C-261/11 Commission v Denmark
The CJEU, following recent case law, concluded that the Danish rules on exit taxation of cross-border transfers of assets within a company are contrary to the freedom of establishment within the meaning of Article 49 TFEU. Under the rules, a transfer of assets internally within a company, but to a permanent establishment outside Denmark having the effect that the assets are no longer subject to Danish tax, is regarded as a sale and is taxed as if the assets had been sold in the year of the transfer. A transfer of assets between a company’s different establishments within Denmark is not taxed. The CJEU affirmed its decision in C-371/10 National Grid Indus, and rejected Denmark’s argument that the rule established in that case is limited to financial assets that are disposed of, or intended to be disposed of, after the cross-border transfer. However, the CJEU confirmed that Denmark can still tax assets that are not intended to be realized, provided the trigger for such taxation constitutes a measure less restrictive to the freedom of establishment than immediate recovery of the Danish tax at the time of transfer.
This article appears in the JHA July 2013 Tax Newsletter, which also features:
Originally printed in Tax Journal on 24 May 2013.
Claims for group relief for the losses of companies in the group in other EU Member States must meet the condition that the possibilities for past, present and future use of the losses locally must be exhausted. The Supreme Court has concluded, in the latest stage of the M&S case, that the date upon which that condition must be met is the date of the claim and not, as HMRC has advocated, the end of the accounting period in which the loss was incurred. Steps taken by taxpayers, such as the liquidation of the loss making subsidiary, will not exclude the making of a claim.
The author acts on behalf of Marks and Spencer in this case.
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Today the Supreme Court delivered its judgment on the principal remaining issue in the M&S case. It has found unanimously in favour of the taxpayer.
The ECJ had found in 2005 that the UK group relief provisions were incompatible with EU rights to the extent that they did not permit the surrender of non resident losses which were beyond possible local use for past, current or future accounting periods. The response of HMRC had been to argue that the “no possibilities” condition could not be met by positive action by the taxpayer. To enable the taxpayer to take steps which would render losses beyond future use would enable a choice of jurisdiction in which the losses could be taken into account offending the balanced allocation of taxing rights. From that principle HMRC argued that the appropriate date at which the “no possibilities” condition should be tested was at the end of the accounting period in which the losses arose, a period short enough to exclude the prospect of such taxpayer action.
Given that all EU jurisdictions permit loss carry forward, to require losses to be beyond possible future use at the end of the accounting period would exclude almost all claims. In cases where a loss making subsidiary was liquidated after years of trading losses leading to a cessation of trade, it would exclude the losses incurred in all but the final year. Although that analysis of the judgment found its way into the amendments to the group relief provisions in 2006 to take account of the M&S judgment, the European Commission have issued infraction proceedings on the grounds, it appears, that in so doing the UK have adopted too restrictive a reading of M&S.
M&S had argued that it must be extended the opportunity of demonstrating that its losses were beyond possible future use. It had liquidated its loss making subsidiaries after some 5 years of inactivity. In doing so it was not exercising any choice of jurisdiction: either the losses were to be taken into account in the UK or not at all. It argued that the time at which the “no possibilities” test should be assessed should be the date of the claim for group relief, giving a reasonable period in which to prove the test was met.
The Supreme Court, relying on C-123/11 A Oy, has now found in favour of M&S concluding that the correct date to assess the condition is the date of the claim. In so doing it has rejected the interpretation of HMRC that permitting the taxpayer to take steps amounted to the exercise of an impermissible choice of jurisdiction. It has concluded that, as in A Oy, the determination of whether the possibilities of local use have been exhausted is a factual one.
The M&S case will however still need to return to the Supreme Court later in the year to answer the other appeal issues. These concern whether further claims can be made while the domestic time limits permit so that the no possibilities test can be assessed at those dates. The remaining issues also concern whether for claims for accounting periods before 2000 under the old pay and file system, with its more restricted time periods, the time period should be extended given that, although M&S made its claims within time, the ECJ did not reveal the existence of the “no possibilities” test until after that time period had expired. There also remains the question of how to compute losses for cross border surrender (on a local or UK basis or both?), a question referred but not directly answered in A Oy.
Other Developments: Recent Listings
The ROSIIP GLO concerns assessments to an unauthorized payment charge and surcharge of 55% upon the transfer of pension savings from UK funds to the Singapore based ROSIIP fund in 2008. A transfer will be an authorized payment not attracting those charges if, among other things, it is to a qualifying fund (a QROPS). ROSIIP appeared on HMRC’s published list of QROPS at the time of the transfers. HMRC defend these assessments on the grounds that, although on the list of qualifying funds, ROSIIP in fact did not meet the criteria for qualification and removed it from the list with retrospective effect. Some 37 affected pension holders challenge those decisions on the grounds of legitimate expectation and EU law (movement of capital). Permission was given on 2nd May to move for judicial review. The hearing will commence on 17 June.
The ECJ has now set the 3rd reference in the FII GLO down for hearing in June. This concerns whether the retrospective reduction in the limitation period for mistake claims issued after 8 September 2003 (s320 FA 04) offended EU rights. The Supreme Court concluded in May 2012 that the like provisions which hit claims issued before that date (s107 FA 07) offended EU principles but could only reach the same decision for s320 FA 04 by a majority (5:2) and therefore referred the matter to the ECJ.
Also in the FII case, the High Court has now listed for 29 April 2014 the full hearing of FII case to apply the ECJ’s 2nd reference and determine the test claims.
Robert Waterson, Senior Associate at Hage Aaronson explains why the Further Judgment in ITC is good news for taxpayers who suffered unlawfully levied VAT but had no direct right of action against HMRC under s.80 VATA.
By Robert Waterson
Investment Trust Companies (In Liquidation) v The Commissioners for HMRC [2013] EWHC 665 (ch)
The ITC litigation concerns the recovery of VAT by Investment Trust Companies (ITCs) who had paid VAT on services supplied to them by management companies (the managers). The imposition of VAT on these services was found to be contrary to EU law by the CJEU in Abbey National and JP Morgan Claverhouse.
The process of recovering overpaid VAT is codified in statute in s.80 Value Added Tax Act 1994 (VATA). That mechanism is open only to those who have accounted to HMRC for the relevant VAT. Consequently, the ITCs had no direct way of recovering their money since they had not accounted to HMRC for the unlawful VAT: the managers had. Claims were therefore made by the managers who then passed on the recovered sums to the ITCs. A difficulty arose however because the managers were unable to recover all the VAT the ITCs had paid. Under s.80, HMRC were obliged only to repay the VAT paid to them. As the managers had made deductions for attributable input tax, the amount repaid was less than the VAT suffered by the ITCs and they remained out of pocket for the difference. In the ITC case this sum was referred to as “the £25”.
In the first judgment, Henderson J found that the Revenue had been enriched to the full extent of the VAT, including the deducted input tax and that the ITCs had no means of recovering the £25 at English law because s.80 prevented them from doing so and any action against the managers would have been futile because they had, as Henderson put it, a “cast iron defence of change of position”.
At EU law the position was different. Henderson J found, following the CJEU’s decisions in Danfoss and Reemtsma, that it was clear that the ITCs must have a direct right of action to recover the £25 from HMRC, notwithstanding the exclusionary nature of s.80. What was less clear was how this was to work in practice. The questions of law which surround this issue are complex and were at that time relevant to issues which were the subject of a reference to the CJEU in Littlewoods and in the FII GLO before the Supreme Court. Henderson J decided to issue a preliminary judgment which dealt with the issues he could determine and reserve his position until judgments were delivered in Littlewoods and FII.
After those judgments were delivered, there was a further hearing at which HMRC argued for the exclusionary scope of s.80(7) to be limited only in so far as it enabled the claimants to make Woolwich style restitutionary claims. They argued that, although EU required claims to be available in circumstances where recovery from the taxable person (in this case the managers) was not possible, the courts must lift the bar on the use of common law remedies instituted by parliament only to the minimum extent necessary to accommodate rights conferred by EU law. Such a finding would have limited the ITCs’ claims to 6 years from the date of the payment of the tax, effectively killing off their claims.
Henderson disagreed with this analysis. Citing the decision of the Supreme Court in FII he found that once the statutory scheme had been overridden by EU law, the situation must be as it would have been if all common law causes of action had been available to the ITCs. Henderson found no justification in EU law jurisprudence for a court engaging in an exercise of identifying a minimum remedy or one which would provide the best fit for existing but unavailable remedies. That was the approach which the Court of Appeal had taken in FII, but that approach had been roundly rejected by the majority decision of the Supreme Court. Drawing from LittlewoodsHenderson found that the job of the national court is to apply such procedures as are “appropriate to safeguard the individual rights conferred by EU law”. Henderson found that this gave no encouragement for the notion espoused by HMRC that a national court is obliged to provide only the minimum remedy, but rather facilitate the type of remedy and choice which English law would normally afford. Once the statutory scheme was ousted the English law domestic principle that a claimant has the freedom to choose its cause of action should not be interfered with.
The ITCs were therefore free to opt for their preferred DMG “mistake” based remedy which would enable them to recover sums paid under a mistake of law for a period of six years from the discovery of the mistake, but importantly, those claims could go back to the time at which the unlawful tax charge began to be levied. The judgment is therefore a comprehensive win for the taxpayer for all periods apart from the so called ‘Dead Period’ where Henderson found that EU law principles were not engaged and recovery could not be sought.
This ruling has wider significance in that it embodies a broader approach than in previous UK court decisions to the availability of common law remedies to taxpayers asserting their EU law right to an effective remedy. The case is likely to go on appeal, but in the mean time, it is expected that those with protective high court claims stood behind ITC may make applications for interim payments.
By Federico M.A. Cincotta
The CJEU concluded that the taxation of unrealised capital gains on assets assigned to a permanent establishment which ceases to operate in Spain does not amount to a restriction on the freedom of establishment. This is considered a purely domestic situation, since that taxation does not result from a transfer of the place of residence or of the assets of a company to another Member State, but merely from a termination of its activities. However, as decided in National Grid Indus, the immediate taxation of unrealised capital gains on the transfer of the place of residence or of the assets of a company established in Spain to another Member State amounts to a restriction on the freedom of establishment. The right to the freedom of establishment does not preclude capital gains generated in a territory from being taxed, even if they have not yet been realised. By contrast, it does preclude a requirement that that tax be paid immediately.
This article appears in the JHA April 2013 Tax Newsletter, which also features:
By Robert Waterson
The ITC case concerns the recovery by Investment Trust Companies of unlawfully levied VAT paid on services supplied to them by their management companies. The Managers were able only to recover the VAT they had passed on to HMRC on these services net of input tax deductions. The ITC case concerned the irrecoverable residual sum of VAT to which the ITCs remained out of pocket. The statutory provisions for the recovery of VAT provide no mechanism for the ITCs to recover this residual sum (because they are not the taxable person accounting for the VAT to HMRC) so the claimants issued claims in the High Court. This second judgment, which awaited judgments on a related point in the Supreme Court and CJEU in the FII and Littlewoods cases respectively, represents a win for the taxpayer on some of their claims (those outside for the so-called “dead period”). Like FII, two types claims were potentially available to the claimants: “Woolwich” type claims limited to 6 years and a “mistake” claim with a potentially unlimited time period. The issue before the Court was whether claimants were restricted to the least favourable of those options which would have left the claims entirely out of time. In FII the Supreme Court saw no reason why a claimant should be restricted to choosing the least-best remedy as a matter of principle in order to vindicate its rights at EU law. There was no reason to restrict the freedom of choice which English law normally affords where different remedies are available. Henderson J concluded, applying that judgment, that the claimants did have a “mistake” claim and therefore had no effective time limit on their claims.
This article appears in the JHA April 2013 Tax Newsletter, which also features:
The Supreme Court hearing took place on 15 April 2013 in the Marks & Spencer group relief case. The hearing dealt only with the question of when the no possibilities test should be assessed (at the end of the accounting period in which the losses arose or at the date of the claim). The Supreme Court will decide whether or not that issue needs to be referred back to the CJEU and, if not, will determine the matter itself. Judgment has been reserved.
This article appears in the JHA April 2013 Tax Newsletter, which also features:
By Federico M.A. Cincotta
The CJEU has held that it is unlawful for a national system to limit the interest granted on repayment of tax levied in breach of EU law to the interest accruing from the day following the date of the claim for repayment of the tax as opposed to when the tax was actually paid. The CJEU confirmed its judgment in Littlewoods, stating that where a Member State has levied taxes in breach of the rules of EU law, individuals are entitled to reimbursement not only of the tax unduly levied but also of the amounts paid to that State or retained by it which relate directly to that tax. The CJEU take into consideration the losses constituted by the unavailability of sums of money as a result of a tax being levied prematurely and the duration of the unavailability of the sum unduly levied. This decision affirms the approach in Littlewoods although what the CJEU meant in Littlewoodsremains the subject of ongoing litigation in that case.
This article appears in the JHA April 2013 Tax Newsletter, which also features:
Originally printed in International Tax Review Premium on 14 March 2013
The European Court of Justice (ECJ) handed down judgment in Wheels Common Investment Fund Trustees Ltd and Others v Commissioners for HMRC on March 7 2013.
Robert Waterson, senior associate at Hage Aaronson, analyses the ruling and explains why the ECJ still needs to answer the question of whether management services provided to defined contribution schemes could qualify for VAT exemption.
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