UK: European Court Rules on Consortium Relief

Last Updated: 18 October 1998
The recent decision of the European Court of Justice in the case of ICI -v- Colmer has important implications for the taxation of corporate groups in the United Kingdom, and potentially has wider implications for the taxation of companies throughout the European Union.

The case was concerned with consortium relief which allows a consortium member to claim a share of any trading losses arising in the consortium based on its proportionate ownership of the surrendering company.

It is possible for the members of a consortium to hold their consortium shares through a holding company, provided that the business of the holding company consists wholly or mainly in the holding of shares in trading companies. The problem in the ICI case was that the holding company concerned had 23 subsidiaries, only 4 of which were UK resident. If, as the UK Revenue contended, the requirement that the business of the holding company must consist wholly or mainly in the holding of shares in UK resident companies, then that requirement had not been met, with the result that the UK subsidiary concerned could not surrender losses to ICI. This interpretation rested upon applying a definition contained in a different sub-section to the whole of the remainder of the relevant part of the tax legislation. ICI contended that the definition requiring UK residence was only relevant to the sub-section concerned, the purpose of which was to prevent cross-border surrender of losses, and should not be applied globally to the consortium relief rules.

ICI won the case in the first instance and before the Court of Appeal; the Inland Revenue, however, won the case before the House of Lords. ICI argued that the UK rules as interpreted by the House of Lords were contrary to European law. A reference was therefore made to the European Court of Justice.

The provision concerned was article 52 of the EC Treaty, concerning the freedom of establishment in member states. In brief, the issue was as follows: by interpreting the UK consortium relief rules in a restrictive manner, was the UK discriminating against the right of EC nationals to incorporate in any member state by having tax rules in place that restricted this freedom?

The Court held as follows:

1. Article 52 precluded the United Kingdom from putting into place consortium relief rules which discriminated against the right of nationals to incorporate in any member state. If the rules applied in the present case would achieve that result, they must be interpreted in a way that is consistent with European law. The fact that such an interpretation could result in a loss of revenue in one member state is immaterial provided that the revenue was taxed in another member state.

2. On the facts of the present case, however, as the holding company had 23 subsidiaries, only 10 of which were resident in member states, the provision is not, on these facts, contrary to European law, as the majority of the subsidiaries are resident in non-member states.

It is now for the House of Lords to interpret the decision of the European Court for the purposes of UK law. It is far from clear what it will do. Simply on the narrow facts of the case, it is left with a decision that states that the denial of consortium relief to ICI will not be contrary to European law. However, on a different set of facts, the law as the House of Lords previously stated it cannot be sustained in a manner that is consistent with European law. Simply to interpret the words "UK resident company" as "EU resident company" would, however, involve the express overruling of the will of Parliament, something which the courts are not empowered to do, unless it is argued that the relevant statutory provisions have already been impliedly overruled by the incorporation of article 52 into UK law by the UK's accession to the European Union.

A way to avoid that argument would simply be to apply the judgment of the Court of Appeal - but this would mean that ICI should be granted consortium relief. It would also potentially have wider implications. In the course of debate before the courts the UK Revenue made great play on the possibility that the UK tax base could be eroded if ICI's argument was to succeed. It seems clear from the decision of the European Court of Justice that, at least to the extent that the European Union as a whole is tax neutral, the fact that the UK tax base may be prejudiced is immaterial. This could mean, for example, that corporate groupings could be set up through non-UK holding companies - or even that losses could be surrendered cross-border, although this was not a point that was explicitly argued before the European Court of Justice.

The converse argument - that article 52 has already impliedly overruled part of the consortium relief rules - could lead to similar results.

It is understood that the Inland Revenue may shortly publish a statement of practice to the effect that surrenders of consortium relief may be made under the circumstances specified by the ECJ - i.e. where the majority of the subsidiaries are located in member states. Until such a statement is issued, however, it is not clear what the statutory basis for such a statement would be. Unless one of the two arguments stated above is applied, it would be arguable that such a statement would be ultra vires and therefore void, unless it were made as part of an announcement of a future change of law which will have retrospective effect.

The wider implications of ICI -v- Colmer remain to be settled, therefore, as the relationship of national tax law to European law continues to evolve.

For further information please contact Mark Simpson, e-mail: Click Contact Link , 2 Park Lane, Leeds LS3 1ES, UK, Tel: + 44 113 284 7000

This article was first published in the Autumn 1998 Hammond Suddards Tax Newsletter Update

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.

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