COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL TAX AND CHANCERY CHAMBER
Mr Justice Warren, President and Judge Edward Sadler
FTC/04/2009, FTC/05/2009/, FTC/28/2009, FTC/32/2009
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE MOSES
LORD JUSTICE ETHERTON
| The Commissioners for Her Majesty's Revenue and Customs
|- and -
|Marks and Spencer PLC
Mr David Milne QC and Ms Nicola Shaw (instructed by Dorsey & Whitney) for the Respondent
Hearing dates: 8th-10th June, 2011
Crown Copyright ©
Lord Justice Moses:
i) Is the test that the ECJ established to identify those circumstances in which it would be unlawful to preclude cross-border relief for losses, the "no possibilities" test, to be applied (as the Revenue contend) at the end of accounting period in which the losses crystallised rather than (as M&S contends) the date of claim? This question involves deciding whether the Court of Appeal in the First Appeal, reached a binding decision on that issue and whether it remains binding on this court in light of subsequent decisions of the ECJ.
ii) Can sequential/cumulative claims be made (as M&S contends) by the same company for the same losses of the same surrendering company in respect of the same accounting period? The Revenue assert that that is not a question decided by the Court of Appeal and is precluded both by UK fiscal rules and by the underlying jurisprudence of the ECJ.
iii) If a surrendering company has some losses which it has or can utilise and others which it cannot, does the no possibilities test (as the Revenue contend) preclude transfer of that proportion of the losses which it has no possibility of using?
iv) Does the principle of effectiveness require M&S to be allowed to make fresh 'pay and file' claims now that the ECJ has identified the circumstances in which losses may be transferred cross-border, when at the time M&S made those claims there was no means of foreseeing the test established by the court.
v) What is the correct method of calculating the losses available to be transferred?
What did the ECJ decide in M&S v Halsey?
"the losses of foreign subsidiaries cannot receive advantageous tax treatment in the State in which those subsidiaries are resident. Where the State in which the foreign subsidiaries are established enables those subsidiaries to impute their losses to another person or to carry them forward to other financial years, the United Kingdom is entitled to oppose a claim for the trans-national transfer of those losses. (his emphasis)".
The reference to a state enabling the use of losses seems to me to be a reference to the state tax regime and not to the particular facts of the subsidiary's case.
"If a company claims group relief at a time when the paragraph 55 criteria are satisfied it should get the relief. If it applies for it at a time when the criteria are not satisfied it should not."
"The question whether the United Kingdom tax authorities are precluded by Community law from applying the restriction on group relief turns on whether the paragraph 55 conditions are satisfied. I can see no reason in principle why the latter question - whether the paragraph 55 conditions are satisfied -should not be answered by reference to the facts as they are when the former question arises" .
"Legislation of a Member State which imposes a blanket prohibition on intra-Community cross border surrenders of losses is not contrary to Community law, but on a case by case basis, may not be applied to any case the facts of which correspond to the circumstances described in paragraph 55 of the ECJ judgment" (my emphasis).
"for losses which have not been used in the other Member State where the surrendering company is resident and are no longer capable of being so used. The qualification to that ruling of the ECJ (the caveat, in Advocate General Geelhoed's expression) is that, if on the facts of an individual case it can be shown that the losses have not been and cannot be used in the other Member State, the UK rule has to be disapplied to that particular case." (my emphasis)
"the judgment of the Court of Justice under consideration by this court in the earlier case had been the subject of further consideration - and consequent interpretation, explanation or qualification - by the Court in a later judgment" .
"55. The court has thus held that to give companies the right to elect to have their losses taken into account in the Member State in which they are established or in another Member State would seriously undermine a balanced allocation of the power to impose taxes between the Member States (see the Marks & Spencer case  and the Rewe Zentralfinanz case "
"31. As regards the first of these justifications (the need to preserve the allocation of the power to impose taxes between the Member States), it should be noted that the preservation of the allocation of the power to impose taxes between Member States may make it necessary to apply to the economic activities of companies established in one of those States only the tax rules of that State in respect of both profits and losses (M&S paragraph 45 and Oy AA paragraph 54)
32. To give companies the right to elect to have their losses taken into account in the Member State in which they are established or in another Member State would seriously undermine a balanced allocation of the power to impose taxes between the Member States, since the tax base would be increased in the first State and reduced in the second by the amount of the losses surrendered (see M&S paragraph 46, Oy AA paragraph 55)"
33. With respect to the relevance of the first of these justifications in the light of the facts in the main proceedings, it should be pointed out that the Member State in which the registered office of the company to which the permanent establishment belongs is situated would, in the absence of a double convention, have the right to tax the profits generated by such an entity. Consequently, the objective of preserving the allocation of the power to impose taxes between the two Member States concerned, which is reflected in the provisions of the Convention, is capable of justifying the tax regime at issue in these proceedings, since it safeguards symmetry between the right to tax profits and the right to deduct losses.
34. In circumstances such as the main proceedings, to accept that the losses of a non-resident permanent establishment might be deducted from the taxable income of the principal company would result in allowing that company to choose freely between the Member State in which those losses could be deducted (see to that effect Oy AA, paragraph 56)."
"65….(the caveat) should be applied extremely restrictively. It functions asymmetrically by, on the one hand, offering relief in cases where applying a source State's tax regulations results in losses for subsidiaries while, on the other hand, leaving extraordinary profits earned by subsidiaries operating in a more advantageous tax regime untaxed in the home State. The final result may be that, by virtue of this caveat, the Court has introduced an additional disparity in the interrelation between national tax systems, thereby further distorting the exercise of the freedom of establishment and free movement of capital within the Community. To put it somewhat differently, I see no reason why companies which decide to relocate their activities to another Member State, in full knowledge of the local tax legislation, should be awarded highly selective and distortional tax relief in the home State in circumstance where their source State activity incurs losses that cannot be offset in the latter State".
"Withdrawal or amendment of claim
(1) A claim for group relief may be withdrawn by the claimant company only by amending its company tax return.
(2) A claim for group relief may not be amended, but must be withdrawn and replaced by another claim."
"A claim is ineffective if the amount claimed exceeds the amount available for surrender at the time the claim is made."(Paragraph 69(2))
"in their final form, the tax returns of the claimant and surrendering companies accurately reflect amounts eventually shown to be available for surrender, as supported by corresponding notices of consent. Further, the processes and adjustments required to reach that final result may continue throughout the period during which it is open for a group company to make a group relief claim (which, in practice, under self-assessment, is a generous period)." 
In the pay and file years, does the principle of effectiveness require that M&S be allowed to make fresh claims within a reasonable time after the decision of the ECJ?
If any part of a loss may be used does that preclude a claim to the part which satisfies the para 55 criteria?
i) Identify the taxable losses under German tax rules; (it is necessary to start at this point to calculate what if anything has been or could be used in Germany);
ii) Identify those losses available to be used against any subsequently earned profits (as calculated under German tax rules) on a first in, first out basis;
iii) Identify the amounts which would equate to the commercial profit or loss in the statutory accounts by removing the adjustments made to the German profits or losses for the purposes of identifying the taxable losses identified in i). (This stage is necessary to calculate a figure to which UK tax law may be applied);
iv) Apply UK tax adjustments to the commercial profits or losses identified at stage 3 to arrive at an equivalent UK taxable loss;
v) Reduce that figure, identified at stage 4, by the amount of overseas losses utilised at stage 2. The result is the amount available for group relief in the UK.
"Once you move from identifying the local losses (computed under local rules) to identifying their equivalent under UK rules, you also have to move from local time of recognition to UK timing of recognition" .
Lord Justice Etherton:
Lord Justice Lloyd: