The High Court held that, in consequence of the judgment of the ECJ in Marks & Spencer plc v Halsey (Case C-446/03), an English company was not entitled to group relief for the losses of its French subsidiary. As regards the losses of its Belgian and German subsidiaries, the matter was remitted to the special commissioners to make further findings of fact and determine the appeals in the light of those findings.

Facts

The taxpayer was a UK resident company with three wholly owned indirect subsidiaries incorporated and resident in France (M&SF), Germany (M&SG) and Belgium (M&SB). At all relevant times the taxpayer had substantial profits which, except to the extent that reliefs for losses or other forms of relief were available to set against them, would be liable to UK corporation tax.

In the 1990s M&SF, M&SG and M&SB were separate companies, based in their own jurisdictions and not resident in the UK. They carried on trades which, in the later part of the decade, gave rise to substantial losses. Under the terms of ICTA 1988, the losses would not be capable of being set off since ICTA 1988 provided that only losses of a UK resident company (or of a nonresident company that carried on a trade through a UK branch, which none of M&SF, M&SG and M&SB did) could be surrendered by way of group relief. However the taxpayer contended that the provisions of the domestic UK statute were in that respect contrary to and overridden by rules of Community law. It made claims for group relief in respect of the losses of the continental subsidiaries. The Revenue refused the claims.

The taxpayer appealed to the special commissioners against the refusals. In 2002 the special commissioners dismissed the taxpayer's appeals, holding that the particular provisions in ICTA 1988 which were challenged by the taxpayer were not contrary to Community law ((2005) Sp C 205). The taxpayer appealed to the High Court which referred to the ECJ the question whether the relevant provisions of ICTA 1988 were contrary to Community law. The ECJ delivered its judgment on 13 December 2005 (Case C-446/03) and the case returned to the High Court to be dealt with in the light of that judgment.

Two different readings of the ECJ judgment were put forward. The taxpayer contended that on a proper reading of the judgment, legislation of a member state which imposed a blanket prohibition on intra-Community cross border surrenders of losses without allowing an exception for such surrenders in the circumstances described in para. 55 of the ECJ judgment was contrary to Community law and unenforceable. (Those circumstances were that the non-resident subsidiary had exhausted the possibilities its state of residence of having the losses taken into account and that there was no possibility for the foreign subsidiary's losses to be taken into account in its state of residence for future periods.) The Revenue contended that the correct reading was that legislation of a member state which imposed a blanket prohibition on intra-Community cross border surrenders of losses was not contrary to Community law, but, on a case by case basis, might not be applied any case the facts of which corresponded to those circumstances.

Issue

Whether the taxpayer could set off the losses of the three continental subsidiaries by way of group relief against the profits of its UK trade.

Decision

Park J (allowing the appeal in part) said that the ECJ general accepted that a rule restricting group relief for losses of non-resident subsidiaries was not precluded’ by Community law. However, the court attached a reservation in relation to a case where the member state subsidiary had not used its losses for tax purposes in the member state where it was established, and could no longer do so. The general thrust of the reservation, or caveat, was that losses of that nature must be capable of being surrendered by group relief the parent company (assuming that there were rules, as in the UK, under which losses of a subsidiary established in the same member state as the parent could be surrendered by group relief to the parent). On the criteria laid down by the ECJ in its judgment, the taxpayer was not entitled to group relief for the losses of M&SF since it was certain that the conditions in para. 55 of the ECJ judgment were not fulfilled. It was not the case that M&SF had exhausted the possibilities in France of having the losses relieved against French tax. It was not the case that there was no possibility of the losses being taken into account in France for future periods. On the contrary, the information received showed that the losses had in fact been used in France to reduce French tax liabilities. The effect was that the rule of UK tax law that group relief could not be claimed in respect of the losses of a group company resident outside the UK was valid and enforceable, notwithstanding the absence of a specific statutory exception for losses which had not been used in the other member state where the surrendering company was resident and were no longer capable of being so used. The qualification to that ruling of the ECJ was that, if on the facts of an individual case it could be shown that the losses had not been and could not be used in the other member state, the UK rule had to be disapplied in that particular case.

It was true that a major part of the ECJ's jurisdiction was to give rulings on whether particular items of national legislation were or were not contrary to Community law but it was certainly within the court's jurisdiction also to give rulings about whether an item of national legislation might or might not be applied in a particular way (ICI plc v Colmer (Case C-264/96) [1998] BTC 304; [1998] ECR I-4695 and Garage Molenheide BVBA v Belgium (Case C-286/94) [1998] BTC 5,088; [1997] ECR I-7281 considered).

As regards the losses of M&SG and M&SB for which the taxpayer had claimed group relief, the position was not clear. The taxpayer said that the losses had not in fact been used to reduce German and Belgian tax liabilities but the Revenue did not yet feel able formally to accept that. However, in so far as the question was whether there was or ever was a ‘possibility’ of the German and Belgian losses being used to reduce German and Belgian tax liabilities, the facts were not specifically found by the special commissioners. Nor was there at present any agreement between the taxpayer and the Revenue on that matter. It followed that the taxpayer could be entitled to group relief for the losses of M&SG and M&SB only if those losses came within the circumstances described by the ECJ in para. 55 of its judgment. M&SG must have exhausted the possibilities available to it in Germany of having the losses taken into account for the accounting periods concerned by the claim for relief and also for previous accounting periods, if necessary by transferring them to a third party or by offsetting them against the profits made by ‘the subsidiary’ (presumably M&SG itself) in previous accounting periods; further, there must be no possibility of M&SG's losses being taken into account in Germany for future periods either by M&SG itself or by a third party, in particular where M&SG had been sold to the third party. The same applied to the losses of M&SB.

The relevant time at which the taxpayer had to demonstrate that the conditions of para. 55 were satisfied in relation to the losses of M&SG and M&SB was the time when the taxpayer made the claim for group relief. If a company claimed group relief at a time when the para. 55 criteria were satisfied it should get the relief. If it applied for it at a time when the criteria were not satisfied it should not.

The claim for group relief in respect of the losses of M&SG and M&SB would be remitted to the special commissioners to hear further evidence and submissions and to determine the appeals in the light of them and of the present judgment and the judgment of the ECJ.

Chancery Division. Judgment delivered 10 April 2006.

VAT Rates within the EU

	Reduced Rate	Standard Rate
Belgium	6	21
Czech Republic	5	19
Denmark		25
Germany	7	16
Estonia	5	18
Greece	9	19
Spain	7	16
France	5.5	19.6
Ireland	13.5	21
Italy	10	20
Cyprus	5—8	15
Latvia	5	18
Lithuania	5–9	18
Luxembourg	6	15
Hungary	5–15	20
Malta	5	18
Netherlands	6	19
Austria	10	20
Poland	7	22
Portugal	5–12	21
Slovenia	8.5	20
Slovakia		19
Finland	8–17	22
Sweden	6–12	25
United Kingdom	5	17.5
Source: European Commission, position as at 1 February 2006