M&S Group Relief Case

Apart from very much enjoying the high quality produce offered by the local M&S foodhall in Longwell Green, the British retail giant M&S has also provided me with a lot of tax related reading over the last ten years.

In 2002 M&S challenged the UK’s corporate group relief rules – that is the surrender of losses from one group company to another group company to manage a group’s overall corporate tax liability. At that time it was possible only for a company resident in the UK to surrender losses to another UK resident company, however M&S claimed that (in simple terms) this rule was not in line with the fundamental concepts of business establishment and non discrimination that had been introduced by the EU. As a result M&S made group relief claims for losses generated by their failing subsidiaries in France and Belgium, and proposed to offset them against UK profits.

What happens after is a very long and complex convoluted story with many twists and turns, hearings at the ECJ, and a plethora of domestic court hearings in the UK. The latest of these was held in June 2011, with the decision published in late October 2011. For the poor old tax practitioner it’s been a real challenge keeping up with goings on and actually properly determining how in practical terms any claim was made and when. M&S had taken the advice of the leading law firm on this issue in the country, but there were no guidelines as to how best to make the claim and when and over what losses simply because the rules didn’t exist – they had made the claims based on concepts and fundamentals of EU law and not detailed UK tax law. For me that means I have talked to SME clients about this issue plenty, but when it comes down to actually making a claim for foreign losses and the hoops to jump through, the uncertain nature of the law, and the costs associated with an exercise of this kind for almost all it became too much and the project was binned.

The recent case in the Upper Tier Tax Tribunal (and the previous hearing in 2010) now sorts a lot of the practical issues out, and for the first time there seems to be some agreement, and certainty as to how a UK company wishing to claim EEA group losses via the group relief mechanism does so. 

The trigger point for a claim is relatively straightforward – the so called ‘no possibilities test’ (NPT). This requires that before the foreign loss can become eligible for UK group relief purposes, locally in the foreign jurisdiction there must be no other possibility of recovering that loss. Even the carry forward of losses with no prospect of recovery does not mean that there is no possibility of future use. This means in substance that ordinarily the only way to trigger eligibility under the NPT is to place the company into liquidation – i.e. to ensure that the losses will be extinguished on liquidation in the absence of a claim.

The next question, most confusing because of the lack of certainty in the court hearings and the challenges from HMRC, was the way in which the claim was made and when. HMRC were adamant that the claim had to be made at the end of the accounting period in which the NPT was met. Such an approach would massively restrict the application of the loss relief, particularly in the years leading up to liquidation and closure. M&S argued that the claim for the loss relief could be made at any time up until the expiry of the normal claims window for corporation tax self assessment – i.e. two years after the relevant accounting period, however at the time the claim was made the NPT had to be satisfied at that point. In the latest hearing the Court of Appeal agreed with M&S, and so we now have a position where once a company is in liquidation it can look back to the accounting periods ending in the last two years, as well as the current period leading up to the completion of the liquidation process.

HMRC also contended that if a single Euro of EEA loss was used in a period this meant that it did not meet the NPT and all the losses from that period would be ineligible. That argument was rejected by the Court of Appeal, and so where a proportion of a loss for a period meets the NPT, it is eligible for use.

There were also a number of guidelines issued on how the loss to be surrendered should be calculated. I am not going to go over this now but the decision is very helpful in directing the tax practitioner to the right answer.

So what should companies now be doing? A claim should be made if a UK company has a subsidiary or related group entity which has EEA losses which meets the NPT within the statutory time limit of two years after the end of the relevant account period, or if a tax return remains open due to enquiry. I have also seen UK parents with EEA subsidiaries that have racked up material losses, but have been reluctant to make claims because of the risk of incurring liquidation costs, having to deal with the complexity of a liquidation and incur advisory fees, all of which might not have yielded any benefit because of the stance taken by HMRC on the claim procedure already discussed above. Those groups will now be rushing to commence liquidation proceedings on the subsidiaries so as to get their NPT claims in for earlier periods.

Another aspect to the M&S group relief principle also developed further in 2011 in the Ford Motor Company case of non discrimination outside of the EEA. HMRC have pushed back on the notion that a UK company can claim EEA losses under the NPT where the two are connected by a non EU resident parent. The Ford Motor Company case seems to make that argument redundant and so such claims are likely to be valid and should be considered.

All of this is hugely helpful. Since 2002 we have been dealing with some pretty broad concepts with little direction on how to make them happen for the benefit of clients. SME’s don’t have the weighty resources of M&S or Ford Motor Company to make these sorts of claims in the absence of UK tax legislation, and force liquidations where otherwise they might not choose to do so - and thus now knowing when the NPT is met, when the claim needs to be made, and how the claims in general should be conducted is exceptionally helpful in being able to take matters forwards with SME clients.

It isn’t all over however, it is possible that the case may be appealed by HMRC to the Supreme Court in the UK, and that this could go on.....but for now we have some good guidance to rest on and taxpayers should feel much more comfortable about making EEA claims.