M & S tax case

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Supreme Court

Judgment given 22 May 2013

Group relief – cross-border relief for losses – German and Belgian subsidiaries ceased trading with unused losses – “no possibilities” test, as to use of losses, established in prior ECJ proceedings – date at which test to be applied


  The Supreme Court has confirmed that it is the date on which the claim for relevant loss relief is made, and not the end of the accounting period in which the losses in question arose, at which the ‘no possibilities’ test is to be applied report Harris & Co accountancy services.

  Two of M & S’s continental European subsidiaries were its German (‘MSD’) and Belgian (‘MSB’) subsidiaries. MSD and MSB both ceased trading in 2001, and both were dissolved following liquidation in 2007. Group relief claims for the (cross-border) surrender of losses incurred by MSD and MSB were submitted at various times from 2000 onwards.

  The basic contention underlying all the claims was that the UK legislation which restricted group relief claims to losses of UK resident companies and (after Finance Act 2000) losses of UK branches of non-UK resident companies, was contrary to article 43 of the EC treaty, on freedom of establishment.

  The ECJ ruling in December 2005 (Case C-446/03 Marks & Spencer plc v Halsey (HMIT) [2006] BTC 318) held that the UK group relief rules were contrary to article 43, in so far as they precluded the UK resident parent utilising losses of its subsidiary resident in another member State where the possibilities of utilising those losses in the non-resident subsidiary’s State of residence, in any current, past or future period, had been exhausted.

  The case returned to the UK to give effect to the ECJ ruling. In April 2006, Park, J held (Marks & Spencer v Halsey (HMIT) [2006] BTC 346) that the ECJ’s ‘no possibilities’ test required an analysis of the recognised possibilities legally available given the objective facts of the company’s situation at the relevant time, and that time was to be applied at the date the group relief claim was made. That judgment was appealed, and now came before the Supreme Court.

  HMRC contended that the ECJ ruling that article 43 was breached applied only where the taxpayer can show, on the basis of the circumstances existing at the end of the accounting period in which the losses in question arose, that there was no possibility of such losses being utilised in the member State of the surrendering company in that, or in any previous, or in any future, accounting period. The argument here, which had been acknowledged in the Court of Appeal, was that allowing the issue to be determined by reference to the facts as at the date of claim gives the taxpayer an option or choice as to where losses may be relieved, and that such option or choice was recognised by the ECJ as substantially jeopardising fiscal sovereignty. In other words, the claimant company should not be given an opportunity to take steps that might bring about a situation in which it could make a cross-border claim.


  Lord Hope, giving the judgment of the Court (with which the four other judges agreed), said that the issue came down to a choice between the ‘principled approach’ contended for by HMRC, and the ‘practical approach’ contended for by M & S.

  He said the HMRC approach would mean there would be no realistic chance of satisfying the ‘no possibilities’ test at all. It would hardly ever be possible, if regard is had to how matters stood at the end of the relevant accounting period, to exclude entirely the possibility that the losses in question might be utilised in the member State of the surrendering subsidiary, unless this was prevented by the local law. The ‘balanced allocation’ of taxes principle did not require to be supported by an approach which restricts the claimant to that extent.

  Hope, LJ noted that, in arriving at this view, the Court had the benefit (which the Court of Appeal had not) of the recent (February 2013) ECJ decision in the A Oy case (Case C-123/11Proceedings brought by A Oy [RDT 181]). The ECJ judgment in that case showed that the mere fact that losses can be carried forward at the end of the accounting period does not mean that the ‘no possibilities’ test cannot be met. In addition, the merger that was contemplated in A Oy was not seen as a ground – in so far as such ground allowed the parent company to choose freely from one year to the next the tax scheme applicable to its subsidiary’s losses – for denying the possible cross-border use of losses: this showed that the decisions by M & S to wind up MSD and MSB were not open to objection on that ground either.

  Hope, LJ rejected a new argument by M & S (advanced on the back of the A Oy case), that the ‘no possibilities’ test should in fact be examined on the facts at the time when the claim was being scrutinised, rather than at the date the claim is made. He said there was no indication that selecting the date of claim as the relevant date was likely to give rise to any difficulty, and that, on the contrary, that date has the advantage of certainty.

  Held, accordingly, that it is the circumstances known at the date of claim which are to be considered for the purposes of the ‘no possibilities’ test; and that the consequence of this finding is that an ancillary issue put to the Court – if a surrendering company has some losses which it can utilise and others it cannot, does the ‘no possibilities’ test preclude transfer of that proportion of the losses which there is no possibility of utilising? – did not need to be answered.

  Three other issues put to the Court were held over to be heard at a later date.


  This litigation now dates from the first hearing before the old Special Commissioners, in 2002. In terms of the UK’s corporate tax regime, and its interaction with EC law, it is of course one of the seminal cases. That no doubt helps explain why, from the HMRC perspective, it has been right to take every point that has been sought to be taken.

  The consequences of the recent A Oy case have perhaps yet to be fully digested, but the particular issue decided by the Supreme Court in the M & S case – the relevant date at which to consider the ‘no possibilities’ test – may now be concluded. If that is so though, other issues remain from the case, to be argued and determined.

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