UK: Marks & Spencer: Cross-Border Loss Relief

Last Updated: 23 November 2011
Article by Ashurst London

The Court of Appeal (Lloyd, Moses and Etherton LLJ) has issued a further decision in this case, dismissing the entirety of HMRC's appeal in relation to the validity of new non-UK loss relief claims made by Marks & Spencer, the timing of such claims and the quantification of the losses.

"No possibilities" test to be determined at the time the group relief claim is made

The "no possibilities" test is that set out by the ECJ such that cross-border loss relief will be permitted, despite the UK domestic rules, provided that the non- UK subsidiary has:

  • exhausted the possibilities in its state of residence for setting the losses against current or past profits (including by way of surrender to other companies); and
  • no possibility of these losses being taken into account in its state of residence in future periods (again, by itself or another group company in that state).

The Court of Appeal previously held that this test must be applied at the point at which the claims are made, following Park J's reasoning in the High Court that to require the test to be met at the end of the accounting period in which the losses arose would be "too soon and likely to rule out every case" because the lossmaking entity was still likely to be carrying on its trade.

HMRC here sought to introduce an argument in principle against this decision as it potentially allows taxpayers to engineer a situation in which losses could no longer be used in the home state, e.g. by way of liquidating the loss-making company.

The Court of Appeal is able to overrule itself if the ECJ judgment under consideration has "been the subject of further consideration – and consequent interpretation, explanation or qualification", but Moses LJ here dismissed HMRC's contention that this had happened with Marks & Spencer and explicitly approved the decision that the "no possibilities" test is to be looked at by reference to the facts as at the date of claim.

Sequential claims are permissible

The Court of Appeal noted that a group with non-UK losses which it seeks to surrender into the UK has a more difficult administrative task in including its claim for group relief in its tax returns than one with UK losses because changing circumstances over time may affect whether and when a non-UK loss has "no possibility" of use in the state in which it arises. In order, therefore, not to put Marks & Spencer at an "unjustifiable advantage", it was permitted to make successive claims.

In allowing sequential claims, Moses LJ recognised that, following Autologic, any formal statutory requirement must be "disapplied or moulded" so that the right [to make a claim] is not rendered "practically impossible or excessively difficult". This principle, that the administrative provisions connected with substantive tax provisions must also not disadvantage cross-border group structures, clearly extends to other contexts and will be very useful to taxpayers which only become aware belatedly of meeting the "no possibilities" test.

Using part of a loss does not preclude surrender of the remainder

The Court of Appeal confirmed the Upper Tribunal's determination that the "no possibilities" test should be applied on a euro for euro basis. Moses LJ noted that the assessment of the test involves a factual question based on the factual position of the subsidiaries suffering the losses and that it would therefore be an "absurdity" to exclude all losses simply because one euro of loss may be used in the state of residence of the subsidiary.

Available loss to be computed according to UK tax rules

Moses LJ held that the correct methodology for calculating the quantum of the surrenderable losses is (to take Germany as an example) to:

  1. identify the taxable losses under German tax rules;
  2. identify those losses available to be used against subsequently earned profits (calculated under German rules);
  3. strip out the tax adjustments made to the commercial profit or loss appearing in the statutory accounts;
  4. apply UK tax adjustments to the figure identified in (iii) to arrive at an equivalent UK taxable loss; and
  5. deduct from the total "UK" loss, the amount of the overseas losses identified at (ii).

This method results in there being the same amount of loss available as if all the companies had been UK resident – the desired outcome. Similarly, UK rules are to be determinative of the accounting period in which the losses may be used, even if this is different from that in which the losses would be recognised under German rules.

However, while the surrenderable relief is thus capped at the amount that would have been available had the company been UK resident, it is not clear that this method could not result in a greater amount being surrenderable to the UK by the German company than would have been available in Germany. The Court of Appeal confirms that it is entirely acceptable – and logical – that timing differences (such as those resulting from the differences between depreciation and capital allowances) may result in a loss for UK purposes being recognised earlier than a loss for German purposes but there is no discussion as to whether it is possible for a loss to be surrendered to the UK where none would ever arise in Germany, for example if 100 per cent allowances were available in the UK. In such a case, it would be clear at the outset that there was "no possibility" of such losses being used in Germany at any point as they would not exist there.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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