Today the Court of Appeal delivered its judgment in the Marks & Spencer case. We provide a brief summary of the important aspects of the judgment.
This judgment concerns the interpretation of the ECJ's judgment delivered in December 2005. The case reached the Court of Appeal as appeals brought by both the Revenue and the taxpayer from the decision of the High Court in April 2006 on the interpretation of the ECJ’s ruling. Further progress of other group relief claims, and in particular the Loss Relief GLO, has been suspended pending this decision.
The ECJ in its ruling indicated that there would be circumstances where the surrender of non resident losses should be permitted, namely, where the possibilities of using the loss locally had been exhausted. The judgment concerns the interpretation of this condition. Three basic issues arose.
1. Question: At what time must claimants show that the possible use of the loss has been exhausted?
Answer: When claims are made or amended.
The Court has dismissed the Revenue’s appeal on this issue. The Revenue appealed the High Court's finding that the conditions for cross border group relief (as determined by the ECJ) need to be satisfied at the time when the Claimant company makes a claim for group relief. The Revenue contended that it must be demonstrated that the conditions were satisfied at the end of the relevant accounting period for which group relief is claimed.
This was rejected by the Court of Appeal on the basis that differential treatment is to be avoided. As in the case of a UK claimant company, a non UK resident claimant company, when it decides to surrender its losses, can do so at or up to the time when the claimant company makes it claim for group relief. The decision to claim group relief could therefore be made on the basis of facts as they are at the end of the period within which the claimant company is permitted to make its claim and not only the facts as existed at the time during the relevant accounting period. Thus claimants must show that the loss was beyond possible use when the claim for group relief was made. As amending group relief claims occurs by withdrawing the existing claim and making a new one, the Court of Appeal has explicitly accepted that this gives claimants the further ability to show that the condition was met at the time of subsequent amendments to the group relief claims.
This is good news for all claimants. It means in effect over a 6 year period from the end of the accounting period for pay and file years in which the loss must fall beyond possible local use and an effectively indefinite period for CTSA years where HMRC has not accepted the claim.
2. Question: When will the possibilities of using the loss be exhausted in the local jurisdiction?
Answer: When there is no real possibility of using the loss on an objective appraisal of the surrendering company's situation
The Court went on to accept Marks & Spencer's argument on the interpretation of the conditions formulated by the European Court of Justice so as to make a claim for cross border relief. The Court has held that a claimant would satisfy the second condition of the test formulated by the ECJ (i.e. no possibility of future use of the loss), on an objective appraisal of the surrendering company's situation, the conclusion is that there is no real possibility of losses incurred in the surrender period to be taken into account in the state of residence for future periods, either by the surrendering company or by a third party. The Court has concluded that the High Court was correct in its view that a possibility may exist even where there is little or no real likelihood that the event will happen.
However there is unhappily scope for further argument in the Court's formulation of the "no real possibility" test with the Court of Appeal accepting our argument that the practical circumstances of the company should be considered but then also accepting Park J's conclusion that that there was no real likelihood of recommencing trade would be irrelevant to the exercise.
3. Question: Does the ECJ's judgment mean that the restriction on cross border surrenders should simply be disapplied in all cases or will claimants need to show that the non resident losses were beyond possible use in accordance with paragraph 55 of the ECJ's ruling?
Answer: Where time periods have closed Claimants should have a reasonable period once the criteria were known to meet them and then to make new group relief claims.
The primary argument that the rules must be disapplied in every case while formally run was not pressed and left as a fall back position. The Court has not supported it although it is still capable of being pursued in other cases.
Instead however the Court has supported Marks and Spencer's alternative formulation of this argument that where time periods have expired Marks and Spencer should still be given a reasonable period to meet the "no possibility of use" requirement following the ECJ's ruling in December 2005. The Court has left it for the Special Commissioners to determine how long such a period should be if it arises.
The Next Stage of the Marks and Spencer Case
The Court has declined to make a further reference to the European Court of Justice. The case returns to the Special Commissioners to determine the facts in the light of this guidance subject to an application by HMRC for further appeal.