The Court of Appeal upheld a decision of the High Court ([2006] BTC 346) that the conditions laid down by the European Court of Justice (ECJ), which would enable a taxpayer to claim group relief despite the provisions of UK legislation which denied such a claim in relation to foreign subsidiaries, had to be shown to be satisfied when the claim for group relief was made.

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 non-resident 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 provisions in ICTA 1988 which were challenged by the taxpayer were not contrary to Community law ((2002) Sp C 352). 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 ruled that art. 43 EC and art. 48 EC did not preclude provisions of a member state which generally prevented a resident parent company from deducting from its taxable profits losses incurred in another member state by a subsidiary established in that member state although they allowed it to deduct losses incurred by a resident subsidiary.

However, it was contrary to art. 43 EC and art. 48 EC to prevent the resident parent company from doing so where the non-resident subsidiary had exhausted the possibilities available in its state of residence of having the losses taken into account for the accounting period concerned by the claim for relief and also for previous accounting periods and where there were no possibilities for those losses to be taken into account in its state of residence for future periods either by the subsidiary itself or by a third party.

The case returned to the High Court to be dealt with in the light of the ECJ judgment. The judge dismissed the appeal to the extent that it concerned the losses of M&SF There was no appeal from that part of his order. To the extent that the appeal related to the losses of M&SG and M&SB, the judge directed that the appeal be remitted to the special commissioners ‘to determine it in the light of the judgment of the High Court’ ([2006] BTC 346). The Revenue appealed against the order remitting the case to the special commissioners to be decided in the light of the judge's interpretation of the ECJ's ‘no possibilities’ tests, which the Revenue argued was wrong in respect of the time at which the conditions for disapplying the UK legislation had to be satisfied. The taxpayer cross appealed also arguing that the judge's interpretation was flawed, and that the Community law principle of effectiveness required that it should be granted a transitional period, from the date of the ECJ judgment, in which to make claims for group relief.

Issues

Whether the judge had erred in his interpretation of the conditions laid down by the ECJ.

Decision

The Court of Appeal (Chadwick, Tuckey and Jacob L JJ) dismissed the Revenue's appeal and allowed the taxpayer's cross-appeal in part.

Time for satisfying conditions laid down by ECJ

In the light of the ruling from the ECJ, it was clear that the UK tax authorities were entitled to reject a claim for group relief where, on the face of the claim, it appeared that the surrendering company was not resident in the UK (or did not carry on business in the UK through a branch or agency) unless the taxpayer company demonstrated to those tax authorities that the conditions laid down by the ECJ in respect of the possibility of having the losses taken into account in the subsidiary's state of residence were fulfilled. It was equally clear that the provisions of domestic law were entitled to require that that was demonstrated at the time when the claim was made. There was no reason why the Revenue should not require, at the time when the claim was made, in addition to or in lieu of a notice of consent, a notice from the non-resident surrendering company which confirmed that it had exhausted the possibilities available in its state of residence in respect of its losses.

The ruling of the ECJ required that, in cases where the restrictions on group relief in respect of the losses of non-resident companies went beyond what was necessary in the pursuit of legitimate objectives compatible with the EC Treaty, those losses were to be treated, so far as possible, in the same way as losses of resident companies. Differential treatment was to be avoided. The decision of a resident company to surrender its losses, and to give notice of consent, could be made at or up to the time when the taxpayer company made its claim for group relief; and so could be made on the basis of facts as they were at the end of the period within which the taxpayer was permitted to make a claim for group relief.

It was plain that the decision of a non-resident company to surrender its losses, because they could not be used in its own state of residence, could be made at or up to the time when the taxpayer made its claim for group relief. There seemed to be no reason why that decision should not be made on the basis of the facts (including facts which went to the question whether or not the conditions were satisfied) as they were at the end of the period within which the taxpayer was permitted to make its claim. There was no support in the reasoning which underlay the approach of the ECJ for the proposition that the conditions had to be satisfied at the end of the surrender period, rather than when the group relief claim was made. The Revenue's appeal was dismissed.

Remittal ‘in the light of the judgment of the High Court’

The taxpayer was correct in its contention that there was no reason to think that the test under the second condition was of a different nature from that under the first, which required consideration of ‘the objective facts of the company's situation at the relevant time’.

So that, if on an objective appraisal of the surrendering company's situation, the proper conclusion was that there was no real possibility for losses incurred in the surrender period to be taken into account in its state of residence for future periods, either by the surrendering company or by a third party, then the second of the conditions was satisfied. Given the context, the phrase ‘no possibility’ in the second condition was to be read as ‘no real possibility’.

There was a danger that more might be read into the judge's observation that ‘the particular circumstances of M&SG and M&SB did not for these purposes include the degree of probability or improbability of them returning to profitability’ than, perhaps, he intended. It was because of that danger that the taxpayer's appeal would be allowed to the extent of varying the judge's order by deleting the words ‘to determine it in the light of the judgment of the High Court’.

Principle of effectiveness

The decision of the Court of Appeal in Conde Nast Publications Ltd v C & E Commrs [2005] BTC 5,447 provided support for the proposition that the Community law principle of effectiveness required that the period during which the taxpayer was permitted to make new claims for group relief be extended so far as necessary to allow those claims to be made within a reasonable time after 13 December 2005. It was not appropriate to make a direction in those terms, because the court did not know whether the taxpayer had sought to make new claims in the light of the judgment of the ECJ; nor what (if the taxpayer had done so) the Revenue's response had been in relation to time-limits. It was more sensible to leave the matter on the basis that the special commissioners would decide the appeal (when remitted to them)-and any application by the taxpayer to bring in new claims on the appeal – on the facts which are then before them.

Court of Appeal (Civil Division).
Judgment delivered 20 February 2007.