than £38 million in Corporation Tax (CT) group relief ultimately left it substantially worse off after it was sold when trading conditions deteriorated sharply.



The company had been consistently profitable and, during two tax years, benefited from group relief for losses made by other members of its group. HM Revenue and Customs (HMRC) allowed £38 million in group relief to be surrendered against its CT liabilities, which had the effect of cutting the company’s CT liability to £564,937 in one year and zero in the next.



However, the company’s fortunes subsequently went into sharp decline and it had to be sold under commercial pressure. That transaction generated a trading loss for CT purposes of more than £30 million. Had it not been for the previously claimed group relief, the company would have been able to carry that loss back to the relevant years through a claim for ‘terminal loss relief’ (TLR).



If the company had been able to fully utilise TLR, it would not have had any profits chargeable to CT during the relevant years and a repayment of just under £9 million would have been due in respect of tax paid by other members of the group.



However, HMRC refused to exercise their statutory discretion to permit adjustments to the claims made for group relief outside the ordinary two-year statutory time limit laid down by the Finance Act 1998. TLR was thus only allowed in respect of the £564,937 in CT that the company had paid.



In dismissing the company’s challenge to that decision by way of judicial review, the High Court rejected arguments that the deterioration in the company’s trading position, and its sale under pressure, were unforeseeable when the group relief had been claimed and that ‘exceptional reasons’ therefore existed for extending the time limit.



The Court acknowledged that, due to subsequent events, the company and others within its group now ‘wished that they had made different decisions’. However, there was nothing irrational in HMRC’s stance and the Court concluded that it could not possibly have been Parliament’s intention that ‘exceptional reasons’ could include re-opening decisions on loss relief claims in the light of subsequent events.