Group relief for losses of foreign group companies

The Marks & Spencer's case has been around for a few years now and has resulted in a number of hearings, before the UK national Courts and the ECJ. The case concerns the availability of group relief for foreign subsidiary losses. The current case was brought by HMRC who appealed against the decision of the Tax Chamber (Judge Avery Jones and Judge Gammie QC – “the Tribunal”) relating to the availability of group relief for the losses of non-resident subsidiaries and the quantification of such group relief. HMRC's ground for appeal was that if the Tribunal had applied correctly relevant case law principles, it would have decided that no losses were available to make a group relief claim. HMRC's case also concerned the time of the valid group relief claim and whether there were eligible losses at the time such a valid claim was made. HMRC also questioned the method of computing the losses available.

Background

The facts of the underlying case were the following. Marks & Spencer (M&S) submitted a claim for group relief in respect of the surrender of losses of its foreign subsidiaries (in France, Germany and Belgium). The case was referred to the European Court of Justice (ECJ) to determine whether the UK group relief rules (which only allowed relief for losses incurred in UK tax resident entities to be set against UK taxable profits) were contrary to EU law. The ECJ held that the exclusion from the UK loss relief regime, losses incurred by an EU subsidiary, did constitute a restriction on the freedom of establishment provisions but that in some cases such restrictive UK provisions were nevertheless justified. The UK government and others put forward three justifications for the exclusion of foreign losses and it was held that the exclusion of non-resident subsidiaries from the group relief provisions did pursue legitimate objectives. However, the ECJ had to consider whether the total exclusion of relief was a proportionate response. The ECJ ruled that the UK group relief provisions went beyond that which was necessary to attain the legitimate objective. The UK rules were contrary to EU law to prevent the UK parent company from claiming group relief where the EU subsidiary had exhausted the possibilities available in its home territory for offsetting the losses in the current accounting period and also for previous accounting periods. Also, the provisions went too far where there is no possibility for the EU subsidiary's losses to be taken into account in its country of residence for future periods either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party.

The case reverted to the UK High Court for resolution. The Court rejected M&S's appeal in respect of its French subsidiary's (MSF) losses, as they had already been used in France, and referred the claims in respect of the German (MSG) and Belgian (MSB) subsidiaries which had both ceased trading, to the Special Commissioners to hear further evidence and submissions to determine whether the tax taxpayer had fulfilled the ‘no-possibility test’. The decision was appealed to the Court of Appeal by both M&S and HMRC.

The Court of Appeal generally agreed with the High Court and concluded that the relevant time at which M&S was required to show that the ‘no possibility’ test was satisfied is the time of the making of the claim for group relief. It decided that Marks & Spencer was entitled to set off the losses of MSG and MSB against its own profits for those years. M&S should be able to make a new claim for group relief where the original claim was found to be invalid and group relief should be achieved by relieving the losses in the year in which they fell for UK computational purposes. HMRC appealed this decision to the Upper Tribunal.

Issues

The issues brought to the Upper Tribunal were as follows:

1. Whether the no possibilities test has to be satisfied in relation to the whole of the subsidiary's loss for the accounting period or does it apply to each euro of loss separately.
2. On what occasion(s) did M&S make a valid group relief claim in relation to the losses of MSG and MSB, and if the claim was outside the time limits, was M&S entitled to make a late claim
3. Did MSG and MSB have losses which could be claimed by M&S
4. If there were losses to be claimed by M&S, how were such losses to be computed

Judgment

1. No Possibilities Test
   • Taking the position where the subsidiary had exhausted the local provision for utilising its loss but still had an amount unrelieved, and there was no possibility of a portion of this unrelieved amount ever being used in the home Member State but the other portion may well be used. The Court disagreed with HMRC's argument that as a portion of the loss might be used in the future, the test is not fulfilled in relation to the loss as a whole. The Court could not see a rational basis for disallowing the entire loss from relief just because a portion of it could be used.
   • The Tribunal ruled that the correct time for deciding whether the no possibility test was satisfied is when the claim is made. HMRC's argument was that the test had to be satisfied at the end of the accounting period in which the loss arose. Referring to the Tribunal's ruling, the Court held that it was clear that regard should be given to the facts as they stand when the group relief claim is made. If at that time it is known that no further local relief is possible, then the no possibilities test may be fulfilled.
2. The validity of the group relief claims by M&S
   • The difficulty for the Court in this case is that M&S made a series of group relief claims in relation to the losses and if the no possibilities test is applied at the time of each claim, it is possible that a different answer will ensue.
   • In determining whether the first group relief claims by M&S were valid, the Court looked to sections 402 and 403 Income and Corporation Taxes Act 1988 together with Schedule 18 Finance Act 1998 and then considered how these provisions applied to give effect to M&S Community law rights. The Court held that domestic law did not require a group relief claim by a single claimant in respect of the losses of a single surrendering group company to be made by one claim. The claimant company did not have to withdraw an earlier claim before making another claim. The validity of the later claim depended on the facts as they are at the time of the later claim. The company claiming group relief for losses of a foreign group company is effectively in the same position as though it were claiming such relief for domestic losses. This was consistent with the decision in the Court of Appeal.
   • The Court also held that where a claim is out of time, it cannot be made even if the local loss was suffered in a year of account which falls within the time limit for making a claim.
3. Application of no possibilities test to MSB and MSG
   • The Court concluded that successive claims are valid to the extent that the no possibilities test is satisfied at the time of each claim. Applying this first to MSB, the fourth (and final) group relief claim in relation to losses arising in the self-assessment years was made after the company was dissolved, with the liquidator consenting to the surrender notwithstanding that the company had been dissolved. Assuming that formality of the surrender was met, then at that time there was no possibility that the losses of MSB could be utilised, so M&S could claim them by way of group relief.
   • For MSG, the group relief claim was made after the liquidator had settled all third party liabilities and had made the final distribution of the company's assets to shareholders and two days before it was dissolved and removed from the registry. The Court stated that, “on these circumstances, the possibility the losses could be utilised in the future fell definitely on the “fanciful” side of the line”.
4. Quantum of Losses
   • The parties had agreed the underlying figures for the losses which satisfied the no possibilities test, but they could not agree the amounts which were eligible each year for group relief, principally because of the different tax systems.
   • The Tribunal had considered several methodologies in calculating the losses allowed. In light of these considerations, the Upper Tribunal concluded that in relation to different calculations of losses/profits in jurisdictions, which were nothing to do with timing differences, any disadvantage that results from the operation or conjunction of different national tax systems, does not contravene Community law. It is correct to cap the amount of group relief available by the amount of any local loss to the extent that the differential in the amount of losses results from differences in principle between tax regimes rather than from timing differences. Although this aspect of quantum was not expressly addressed by the Tribunal, it was already taken account for in one of its methodologies (Method E). Inherent in this method was that group relief can only be claimed for the amount of local losses; the method is concerned with re-allocating losses to periods for where they arise for UK tax purposes and does not result, overall, in a group relief claim being available for an amount in excess of the losses it sought to re-allocate. If the losses calculated on a UK basis are greater than those calculated on the local basis, the group relief claim cannot exceed the amount calculated on the local basis. Similarly, if the local calculation gives a greater loss, the group relief claim is restricted to the amount of the loss calculated on the UK basis.
   • The Court held that the approach of the Tribunal was correct and that ‘Method E’ was most in tune with the ECJ's judgment and the principles which under lie it.
   • The full text of the case is available at http://www.tribunals.gov.uk/financeandtax/Decisions.htm