Marks & Spencer Upper Tribunal Decision: One-All Draw?
On 21 June 2010 the Upper Tribunal published its decision on the Marks & Spencer (M&S) case (click here to read the full text). The case was appealed by HMRC to the Tribunal from both the Substantive Decision (First-Tier Tribunal - 2 April 2009) and the Quantification decision (First-Tier Tribunal- 24 August 2009), to determine which of those claims made by M&S would succeed and in what amounts.
Many of the principles of the case have already been settled, however, the main thrust of the current Tribunal decision is around the technical validity of claims and calculation of the quantum of available losses.
Although to a certain extent overshadowed by the Emergency Budget (click here), in the current environment, a reduction of the effective tax rate and a potential receipt of tax refunds will be important issues for most companies
Background
The case concerns the ability of a profitable UK parent company (M&S plc) to offset losses generated by its overseas subsidiaries (originally in France, Germany and Belgium) against its UK profits under the UK group relief rules. The case went to the European Court of Justice (ECJ) where it was argued that in not allowing EU subsidiaries to surrender losses to UK group companies, the UK group relief rules were contrary to EU law. The ECJ found the UK rules did restrict M&S' freedom of establishment but this was generally justifiable. However it was not proportionate to apply the restriction where the EU subsidiary had, in its State of residence, exhausted the possibilities for offsetting losses in the current or previous accounting periods and there was no possibility for the losses to be taken into account in future periods. It was then up to the UK Courts to apply this ruling to the actual facts.
M&S had made several claims for various periods and at various times - the First-Tier Tribunal decision of April 2009 considered each of those claims and determined which were valid. Broadly, the Tribunal held that claims which were made within the relevant domestic time limits (or even outside domestic time limits under the principle of effectiveness), and which satisfied the no possibilities test when made, were valid claims.
Points to note from the decision
HMRC appealed both the Substantive and the Quantification decision on the basis that there were no losses in relation to which M&S could properly make a group relief claim, and that even if there were, the method of quantifying them was not correct.
The Upper Tribunal (as is to be expected) applied the decisions of the High Court and Court of Appeal, stating that on:
1) The no possibilities test:
- The surrendering company must have exhausted the possibilities available to it in its State of residence (under domestic law) of having the losses taken into account for the accounting periods concerned by the claim for relief and also for previous accounting periods.
- There must be no possibility for the losses to be taken into account in the State of residence of the surrendering company for future periods either by the surrendering company itself or by a third party (in the event of the company/losses being sold to a third party).
- Possibilities available should be read as "recognised possibilities legally available given the objective facts of the company's situation at the relevant time.” This is different from there being "little or no real likelihood, or that the claimant (or the surrendering company) had no intention, that losses could or would be set against future profits”. It is also the case that "no possibility” in the second condition is to be read as "no real possibility”; in the sense that a real possibility is one which "cannot be dismissed as fanciful”.
- The relevant time - i.e. when the "no possibilities" test must be met - was the time when the group relief claim was made. The Upper Tribunal, like the First-tier tribunal, was bound by the decision of the Court of Appeal on this point. The Upper Tribunal agreed with the First-tier Tribunal that the test should be applied to each euro of losses rather than to the amount of loss as a whole.
2) Time limits and claim procedure:
The Upper Tribunal considered the operation of the claims procedure and time limits under both the pay and file and the self-assessment regimes. The Tribunal held that the effect of Community law was that more than one claim could be made in respect of the same amount of loss. For example, if an earlier claim did not meet the no possibilities test but at the time of a second, later claim it was met, the second claim was valid provided it was made within the relevant time limits. The time limits under the Pay and File regime were more restrictive and incorporated an absolute six year time limit. As a result the later claims made by M&S under the pay and file regime (made once the no possibilities test was met) were made out of time and therefore failed.
M&S argued that they were entitled to 'special treatment' as the taxpayer bringing the case and that there should be special transitional arrangements available to them, to allow their out of time claims. This was on the basis that they 'led the way in establishing the Community law rights' in relation to group relief and thus, according to the principle of effectiveness, should not be 'prejudiced, if it has, through ignorance of what the courts ultimately might determine failed to comply with the procedural requirements'.. i.e. as it had not known the no possibilities test was a requirement until after the time limit for making a claim expired.
The Tribunal dismissed this, ruling that the principle of legal certainty effectively overrules the principle of effectiveness.
This creates a somewhat paradoxical situation where, at the date the right arises, - i.e. once the no possibilities test is met - domestic time limits can have denied a right to enforce a claim. If it is upheld, this part of the decision could limit the circumstances in which late claims will be accepted.
3) The quantum of the losses:
The judgment also considered and approved the First-Tier Tribunal's decisions as to how the losses claimed should be calculated. The no possibilities test can be applied only to losses as computed under the company's local law. Local law must determine whether any particular amount of loss as so computed can be used. This should be considered on a euro by euro basis; if one euro can be used this does not mean the entire losses cannot be claimed. Once the no possibilities test is satisfied one may be left with the remaining losses as so computed. These should then be converted into sterling and recomputed in accordance with UK tax principles.
The judgment provided further guidance regarding differences between UK tax losses and overseas losses:
1) The fact that losses to be claimed should effectively be capped at the lower of the overseas tax loss and UK tax loss where differences arise as a result of differences in principle between tax regimes rather than timing differences,
2) That the periods for which claims for UK group relief are made should correspond to the periods where there are losses computed under UK tax principles. By way of example, if a local loss arose in 1998 but, due to timing differences under UK tax principles, the UK tax loss would actually arise in 1997, a claim should be made for group relief in respect of the 1997 period. This gives rise to some potentially interesting issues. 1) Review and confirm whether loss claims will still succeed. In particular: 3) If the no possibilities test was not met when the claim was made, consider withdrawing and remaking it. Please speak to your normal KPMG Tax and Pensions contact if you would like to discuss any of these issues.
Actions
Existing claimants
2) If all conditions are met, consider following up with HMRC. We are aware that HMRC are of the view that only claims with fact patterns 'on all fours' with M&S may succeed. In HMRC's view claims by companies with non-EU ultimate parent companies, or 'sister company claims are not valid. KPMG in the UK disagrees with HMRC's views and are considering the most cost efficient way to progress such claims.
New claimants
A claim should be made forthwith if overseas losses are non-useable and if within the relevant time limits (broadly this is two years from the end of the relevant accounting period under UK domestic provisions, or where a tax return remains open due to enquiry).
It is anticipated HMRC will appeal.
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