Marks & Spencer: cross-border group relief

This Supreme Court judgment continues the protracted saga of the Marks & Spencer (M&S) cross-border group relief claims in relation to losses incurred by subsidiaries resident in Germany and Belgium.

M&S was successful in arguing that it should be permitted to make sequential claims for loss relief (although it was out of time to resubmit certain of the claims) and the Supreme Court also preferred M&S's method of calculating the losses.

Principle of effectiveness did not extend time limit for making claims

Certain of the claims (known as the Pay and File Claims) were made at a time when the German and Belgian resident subsidiaries were not in liquidation and prior to the December 2005 ECJ judgment which established the "no possibilities test" (i.e. that there was no possibility of the losses being used in any other jurisdiction). By the time the test was established, the usual time limits for making loss relief claims had expired.

The court rejected M&S's argument that the principle of effectiveness meant that it should have been given time to liquidate the relevant subsidiaries (and hence to satisfy the "no possibilities test") prior to making these claims. Because the subsidiaries were not liquidated until after the expiry of the time limits for claims, M&S had no EU law right to surrender the losses cross-border and the principle of effectiveness only extends to ensuring that a person's EU law rights are effective and not to give a person time to create new rights. Fresh claims could not therefore be submitted outside the normal time periods.

Sequential claims are permitted provided they are within the time limits

Other claims were made in respect of later years governed by the self-assessment regime. These were originally made prior to the establishment of the "no possibilities test" but were subsequently resubmitted on a number of occasions albeit always within the statutory time limits.

HMRC claimed that group relief claims could not be amended and, because the original claims had not been withdrawn, the later claims were not valid. This argument was dismissed on the basis that the domestic legislation (even read without conforming it to EU law principles) clearly envisaged circumstances where an original claim could be replaced by a subsequent claim.

Furthermore, the EU law principle of effectiveness meant that EU rights must not be rendered practically impossible or excessively difficult to exercise. If HMRC were correct, the making of a claim at any time before the "no possibilities test" was satisfied would have precluded further claims within the time limit in circumstances where, if the taxpayer had but waited until the "no possibilities test" was met, its claims would have been valid. This inconsistency helped confirm the Court's view that subsequent alternative claims for group relief were in principle valid (if prior claims failed to pass the "no possibilities test") although it is not clear how the previous claims were "withdrawn".

Method of calculating the losses

M&S contended that the method for calculating the amount of the losses available for cross-border surrender was to determine the losses which were not utilised in the foreign subsidiary's jurisdiction of residence and then to convert them in accordance with UK rules. HMRC argued that the calculation should only include the lower of the amount converted as M&S contended and the amount calculated under local rules.

The difference between these approaches is that if an unutilised loss was incurred in, say, 2000 under local rules but in 1999 under UK rules (due to a timing difference in when a deduction is recognised), under M&S's approach the loss would be available for surrender in 1999 but under HMRC's approach it would not (as no such loss would have arisen in that year under local rules).

The Supreme Court found in favour of M&S on the basis that HMRC's method of calculation would deprive M&S of its ability to claim relief for losses at all when these sort of timing differences arose.

Implications

Although the domestic legislation has subsequently been amended to facilitate such cross-border group relief claims, it appears to restrict the scope of cross-border group relief more narrowly than EU judgments in the course of this litigation would allow. The statutory method of calculating overseas losses for these purposes has been explicitly rejected and the legislation still does not reflect the earlier Supreme Court decision that the "no possibilities test" must be satisfied at the time the claim for group relief is submitted rather than the end of the accounting period in respect of which the losses arose.

This legislation has been referred to the ECJ as being incompatible with the right to freedom of establishment and the outcome of this will be awaited with interest.

Please click on the links below for the other articles in the February 2014 tax newsletter.

• "Salaried Member" rules for LLPs
• Tax avoidance: high-risk promoters and follower penalties
• Kumon: VAT abuse
• Southern Cross: compromise agreements with HMRC
• Tax compliance through use of the procurement process
• VAT - changes to zero-rating in relation to student accommodation