The Court of Appeal has handed down its decision in the M&S group relief case and has upheld the decision of the Upper Tribunal on every issue. Claims for cross-border group relief require fulfilment of the ‘no possibilities’ test.
That test is to be assessed at the date of the claim and not, as HMRC argued, at the end of the accounting period in which the losses arose. For CTSA periods, sequential claims for the same losses in the same period are permitted. For pay and file periods, M&S could not rely on the principle of effectiveness to extend the time limit for bringing claims.
The Court of Appeal has handed down its judgment in the long-running Marks and Spencer (M&S) group relief litigation ([2011] EWCA Civ 1156).
In brief, the Court of Appeal has upheld the findings of the Upper Tribunal and dismissed the entirety of HMRC's appeal.
The Court of Appeal also upheld the Upper Tribunal in relation to the validity of out-of-time claims made by M&S for pay and file periods.
As Moses LJ noted in his judgment, few interested readers can be unfamiliar with the basic facts of this litigation.
That said, it is worth summarising some of the key issues and findings of previous courts before returning to the decision of the Court of Appeal.
M&S had chronically loss-making subsidiaries in Germany and Belgium.
Ultimately, in 2001, M&S announced that it would close its European stores and those stores ceased to trade.
The subsidiaries were in due course put into liquidation and were dissolved by the end of December 2007.
The question at the centre of this dispute is whether M&S could offset the losses of the German and Belgian subsidiaries against its profits in the UK by way of group relief.
Group relief claims were made by M&S between 2000 and 2003 in respect of accounting periods ending on 31 March 1998 to 2002, which included claims in respect of both pay and file and CTSA periods.
The decision of the Court of Appeal also deals with subsequent claims for group relief made by M&S at significant dates following the decision of the ECJ and the commencement of the liquidations.
No comprehensive review of the decision of the Court of Appeal can forgo some re-examination of the earlier decisions by the courts and tribunals.
The ECJ gave its decision in December 2005, finding that the UK’s group relief provisions offended Community law because they did not provide for the surrender of losses in a cross-border situation, even where there was no possibility of using the losses locally in past, current or future periods; the so-called 'no possibilities' test.
The case then returned to the High Court and from there to the Court of Appeal (the First Appeal) for rulings on the interpretation of the ECJ’s decision.
The Court of Appeal upheld the decision of Park J that the date at which the no possibilities test should be applied was the date on which the claim for group relief were made.
HMRC had contended that the relevant date was the end of the accounting period in which the losses arose, which would be extremely restrictive.
The case then returned to the First-tier Tribunal (FTT) for it to determine, essentially, whether the claims satisfied the no possibilities test and, if so, how the losses which were available for surrender should be quantified.
The FTT handed down two separate decisions on these issues in April and August 2009.
On appeal, the Upper Tribunal agreed with the FTT that the no possibilities test was satisfied when the subsidiaries were put into liquidation.
As noted above, M&S had made various group relief claims at various stages of the demise of the subsidiaries.
The Upper Tribunal permitted this as the original claims were claims for zero losses (as none of the losses at that time satisfied the no possibilities test) and therefore did not reduce the losses available for surrender.
Furthermore, there was nothing in the domestic legislation to prevent multiple claims.
The subsequent claims relating to CTSA periods, which were made after the subsidiaries had been put into liquidation, therefore succeeded.
As for the pay-and-file periods, the Upper Tribunal concluded that the Community law principle of effectiveness did not require time limits to be extended to allow M&S to meet the other requirements (eg, to liquidate the companies) once those requirements became known.
The fact that M&S did not know that its claims had to satisfy the no possibilities test until the decision of the ECJ (which post-dated the last deadline to make in time claims for pay-and-file periods) was of no consequence.
On the ancillary but important issue of quantification, the Upper Tribunal accepted M&S's alternative method which takes the losses adjusted for UK tax and deducts (on a first-in, first-out basis) those losses which were used on a local basis.
This judgment of the Court of Appeal is the outcome of HMRC's appeal against that decision and M&S’s cross appeal in relation to the pay-and-file periods.
The Court of Appeal decision deals with the following five issues:
1. Which is the date at which the no possibilities test should be applied: the end of the accounting period in which the losses arise or the date of the claims (the timing issue)?
2. Can sequential claims for group relief be made?
3. Is M&S able to rely on the principle of effectiveness to make new claims for group relief, in respect of pay-and-file periods, within a reasonable time after the decision of the ECJ?
4. Does the no possibilities test apply to each Euro of losses, so that a surrendering company would be prevented from surrendering losses if some of the cumulative losses had been utilised?
5. What is the correct way to quantify the amount of losses available for surrender?
To answer the first issue, the Court of Appeal had to deal with the unusual prior question of whether it was bound by the decision in the First Appeal.
HMRC argued that subsequent case law from the ECJ demonstrated that the conclusions reached in the First Appeal were wrong.
In support of its argument, HMRC cited the cases of Oy AA [2008] STC 991 and Lidl Belgium GmbH Case C-414/06 [2008] ECR I-3601.
The former dealt with an intra-group transfer of profits from a Finnish parent company to its ailing UK subsidiary.
In that case, the ECJ decided that the legislation in issue was not contrary to Community law because its objective was to safeguard the balanced allocation of taxing powers.
Similarly, in Lidl Belgium, the ECJ held that measures which prevented the transfer of losses to a German resident company from its permanent establishment in Luxembourg did not contravene Community law.
HMRC argued that the decisions of the ECJ in these two cases demonstrated that the court had moved on from its decision in M&S but the Court of Appeal were unconvinced.
Moses LJ said that the ECJ had not taken the opportunity to review its decision in M&S but that it ‘merely adopted its previous approach and reasoning in different circumstances’ that he said did not permit the Court to depart from its earlier decision.
It followed that the Court of Appeal dismissed HMRC’s appeal on the timing point and agreed that the applicable date to assess the no possibilities test was the date of the claim.
The Court of Appeal also upheld the decision of the Upper Tribunal on the question of sequential claims.
The Court of Appeal determined that there was no reason to prevent a series of claims being made and, as a matter of law, to prevent M&S from doing so ‘would put it at an unjustifiable disadvantage as against other potential claimants who have made no claim at all’.
The Court of Appeal also considered the cross-appeal of M&S in relation to the pay-and-file periods.
Significant losses arose in the relevant pay-and-file periods.
However, M&S was prevented from claiming any relief for those losses because the last deadline to file claims had passed long before the judgment of the ECJ.
As it could not have known the conditions for making cross-border group relief claims prior to the decision of the ECJ, M&S therefore argued that it should be afforded a reasonable amount of time thereafter in which to put itself in a position to satisfy the no possibilities test.
The Court of Appeal upheld the finding of the Upper Tribunal that the principle of effectiveness could not be invoked to permit a claimant to bring about circumstances to enable it to make a claim which it would otherwise not have been in a position to make.
The Court of Appeal found no authority which supported that proposition (although equally there was no opposing case law).
The result was that M&S’s claims for the pay-and-file periods did not succeed.
On the final two issues (whether partial utilisation of losses precluded the availability of the entirety of the losses for surrender and quantification), the Court of Appeal again upheld the decision of the Upper Tribunal.
If HMRC had succeeded in its arguments, particularly on the timing issue, the practical result would have been that virtually no taxpayer could ever succeed in a claim for cross-border group relief.
However, it is clear that the ECJ considered that the ability of taxpayers to claim cross-border group relief should exist where the losses could not be used in their local territory.
This was not merely a theoretical condition but necessarily a real and achievable practical requirement, in order to avoid a contravention of the freedom of establishment.
The Court of Appeal was not prepared to render ineffectual, in practical terms, the decision of the ECJ in this regard.
This is obviously a positive result for all taxpayers who have made cross-border group relief claims and who have been awaiting this decision.
That said, there are still a number of issues of principle to be tested for other taxpayers and HMRC will no doubt continue to challenge all such claims on any factual distinctions that arise.
Alison Last, Senior Associate, Dorsey & Whitney (Europe) LLP
