UT/2024/000060 - [2025] UKUT 00143 (TCC)

Section 83(6) Finance Act 1996 (“FA 1996”), gives HMRC the discretion to extend the two year time limit that would otherwise apply for a company to make a claim to set-off its non-trading loan relationship deficit, (“NTLRD”) against profits.

On 11 March 2021 the Claimant made a claim to set off NTLRD against profits (“the Deficit Claim”) (that arose from the Claimant’s dividend income from a foreign subsidiary) received in accounting period ended 31 December 2002 (“the Dividends”) The two year time limit had expired on 31 December 2004. This decision concerns the Claimant’s judicial review (“the JR Claim”) challenging HMRC’s refusal to exercise its discretion to extend the two year time limit. The decision of HMRC to refuse the Deficit Claim was issued on 5 January 2024, (“the Decision”).

On the face of it a period of just over 16 years might appear an unusually long extension to seek. However it was, says the Claimant, a time extension that HMRC could not rationally refuse to give. That was because it was not until the consequences of decades long litigation before the CJEU and in the UK courts had been worked through and moreover not until HMRC had actually brought such profits into charge by amending the Claimant’s return upon closing the enquiry which remains open in relation to the return (which HMRC is yet to do), that it would be possible for the Claimant to make a properly quantified and valid NTLRD claim. That litigation (the Franked Investment Income cases - the FII litigation) concerned the taxation of foreign dividends. It confirmed that foreign dividend income did give rise to profits that were chargeable as opposed to exempt, and also the nature of the credit to be provided for. Although that litigation did not concern NTLRD, it was relevant in the Claimant’s circumstances given the dependency between the amount of that NTLRD claim and the amount of eventual foreign tax credit.

Back in 2004 the Claimant had taken the view that the UK’s domestic provisions (which exempted domestic dividends income but not foreign income) were in breach of EU law and accordingly did not include the income in its corporation tax return. The Claimant’s case is therefore that it was only once it knew, following the FII litigation that the foreign dividend income was chargeable rather than exempt and the amount of credit for foreign tax it could get that it could then go on to quantify the amount of NTLRD it needed to keep back for itself to set against the any foreign dividend income.

In refusing to exercise their discretion to extend time, HMRC applied their Statement of Practice (5/01) (“the SP”). Although that dealt with HMRC’s approach to time extension applications in relation to different statutory claims the parties agree that HMRC were right to apply the SP here. The Claimant’s public law challenge to the Decision (there being no statutory right of appeal against that) is that HMRC made various errors of law in interpreting the SP, that they failed to take relevant considerations into account, and that they reached an irrational decision.