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The Court of Appeal has handed down judgment in an appeal from the Upper Tribunal concerning the operation of the “corresponding deficiency relief” (CDR) regime in the Income Tax (Trading and Other Income) Act 2005.

Mr Scott, the taxpayer, had an entitlement to claim substantial amounts of CDR on his higher rate income tax liability. Indeed, so much CDR that it vastly exceeded his higher rate income tax liability. Mr Scott argued that he should be able to use the unused part of the CDR available to him as relief from his higher rate of capital gains tax.

Mr Scott contended that the legislative scheme mandated a calculation whereby the full amount of the CDR was deducted from his income, even if that produced a negative “total income” figure. Mr Scott then argued that the negative “total income” could be deducted from his basic rate limit, having the effect of significantly extending his basic rate band and thereby allowing him to use his unused CDR to provide relief from capital gains.

The Court disagreed. Affirming the decisions of the First tier Tribunal and the Upper Tribunal, and agreeing with the submissions of HMRC, the Court held that a person’s total income could not be reduced below zero and, in the absence of a special provision, a relief which was set against income, such as CDR, was exhausted once the income was reduced to nil. The Court rejected the argument that the statutory objective of harmonising the rates of capital gains tax and income tax means that a relief from income tax should also operate as a relief from capital gains tax.

The Court of Appeal’s judgment can be found here.

Simon Pritchard successfully acted for the HMRC.