In Finance Act 2006 the UK introduced changes to the group relief rules, ostensibly to ensure compliance with the judgment in the Marks & Spencer case. Many commented, including ourselves, that those changes reflected an overly restrictive interpretation of the judgment and would only give the ability to exercise group relief for cross border losses in extremely rare cases. In particular the guidance to the rules seemed to limit available losses to those which were legally barred from any form of carry forward or use in the local jurisdiction and required the losses to meet that condition on the day after the end of the accounting period. Thus losses which became date expired in the local jurisdiction could not even be used. The Court of Appeal in the Marks & Spencer case in February 2007 considered this time limitation inconsistent with community law.
The restrictive nature of these changes produced complaints to the European Commission by the COIT and ICAEW. It appears the Commission agrees and they have now commenced action against the UK.
On 18 September the Commission issued a reasoned opinion formally requiring the UK to implement properly the Marks & Spencer ruling. The Commission considers that, notwithstanding the amendments to the UK legislation, the UK still imposes conditions on cross border group relief which in practice make it impossible or virtually impossible for the tax payer to benefit from relief pursuant to the judgment. This in particular concerns the following points:
- An unnecessarily restrictive interpretation of the condition that there should be no possibility of use of the loss in the state of the subsidiary (paragraph 7 of Schedule 18A of the Income and Corporation Tax Act (ICTA) 1988);
- the date for determining whether the condition that there should be no possibility of use of the loss in the state of the subsidiary is met is set immediately after the end of the accounting period in which the loss arises (Part 1, paragraph 7(4), of Schedule 18A ICTA 1988);
- the time limit to claim for group relief for losses made by subsidiaries established in other Member States is set at twelve months (extended in case of enquiries by the Revenue) after the filing date for the company tax return of the claimant company (Schedule 18, paragraph 74, of the Finance Act 1998);
- the legislation states that it applies only to losses incurred after 1 April 2006 (Part 3 of Schedule 1 of the Finance Act 2006).
The Commission has given the United Kingdom two months to respond. If the Commission is not satisfied with the UK’s response it may refer the matter to the ECJ with a view to getting a judgment against the UK. If it decides to take that step then a likely timescale would be two years following the lodging of the application with the ECJ.
The issuing of the reasoned opinion shows that the Commission too believes that HMRC’s response to the M&S case is overly restrictive.