Originally published on LexisPSL Tax, 24 February 2014
The Supreme Court (SC) ruled on matters arising from proceedings concerning the right of Marks and Spencer plc (M&S) to claim group relief in respect of losses sustained by two of their subsidiaries resident in Germany and Belgium respectively. Examining the Supreme Court’s decision, Michael Anderson, partner at Joseph Hage Aaronson, advises that although this is a successful conclusion for M&S some issues still remain to be resolved for other taxpayers.
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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:
Reed Employment Ltd v HMRC [2014] EWCA Civ 32
By Alice McDonald
Section 3 of the Finance Act (No.2) 2005 introduced an unjust enrichment defence against claims for repayment of VAT. This defence came into force on 26 May 2005. In 2009, and therefore following the introduction of section 3, the claimant filed repayment claims which had arisen in years before the defence came into force. HMRC relied upon the defence and refused to make repayments. The claimant challenged the application of the defence to the pre 2005 claims on the basis that the defence was incompatible with the EU law principle of equal treatment.
The Court of Appeal dismissed the appeal. It found that the defence introduced in section 3 did not breach EU law and that HMRC could rely upon it.
This article appears in the JHA January 2014 Tax Newsletter, which also features:
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In the Prudential case (Portfolio Dividend Tax and Life Assurance) the High Court has now given permission to both parties to appeal to the Court of Appeal. HMRC’s permission however was restricted, so that it cannot appeal on the issues connected with its “change of position defence” or the nominal rates of tax to apply. The Claimants were granted permission to appeal on the issue of whether dividend income should be exempt as opposed to carrying an additional credit. The court has also ordered that the quantification of Prudential’s claim for sample years be undertaken so that remaining disputes relating to computation are identified.
In the FII Group Litigation yesterday the High Court refused permission for HMRC to run two new defences on the grounds that they had been raised too close to trial and would impose extreme evidential burdens on the Claimants. One of these defences was the contention that the recovery of unlawfully paid tax should be reduced by the hypothetical tax saving that would derive from the increased interest deductions available as a result of the payment of the unlawful tax. The second defence was that the Claimants would have to prove that their subsidiaries were “genuinely established” in the terms of the Cadbury Schweppes case. Although HMRC was refused the ability to introduce these defences into the FII case, they implied that they might well be raised beyond the context of the GLOs. The trial of the FII test cases is set for May.
This article appears in the JHA January 2014 Tax Newsletter, which also features:
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By Amita Chohan
K, a Finnish taxpayer, sought to deduct losses that were incurred in respect of the transfer of immovable property in France from taxable shares that were transferred in Finland. Finnish national legislature permitted the deduction of such losses in respect of the transfer of only resident immovable property. In France the losses could not be taken into account on the sale. The ECJ followed the approach in the M&S case but concluded that the “no possibilities” condition had not been met. The losses never having been available for use locally, it could hardly be said that those possibilities had been exhausted.
This article appears in the JHA December 2013 Tax Newsletter, which also features:
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Deep within the press notices accompanying both the budget and pre-budget review has in the past been a likely place to announce retrospective changes limiting claims for the recovery of tax or changes responding to ECJ decisions. Examples include the changes following Cadbury Schweppes, Marks and Spencer and DMG.
The notices accompanying today’s statement however contained no such announcements of legislative changes affecting EU tax claims.
The Chancellor did announce a number of measures relevant to cross border groups to be included in Finance Bill 2014 which have immediate effect. They include:
Debt Cap Provisions
The grouping rules will be amended to ensure that a UK tax-resident company which does not have ordinary share capital can be a relevant group company subject to the world wide debt cap. Further changes relate to the rules’ application to the parent company in a group with intermediaries without ordinary share capital, and to the definition of a 75% subsidiary for the purpose of tracing indirect ownership.
Controlled Foreign Companies: Profit Shifting
A new rule will be introduced relating to profit shifting by controlled foreign companies (‘CFCs’) into Chapter 9 of the Taxation (International and Other Provisions Act) 2010 (‘TIOPA’). This will prevent a CFC creditor relationship from being a qualifying loan relationship (QLR) if it arises from an arrangement which has been set up to transfer profits from intra-group lending out of the UK. This will prevent application of the provisions for full or partial exemption in ss371IB and 371ID TIOPA. A provision will also be introduced ensuring that the rules relating to QLRs operate effectively.
Double Tax Relief
The Bill will be amended to clarify that s42 TIOPA applies separately to each non-trading credit, so that any credit for foreign tax which arises will be limited to the amount of corporation tax on the non-trading credit. Legislation will also amend ss34 and 112 TIOPA, reducing the credit or deduction to be given where a foreign tax authority has made a repayment and where there are arrangements enabling another person to receive that repayment.
This article appears in the JHA December 2013 Tax Newsletter, which also features:
By Federico M.A. Cincotta
In 2012 HMRC issued a series of assessments against pension fund holders who had transferred their pensions in 2007-8 from UK pension funds to a Singapore based fund, ROSIIP. The assessments were for 55% of the pension savings transferred on the basis that the transfers were not to an authorised fund. ROSIIP had at the time been accepted by HMRC as an authorised fund (a QROPS) and listed as such on HMRC’s website. HMRC maintained that it had nevertheless never been a QROPS and statements by HMRC to the contrary effect could not be relied upon. At around the same time HMRC had exonerated from assessment investors in another similarly placed scheme, the Beazley scheme, even though on that occasion HMRC suspected the investors of tax avoidance motives, while no such suspicion was raised against the ROSIIP investors. We ran the challenge to these assessments under a GLO.
On the last day of the hearing of the ROSIIP GLO HMRC withdrew all the assessments to tax and undertook to issue guidance on how it would treat transfers to overseas pension funds.
That guidance has now been issued although confusingly referring to the ROSIIP GLO as “R (Gibson) v Commissioner for HM Revenue and Customs”, one of the test cases, rather than its official title.
HMRC will not raise assessments from transfers from a registered pension scheme to an overseas scheme provided that 1) the transfer took place before 24 September 2008; and 2) the scheme was included on the list as a QROPS when the transfer took place (or at a time reasonably proximate to the transfer). This is subject to an obvious proviso in case of dishonesty, abuse, artificiality, etc.
The date of the 24 September 2008 represents when HMRC assert a caveat was placed on its website alerting readers that they could not rely on the inclusion of a fund on HMRC’s QROPS list as evidence that it was in fact a QROPS. For transfers made after that date to funds appearing on the QROPS list HMRC indicate that HMRC will consider whether to issue assessments “in the light of the principle of conspicuous unfairness”. No further explanation is given as to whether that should mean that a transfer made in good faith in reliance on the entry of the recipient fund on the QROPS list would not be assessed to tax. In the ROSIIP litigation it was contended that the proper statutory construction of the provisions meant that the entry of a fund on the list amounted to an assessment that it was a QROPS irrespective of any such caveat and that were that not the case the provisions would offend legal certainty. With the withdrawal of the assessments no judgment will be delivered on that point.
This article appears in the JHA December 2013 Tax Newsletter, which also features:
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Originally printed in Tax Journal on 1 Nov 2013.
Michael Anderson and Samantha Wilson examine the recent High Court ruling on Prudential, the test case in the CFC and dividend GLO.
Under the credit system in place before 2009, non-resident dividend income from the EU/EEA is not to be regarded as exempt but as taxable with credit, in addition to withholding tax, for the higher of the tax actually paid on the profits or the nominal (statutory) rate of the jurisdiction of the dividend paying company. The same outcome applies where the investment is below a controlling interest for dividends from all jurisdictions outside the EU/EEA as well. Where possible, tax returns must be amended to claim the enhanced credit, rather than to show the non-resident income as exempt. The claimants are entitled to compound interest on overpaid tax. HMRC’s ‘change of position’ defence is contrary to EU law.
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Originally printed in International Tax Review Premium on 31 October 2013
UK tax payers will need to amend any open returns to show foreign portfolio income as carrying a tax credit following the England and Wales High Court’s ruling in the Prudential case last week.
Nicola Hine, of Joseph Hage Aaronson, the firm acting for the claimants in the case, explains why the judgment should be welcomed by tax payers with claims for interest on overpaid tax.
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Originally printed in International Tax Review Premium on 1 October 2013
The Franked Investment Income Group Litigation (FII GLO) concerning claimants’ rights to recover overcharged tax from HM Revenue & Customs (HMRC) has been batted back and forth between the UK courts and the European Court of Justice (ECJ) since 2006. Philippe Freund explains why an Advocate General’s opinion on the third reference to the ECJ has given taxpayers cause to be optimistic.
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