Marks And Spencer Plc v Halsey (HM Inspector of Taxes)

A general rule denying UK group relief for losses of non-UK subsidiaries is compatible with the right of establishment where it protects the allocation of taxing powers, prevents double use of losses and limits tax avoidance. It must nevertheless be disapplied in an individual case where the subsidiary has exhausted all legally recognised possibilities of using the losses in its state of residence, both for the relevant and earlier periods, and no future use remains for the subsidiary or a third party.

The question is determined on the facts existing when the claim for group relief was made. The claimant must demonstrate that the recognised possibilities of foreign relief were exhausted, but need not eliminate merely hypothetical or unrecognised possibilities.

Marks and Spencer plc claimed UK group relief for trading losses incurred by wholly owned subsidiaries resident in France, Germany and Belgium. The relevant provisions of the Income and Corporation Taxes Act 1988 restricted group relief to losses of UK-resident companies, or non-resident companies trading through a UK branch or agency.

The Special Commissioners dismissed the claims. On appeal, the High Court referred questions concerning compatibility with the right of establishment to the ECJ, which delivered judgment on 13 December 2005. The case returned to the High Court to determine the effect of that judgment on the French, German and Belgian losses.

1. Effect of the ECJ judgment. The ECJ’s ruling was to be understood as preserving the validity and enforceability of the general UK restriction, while requiring its disapplication in particular cases satisfying the conditions identified in paragraphs 55 and 56 of the ECJ judgment. The ECJ had accepted that the restriction pursued legitimate objectives: preserving a balanced allocation of taxing powers, preventing losses from being used twice, and preventing tax avoidance.
2. Three-stage analysis. The relevant Community-law analysis asks whether the national measure restricts the right of establishment, whether it pursues a legitimate and Treaty-compatible objective, and whether its application is proportionate. The restriction constituted a restriction on establishment and pursued legitimate objectives, but went beyond what was necessary in the exceptional circumstances identified by the ECJ.
3. French losses. Relief for the losses of M&SF was refused. The conditions for disapplication were not met because the losses remained available for use in France and had in fact been used there by the purchaser’s group.
4. German and Belgian losses. The claims concerning M&SG and M&SB required further findings. “Possibilities available” meant legally recognised possibilities, assessed by reference to the objective facts of the company’s situation. The court should consider the types of loss, the forms of relief available, and the relevant periods. The mere improbability of a return to profitability did not eliminate a legal possibility of using losses against future profits.
5. Burden and relevant time. M&S had to demonstrate that all generally recognised means of obtaining relief in Germany or Belgium had been exhausted. It was not required to disprove speculative possibilities which reasonable enquiries by specialist advisers had not identified. The relevant time was when each claim for group relief was made, rather than the end of the loss period or the date of the later appeal.
6. The claims for M&SG and M&SB were remitted to the Special Commissioners for further evidence and determination in accordance with the ECJ judgment and this judgment. The parties could agree the outcome without a further contested hearing.

1. Special Commissioners: dismissed Marks and Spencer’s appeals against refusals of group relief.
2. High Court (Chancery Division): referred questions of Community-law compatibility to the ECJ, then dismissed the claim concerning the French losses and remitted the claims concerning the German and Belgian losses for further findings.