The Court of Appeal’s judgment in the FCE Bank case was handed down today. It is a unanimous decision in favour of the taxpayers, as were the decisions of the two Tribunals before them and for the same reasons.
Prior to April 2000 it was a requirement of the UK group relief system that for losses to be surrendered between two UK subsidiaries, their common parent company also had to be a UK resident. In the FCE Bank case the taxpayers argue that the inability of one UK subsidiary to receive the surrender of losses from another where the common connecting parent was a US resident, amounted to other or more burdensome tax by reason of the fact that its capital was owned in the other contracting state and a breach of the standard OECD non-discrimination article (in that case article 24(5) of the US/UK double tax convention).
HMRC accepted that the proper comparator for establishing whether discrimination existed in breach of the non-discrimination article was to suppose that the UK resident subsidiaries were owned by a UK parent and that in such circumstances group relief would have been permissible. HMRC however, contended that the non-discrimination article was not engaged because the purpose of group relief was to permit an aggregation of the group’s tax results in a year and it was therefore relevant that the US parent was not liable to UK corporation tax. The restriction was therefore not solely by reason of the fact that capital was owned in the other contracted state but because the US parent was not a UK taxpayer.
The Court of Appeal has, like the Tribunals before, rejected that argument. The common parent’s tax position is entirely irrelevant to the surrender of losses from one UK resident subsidiary to another, both of whom were naturally subject to UK corporate tax.
In order to appeal the matter further HMRC will need to obtain the permission of the Supreme Court. Given the unanimous rulings already, whether they would obtain leave is open to doubt.