This morning the Supreme Court delivered its second and final ruling in the M&S case. Like its first judgment last May, this judgment is unanimous and in favour of the taxpayer on the key remaining issues. No questions have been referred to the ECJ. This judgment should therefore conclude the litigation. The team has worked on the case for 11 years and 1 month.
In 2001 M&S ceased trade in its subsidiaries in Europe. The French and Spanish subsidiaries were sold. Buyers could not be found for the German and Belgian subsidiaries whose losses were claimed against the UK profits of the parent by way of group relief. In 2005 the ECJ held that the restriction in the UK’s group relief provisions to the surrender of domestic losses was contrary to EU law where the possibilities of using the losses locally in the past, present or future had been exhausted. By the level of the 2nd trip to the Court of Appeal in 2011 it had been established that M&S had met the “no possibilities” standard when it appointed liquidators of the German and Belgian subsidiaries in 2007.
The issues which reached the Supreme Court involved crucial points of interpretation. For procedural reasons the appeal to the Supreme Court was split into two hearings. The first hearing dealt with the primary question: at what date did M&S have to meet the “no possibilities” test? HMRC’s argument (consistent with the new group relief provisions) was that the past, present and, critically, future possibility of using the foreign loss had to be exhausted at the end of the accounting period in which the loss arose. Any ability to carry forward a loss under local law into the next accounting period would prohibit a claim.
Last May the Supreme Court rejected that argument and held that the correct time period for assessing whether the no possibilities test was met was the date of the claim. Setting it at the end of the accounting period would render it practically impossible ever to make a successful cross border group relief claim, which could not have been the intention of the ECJ in its judgment. It would also be inconsistent with the approach in the subsequent ruling of the ECJ in C-123/11 A Oy.
That first judgment however still did not permit any of M&S’s group relief claims to be concluded. M&S’s original cross border group relief claims had been made in the period around the cessation of trade in 2001-2002. As the time period for making group relief claims under CTSA remained open, M&S re-made its group relief claims after the liquidation process had started and again upon dissolution of the companies in 2007. HMRC contended however, that while those subsequent group relief claims were within the statutory time period, the “date of the claim” on which the no possibilities test had to be assessed was the date of the very first claims in 2001-2, at which time M&S had not yet met the no possibilities test.
The second Supreme Court judgment addresses that issue and concludes consistently with the Courts below that “the date of the claim” includes the date of any subsequent claim which was issued within time: there is nothing in the domestic legislation to prohibit the making of sequential claims which are clearly valid and, being valid, there is no reason of domestic or EU law why they should not be taken into account.
The Supreme Court has also resolved the important question of how to calculate a foreign loss for surrender for UK tax purposes. HMRC had argued the tax computations showing the unutilised losses under local rules had to be compared with the amount of losses which would remain unutilised if UK tax rules had applied: the surrenderable amount was then the lower of the two in each year. However this would cause losses which were capable of group relief under UK principles from being available for surrender where the local rules brought them into account in different accounting periods to the UK rules. For that reason the Supreme Court rejected that approach and preferred the approach of M&S, known as “Method E”. Under this approach the losses which remain unutilised on the application of local rules are then converted to accord with UK tax principles.
M&S’s claim was however not entirely successful. While most of its claims were in accounting periods covered by the self assessment system, a portion fell under the previous pay and file system. Importantly the time period for claiming group relief under the pay and file system was a maximum of 6 years and 3 months (with discretion to extend it). That period had expired before the ECJ’s judgment in 2005. Although M&S liquidated the companies in 2007, it had been distracted from the normal commercial course of liquidating the companies any earlier by the requirements of this litigation. M&S argued that in those circumstances they should be permitted to issue fresh claims outside the statutory period to cover the subsequent liquidation of the companies. The Supreme Court rejected that argument. M&S’s EU rights were not infringed during the 6 years and 3 months available to claim group relief under the pay and file system. The UK provisions were not in breach of EU law until HMRC refused the surrender of losses beyond the possibility of use. As this did not occur within the 6 year and 3 month period M&S could not invoke the requirements of EU law to obtain an extension.
Although the group relief provisions were amended in 2006 in the wake of the ECJ’s ruling in 2005, at least two aspects of those new rules do not accord with these Supreme Court judgments: the need for the “no possibility” test to be met at the end of the accounting period, and the “lower of” computation method. It will be interesting to see how the UK will respond.
This article appears in the JHA February 2014 Tax Newsletter, which can also be downloaded as a PDF below:
