Changes to Company Tax Loss Relief Following European Court of Justice (ECJ) Judgment

1. The UK's loss relief legislation for groups of companies, which was challenged under EU law, is to be amended slightly following the judgment of the European Court of Justice on 13 December 2005 in the case of Marks and Spencer Plc v David Halsey Case C-446/03.

2. In its judgment, the Court confirmed that the UK's group loss relief rules are in principle compatible with European law. The Government welcomes this judgment which means that the system of group relief can be kept broadly as it is now.

3. The Court also held that, in some very limited circumstances, relief should be available in the UK for the otherwise unrelievable losses of some group companies resident in other States.

4. The Government therefore intends to introduce legislative changes to reflect these principles in the 2006 Finance Bill.

5. Wider availability of group loss relief, even in the very limited circumstances described by the Court, opens the potential that a group may make arrangements that it would not otherwise have made in order to obtain relief in the UK. The Government has identified this as a particular risk, and is announcing today measures to remove this risk. Details of these measures are described below. They will be included in the 2006 Finance Bill, and will be effective from today.

Detail of Anti-avoidance Measures Announced Today

6. It has come to the Government's attention that some tax advisers have been suggesting that groups that have loss-making companies resident in another State should engineer their circumstances so as to preclude the possibility of a loss making company obtaining relief in its State of residence by, for example, liquidating that company whilst transferring its business to another company.

7. The Government will therefore be introducing legislation to deny loss relief where there are arrangements which either:

• result in losses becoming unrelievable outside the UK that were otherwise relievable, or
• give rise to unrelievable losses which would not have arisen but for the availability of relief in the UK,

if the main purpose or one of the main purposes of those arrangements is to obtain UK relief.

8. This legislation will also be included in the 2006 Finance Bill and will apply to all arrangements that give rise to unrelievable losses or make losses unrelievable on or after today.

Background Notes

1. Group relief allows a company to claim tax relief for the losses (and certain other tax reliefs) of another company if both companies are members of the same group. It seeks to make the tax treatment of groups of companies, carrying on a number of activities through different companies, closer to what it would have been if the activities had been carried on in a single company. Before the judgment in the Marks & Spencer case, only companies within the UK corporation tax regime (that is, those which are resident in the UK or trade here through a permanent establishment) could share group relief.
2. In their case, Marks & Spencer Plc submitted that the UK rules were not compatible with EU law because companies outside the charge to UK corporation tax are not able to surrender losses to a UK parent in the same way as companies within the charge to UK corporation tax.
3. In the light of the Court's judgment, the High Court will now resume consideration of the Marks & Spencer case. Other claims made by companies that have followed Marks and Spencer in seeking cross-border group relief will be dealt with through the appropriate legal processes.