“Today’s judgment concerns whether or not the UK was in breach of the original ruling from the European Court in the long-running ‘M&S’ case. In that case, the European Court found that a UK company investing in a foreign EU subsidiary was objectively comparable to a UK company investing in a UK subsidiary. Therefore the principle of freedom of establishment in the EU treaty meant there should be no unjustified discrimination between the two cases because as a UK parent company could claim tax relief for the losses of its UK subsidiary it meant it should also be able to claim losses from a foreign subsidiary. However loss relief could be restricted in order to protect the balanced allocation of taxing powers and prevent avoidance, but the Court said the restrictions should not apply if the loss could not be used in the foreign country.
“It’s good news in so far as the court has decided not to follow the earlier Advocate General’s Opinion issued last October and overturn the original decision in the M&S case. But it’s a shame that they took a very legalistic view of the requirement that relief must only be given if a loss cannot be carried forward – so they agree with the UK rules which say that determination must be decided at the end of the accounting period in which the loss was made.
“The practical implication is that for losses under the 2006 rules you can only get relief for the one – ie current year losses – and at the end of the accounting period the subsidiary needs to be in a position where the losses are no longer able to be carried forward – either by having disposed of its income earning assets, ceased trading, been wound up etc.
“We anticipate that there could well be some confusion around timing as HMRC told the Court that this did not have to be done as at the end of the relevant accounting period but could be done at the start of the next one. It will be interesting to see if HMRC stick by this or if they start to argue that a company which does so at the beginning of the new period has breached the test as the losses could theoretically be used for the first few weeks of the new period. It is also unsatisfactory as we don’t know the cut off point for using these losses. Could it be a month, two months – it’s not clear.
“And finally, it’s interesting the UK Supreme Court held that M&S cases only have to satisfy the use of losses test at the time of the claim. This is now UK law – by precedent – so we potentially have different standards for pre and post 2006 losses.”
On 15 July 2014 the Court of Justice of the European Union (CJEU) held the hearing for the European Commission’s infringement proceedings against the UK in respect of the lawfulness of the cross border group relief provisions that were introduced by Finance Act 2006.
On 23 October the CJEU issued its Advocate General’s Opinion on this case.
Today the CJEU issued its judgment, which is significant for UK taxpayers with existing cross border group relief claims as well as those considering new claims in all periods that follow the introduction of the FA 2006 rules.
To date HM Revenue & Customs have expressed the view that the introduction of the FA 2006 rules made the UK’s group relief regime compatible with EU law following the landmark judgment in the Marks & Spencer (M&S) case from December 2005 which showed the UK’s domestic rules (pre-FA 2006) were contrary to the EU Treaty.
The rules introduced by FA 2006 allowed for cross border group relief claims in principle, but only in extremely limited circumstances that were impossible for taxpayers to satisfy in many cases - essentially the ‘no possibilities test’ (NPT) needed to be satisfied at the end of the period in which the losses arose. The EU Commission had challenged the rules on the basis that this condition was too restrictive. AG Kokott said she believed the restriction was legitimate because the UK should be under no obligation to grant cross-border group relief in the first place.
By contrast, in the course of the long running series of M&S cases going through the UK courts which have considered the old rules and how the European Court’s initial judgment should be interpreted, the Supreme Court judgment of 2013 held that the NPT should be assessed at the date the claim for cross border group relief is actually made by the taxpayer and not the end of the period in which the losses arose.
Margot Cowhig, KPMG Corporate Communications
T: +44 (0) 207 694 4246
M: +44 (0) 7920 274856
KPMG Press office: +44 (0) 207 694 8773
Follow us on twitter: @kpmguk
KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 12,000 partners and staff. The UK firm recorded a turnover of £1.9 billion in the year ended September 2014. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 162,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.