To set the scene, claims for group relief were made in 20003 for the losses of German and Belgian indirect subsidiaries of a UK resident parent in both pay and file and CTSA periods. Following the ECJ’s judgment in December 2005 the companies were put into liquidation. Further claims were made for these accounting periods as the liquidations progressed and again around the time of the companies’ dissolution to respond to the conclusions of the High Court and Court of Appeal that the “no possibilities” test was to be assessed at the date of the claim. For CTSA periods these new claims were within time but were made as alternative claims without withdrawing the original claims. For the pay and file periods these new claims were beyond the statutory time period but community law was invoked to contend that they could nevertheless be made.
- At the time the original claims were made in 20003 the no possibilities condition was not met. When the earliest claims were made the companies were still trading. Afterwards it was always “possible” that new lines of business might have been introduced the profits from which could have been used to absorb the losses;
- It is not possible to make “alternative” claims for group relief. All subsequent claims were a procedural nullity and to be ignored. The subsequent claims for the pay and file periods were out of time anyway;
- For German and Belgian losses the no possibilities condition could not be met short of the dissolution of the loss making companies. There is nothing to stop a company being taken out of liquidation and new trades introduced. All the German claims were made before that company was liquidated and therefore must fail. While Belgian claims were made after dissolution, once a company is dissolved it ceases to exist and is no longer able to consent to the surrender of its losses. They therefore fail as well.
It is difficult to conceive of a more extreme position. The conditions to make a claim cannot be achieved short of dissolution and by then no company exists to complete the necessary documentation. A Catch 22.
The Tribunal Judges (previously the Special Commissioners) have found largely in favour of the taxpayers. They conclude, in summary:
- In the objective circumstances of the taxpayers once the companies were put into liquidation the no possibilities condition was met. It would be fanciful to suggest that they might have been taken out of liquidation and new lines of business introduced at that time. On the other hand such a step was a possibility when the original claims were issued around the time trading ceased but prior to liquidation.
- Accordingly the no possibilities condition was not met at the time the original claims were made in 20003. However as those claims did not meet the no possibilities condition they were not valid and effective claims, it follows that for the CTSA years the claims made once the companies were in liquidation were procedurally fine and succeed.
- For pay and file periods where the time for making claims had expired prior to the ECJ’s decision, community law did require the ability to make new claims once the conditions were known. This covered the subsequent alternative claims made in 20078 which succeed. This however does not extend to claimants who, unlike M&S, slept on their rights and only now seek to issue claims outside the period prescribed for doing so.
More problematic for claimants is the conclusion the judgment reaches on how to compute the losses available for surrender once the no possibilities condition is met. The taxpayer had provided detailed figures for the calculation of the losses on 3 bases, which produced roughly comparable results: A: using local tax rules to establish the unutilised losses; B: using local rules but distinguishing losses which would not be available for group relief in the UK (e.g. excluding capital losses); and C: a full UK recomputation.
HMRC chose in contrast to deal with this issue of computation as one of principle only, without engaging in the actual calculation of the results. They maintained that one first needed to establish the level of local losses which remained unutilised under local rules and then recompute those remaining losses on a UK basis in order to surrender them.
The Tribunal has followed HMRC’s approach concluding that “if this were not done a nonresident subsidiary could obtain a greater amount of relief for losses than a UK subsidiary in the same circumstances, which goes further than necessary to give effect to the nopossibilities test” (paragraph 51). It is not obvious why the cross border surrender might result in a better result than a domestic one given that the former is limited to stranded losses incapable of local use while the latter is not. Indeed the best result for the taxpayer was obtained by a purely UK centric recomputation. More fundamentally the “worst case” approach runs the risk that losses meeting the no possibilities test might nevertheless fail to be eligible because the different timing provisions for bringing them into account in the local jurisdiction and the UK left a situation where they did not produce losses under the two methods in the same accounting period.
Take the example of a German company whose results applying local principles and tax adjustments produce a loss in Year 1. UK rules may calculate the loss in precisely the same amount but simply allocate the loss to a different period, say, Year 2. An obvious example would be the difference between the treatment of depreciation in other jurisdictions and capital allowances in the UK. On this example however the Tribunal Judges’ approach produces no losses capable of surrender at all: in Year 1 there are local losses but no UK recomputed losses and vice versa in Year 2. Through nothing more than timing differences the loss escapes the Marks and Spencer ruling even though it may be beyond any possible use.
The judgment is clearly of considerable assistance in establishing when and how claims can be made, although for pay and file periods claimants will need to consider what steps they too took to preserve their rights to rely upon the conclusions the Special Commissioners have reached. On the down side, the “worst case” approach to computing surrenderable losses may well produce unfair and anomalous outcomes. All in all the judgment provides welcome guidance but not a complete answer.