What is this about?
In 2010, the corporation tax provisions on consortium relief were amended to allow claims where the ‘link company’ was based anywhere in the EEA, even if not within the charge to UK corporation tax. However, these amendments were partial and limited.
In a decision on 1 April 2014, the CJEU addressed arguments by HMRC which followed the same limited approach as that new legislation. The CJEU’s decision indicates that these limitations are invalid. Consortium relief should properly be available within structures with an EEA link company, in just the same way as it is in those structures with a link company subject to UK corporation tax.
The CJEU’s decision also strengthens ‘sister/sister’ claims for EEA loss relief. For groups headed by UK or EEA companies, it is not clear how HMRC might continue to resist sister/sister claims, made in time, in relation to ‘no possibilities’ losses.
What were the facts?
Felixstowe Dock and Railway Company Ltd (C-80/12) relates to consortium relief claims by eight UK companies in the (Hong Kong) Hutchison Whampoa group. The claims were for losses incurred by Hutchison 3G UK Ltd, a company in a joint venture group in which the Hutchison Whampoa group had a 65% stake. Of that 65%, 50.1% was held by a Luxembourg company in the Hutchison Whampoa group and the remainder was held outside the EEA.
The eight companies claimed consortium relief, presumably of up to 50.1% of the losses. They argued that the Luxembourg company was a ‘link company’ for the purposes of what is now CTA 2010 s 133, even though UK law at the time prescribed that only a UK company (specifically, a UK corporation tax payer) could be a link company. HMRC argued in effect that no relief should be given, as there was no EEA chain of ownership between the Luxembourg company and the claimant companies in its group. HMRC accepted that no such limitation applied in relation to UK link companies.
What was decided?
The court decided that denial of consortium relief by reference to the link company was a prohibited restriction on freedom of establishment. This was because the circumstances in which surrender could be made were more limited than those where a link company is a UK corporation tax payer.
The language of the decision is unclear as to whose freedom was restricted, and how. The most sensible conclusion is that the link company’s freedom of establishment was restricted in relation to its indirect 50.1% investment in Hutchison 3G UK Ltd. It is not immediately clear whether the restriction was in denying its UK establishment (i.e. Hutchison 3G UK Ltd) the right to surrender losses, or in denying its fellow group companies the right to claim those losses.
The advocate general’s opinion should also be approached with some caution in this case. The court does not appear to have consistently adopted AG Jääskinen’s views.
What is the impact on the consortium relief rules?
The decision has two effects on the consortium relief regime. Firstly, the 2010 changes only extended consortium relief to situations with an EEA link company for accounting periods beginning on or after 12 July 2010. It is clear from Felixstowe Dock that EU law demands an equivalent extension to be read into the legislation in force for earlier periods.
Secondly, CTA 2010 s 133(5)–(8) contains limitations equivalent to the arguments made by HMRC in Felixstowe Dock and rejected by the CJEU. On a fair reading of the case, it appears that those sections can now be properly ignored for all periods (i.e. they must now be disapplied).
What is the impact on Marks & Spencer claims?
The CJEU’s approach includes aspects which are of real help to some groups claiming EEA loss relief. This is likely to affect more groups than the decision on the specific consortium relief issues.
Signs of movement from HMRC suggest that it will consider and finalise EEA loss relief claims where possible, following February’s decision of the Supreme Court in HMRC v Marks and Spencer PLC [2014] UKSC 11. HMRC had historically argued that the CJEU’s decision in that case only supported claims by UK parent companies for losses of EEA subsidiaries. However, the CJEU’s case law makes it quite clear that denial of a surrender from an EEA sister company to a UK sister company is a restriction on freedom of establishment where there is an EEA parent company (of the UK subsidiary) or a UK parent company (of the EEA subsidiary). Further, Felixstowe Dock (at paragraph 23) has now followed Philips Electronics UK Ltd (C-18/11) in making it clear that the UK claimant company can rely on that restriction in order to support its EEA loss relief claim.
The effect is that taxpayers should in theory now have all the tools they need to deal successfully with this argument of principle from HMRC. In these situations, as with the simpler fact patterns, only practical issues relating to quantification should remain to be resolved.
What action should I take?
Groups where losses may be available for surrender to or from a consortium (i.e. a joint venture group), but which have not considered this fully, and where the potential link company is EEA incorporated, should now review their position.
Groups with EEA loss relief claims which HMRC has so far resisted as being ‘sister/sister’ claims should now consider seeking to finalise those claims as far as possible. There may well be value in speed here. A limited number of experts in HMRC is likely to be faced, shortly, with a large number of claims.
