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

For cross-border group relief, the conditions governing the exceptional availability of relief for a non-resident subsidiary’s losses fall to be assessed by reference to the facts when the parent makes its group-relief claim. The claimant must then demonstrate, with objective evidence, that local opportunities to use the losses have been exhausted.

The future-use limb requires no real possibility of local use by the subsidiary or a third party. A possibility which is merely fanciful may be disregarded, but a low likelihood of future profitability does not itself eliminate a real possibility. The domestic residence restriction is disapplied only where those conditions are met; it is not automatically invalid.

M&S, a United Kingdom-resident parent company, claimed group relief for losses incurred by subsidiaries resident in Germany and Belgium. The Special Commissioners rejected the claims. On an appeal under domestic tax legislation, Park J sought a preliminary ruling from the Court of Justice in Case C-446/03, reported at [2006] Ch 184.

Following that ruling, the High Court dismissed the appeal concerning the French subsidiary but remitted the German and Belgian claims to the Special Commissioners for determination in the light of its judgment: [2006] EWHC 811 (Ch). The Revenue appealed the High Court’s conclusion that the relevant time was the date of the group-relief claim. M&S cross-appealed against aspects of the construction of the Court of Justice’s “no possibilities” test and sought directions concerning effectiveness and disapplication.

1. The Revenue’s appeal was dismissed. The Court upheld the conclusion that the exceptional conditions for cross-border group relief are to be determined by reference to the facts when the claim is made, not at the end of the surrendering subsidiary’s accounting period. The question whether the United Kingdom authorities are precluded from applying the residence restriction arises only upon a claim. They may require the claimant then to demonstrate the relevant conditions and to provide objective supporting evidence.

2. The first limb of the Court of Justice’s test requires exhaustion of recognised means of obtaining loss relief under the law of the subsidiary’s state of residence, assessed against the objective facts at the relevant time. It does not require the claimant to eliminate unrecognised or speculative relief mechanisms which remain undiscovered after reasonable enquiries.

3. The Court accepted M&S’s qualification of the second limb. There is no reason to construe future availability differently from present or past availability. The requirement of “no possibility” of future use means no real possibility: a possibility which is fanciful may be disregarded. However, the test is not whether future use is unlikely, whether the company is unlikely to return to profit, or whether the group lacks an intention to generate future income.

4. M&S’s cross-appeal was allowed to that limited extent. The order was varied by deleting the direction that the Special Commissioners determine the appeal in the light of the High Court judgment. The claims remained remitted for fact-sensitive determination.

5. The Court accepted that the Community-law principle of effectiveness could require sufficient time for a new claim after the relevant right had been established, but declined to give a direction on incomplete facts. It rejected automatic disapplication of the residence rule in Income and Corporation Taxes Act 1988: disapplication arises only where the exceptional conditions are demonstrated. A further reference to the Court of Justice was refused.

• Court of Appeal (Civil Division): The Revenue’s appeal was dismissed. M&S’s cross-appeal was allowed only to vary the remittal direction: [2007] EWCA Civ 117.

• High Court (Chancery Division): Park J dismissed the French-loss claim and remitted the German and Belgian claims to the Special Commissioners with a direction to determine them in the light of his judgment: [2006] EWHC 811 (Ch).

• Court of Justice: On a preliminary reference, it held that articles 43 and 48 of the EC Treaty permit the general residence restriction but require relief where the non-resident subsidiary has exhausted local use and there is no future possibility of local use: Case C-446/03; [2006] Ch 184.

• Special Commissioners: They rejected the group-relief claims: SC 3050/02.