Commissioners for Her Majesty's Revenue and Customs v Marks and Spencer plc

The exceptional entitlement to cross-border group relief depends on a practical assessment of whether the foreign subsidiary’s losses can be used in its state of residence. The assessment is made by reference to circumstances known when the claim is made, rather than those existing when the losses arose or when the claim is later examined.

The claimant must show that the losses could not have been used before the claim and cannot be used in the current or any future accounting period. The mere availability of loss carry-forward at the end of the loss-making period does not prevent the exception from applying. A voluntary liquidation does not itself constitute an impermissible choice of taxing jurisdiction, although courts must guard against attempts to choose where losses are relieved.

Marks and Spencer plc claimed United Kingdom group relief for losses sustained by subsidiaries resident in Germany and Belgium. The subsidiaries had ceased trading and were later liquidated. Domestic legislation generally confined group relief to losses of resident companies or United Kingdom branches of non-resident companies.

Following earlier domestic proceedings and a preliminary ruling concerning the freedom of establishment, the dispute returned to the domestic courts. The Court of Appeal held in [2011] EWCA Civ 1156 that the exceptional conditions permitting cross-border relief were to be assessed at the date of the claim. HMRC appealed.

The hearing concerned the first of five issues: whether the absence of any possibility of using the foreign losses had to be established by reference to circumstances at the end of the accounting period in which the losses arose, or those existing when the claim was made.

HMRC’s appeal on the first issue was dismissed. Lord Hope gave the unanimous judgment of the court.

1. The inquiry into whether the foreign subsidiary had exhausted the possibilities of using its losses was essentially factual. The claimant had to receive a realistic opportunity to demonstrate that the exceptional conditions for cross-border relief were satisfied. Assessment at the end of the loss-making accounting period would almost always be premature because some future use of the losses would ordinarily remain possible.

2. The relevant circumstances were those known at the date when the claim was made. That date gave the inquiry certainty and prevented the relevant facts from changing between the claim and the later examination of it. The date of the first-instance hearing was rejected because it lacked the same certainty. Paragraph 69(2) of Schedule 18 to the Finance Act 1998, which referred to the time when the claim was made, supported that conclusion for self-assessment years.

3. The claimant must show that, at the date of the claim, there had been no possibility of using the losses in the subsidiary’s state of residence in any earlier accounting period and that no possibility existed in the accounting period of the claim or any future period. The conditions protect the balanced allocation of taxing powers by preventing a taxpayer from choosing freely in which member state its losses should be relieved.

4. The decision in Proceedings brought by A Oy, Case C-123/11, showed that the ability to carry losses forward at the end of the loss-making period did not itself prevent the exceptional conditions from being satisfied. It remained necessary to examine the practical possibilities of using the losses. A transaction undertaken voluntarily did not necessarily represent an impermissible choice of tax jurisdiction.

5. The decisions to wind up the German and Belgian subsidiaries were attributable to their having ceased trading years earlier. They did not, merely because they were voluntary, threaten the balanced allocation of taxing powers. Courts must nevertheless remain alert to arrangements through which a claimant is simply choosing the member state in which relief should be obtained.

The first issue was therefore answered in favour of Marks and Spencer. The third issue did not require an answer as a consequence. The questions concerning successive claims and the other remaining issues were left for a later hearing.

1. United Kingdom Supreme Court: In [2013] UKSC 30, unanimously rejected HMRC’s appeal on the first issue and held that entitlement to exceptional cross-border loss relief was to be assessed by reference to circumstances known at the date of the claim. The remaining issues were left for a later hearing.
2. Court of Appeal: In [2011] EWCA Civ 1156, reported at [2012] STC 231, found for Marks and Spencer on four of five issues. Although it disagreed with the earlier Court of Appeal’s reasoning on the relevant date, it held itself bound to use the date of the claim.
3. Upper Tribunal: In [2010] UKUT 213 (TCC), reported at [2010] STC 2470, treated the date of the claim as appropriate for the relevant self-assessment claims.
4. First-tier Tribunal: In [2009] UKFTT 64 (TC) and [2009] UKFTT 231 (TC), also reported at [2009] SFTD 757, considered the remitted group-relief claims.
5. First Court of Appeal: In [2007] EWCA Civ 117, reported at [2008] STC 526, upheld the conclusion that the exceptional conditions were to be assessed at the date of the claim.
6. High Court: In [2006] EWHC 811 (Ch), reported at [2006] STC 1235, applied the European ruling, selected the date of the claim and remitted the matter. The earlier reference to the European Court had been made in [2003] EWHC 1945 (Ch).
7. Special Commissioners: In [2003] STC (SCD) 70, initially held that the domestic restriction on cross-border group relief did not breach the freedom of establishment.