First-tier Tribunal (Tax)

[2009] UKFTT 231 (TC)

TC00181

Appeal number: SC 3050/02

EUROPEAN LAW – quantification of losses for group relief in Marks and Spencer appeal

FIRST-TIER TRIBUNAL

TAX

MARKS AND SPENCER PLC Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS [corporation tax] Respondents

Tribunal: TRIBUNAL JUDGE JOHN F. AVERY JONES CBE

TRIBUNAL JUDGE MALCOLM GAMMIE CBE QC

Sitting in public in London on 10 July 2009

Nicola Shaw, counsel, instructed by Dorsey & Whitney (Europe) LLP, for the Appellant

David Ewart QC, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009


 


DECISION

1. This is a further decision in the appeal of Marks and Spencer plc which relates to the figures. The Appellant was represented by Miss Nicola Shaw, and HMRC by Mr David Ewart QC.
2. Before dealing with the figures two points arise out of our decision issued on 2 April 2009 [2009] SFTD 1, [2009] UKFTT 64 (TC), which is under appeal. The first is that we overlooked making a decision in relation to MSB (defined terms in our previous decision apply to this decision) for the period ended 31 March 2000. The parties are agreed that the effect of the reasoning in our previous decision is that the claim should be dismissed. Our previous decision should be corrected under rule 37 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 to reflect this.
3. Secondly, in our previous decision at [25] we left open the factual issue of whether there was any possibility of the losses being used after the subsidiaries went into liquidation. On the present facts, HMRC now accept that none of the losses would be used in the liquidation.
4. The issue we deal with in this decision is the quantification of the amounts on which group relief can be claimed. The parties have agreed all the figures but disagree about how our previous decision should be applied to them. The agreed figures are:

	MSG Local Losses (Method A) £	MSG UK Equivalent Losses (Method C) £	MSB Local Losses (Method A) £	MSB UK Equivalent Losses (Method C) £
31 March 1996			N/A	N/A
31 March 1997		1,791,988	N/A	N/A
31 March 1998	4,164,747	4,485,549
31 March 1999	17,483,008	19,561,628		3,867,786
31 March 2000	30,725,152	15,634,116		2,340,914
31 March 2001	26,082,933	18,497,152	14,854,155	12,120,578
31 March 2002		15,849,941
TOTAL	78,455,840	75,820,374	14,854,155	18,329,278

5. Miss Shaw for the Appellant contends that apart from the relatively small difference in the total figures between Methods A and C the other differences are timing differences between UK and local rules, which should not mean that any part of the Method C losses should be disallowed. She achieves the group relief for the losses shown in Method C in one of two alternative ways: Method D by carrying forward or back any excess losses in Method C over Method A in any period; or Method E group relieving the losses in the year in which they fall for UK computational purposes.
6. Mr Ewart QC for HMRC contends that for any year the lesser of the UK and foreign losses should be allowed. If there is no foreign loss there can be no restriction in denying the benefit of group relief. The ECJ said at [33]:

"33. The exclusion of such an advantage [the ability to claim group relief] in respect of the losses incurred by a subsidiary established in another Member State which does not conduct any trading activities in the parent company's Member State is of such a kind as to hinder the exercise by that parent company of its freedom of establishment by deterring it from setting up subsidiaries in other Member States."

If the subsidiary did not incur any loss in its state in a particular period (as is the case for MSG for the periods ended 31 March 1997 and 2002, and MSB for periods 31 ended 31 March 1999 and 2000) there can be no restriction in denying the parent the benefit of group relief. Further the ECJ said at [56]

"56      Where, in one Member State, the resident parent company demonstrates to the tax authorities that those conditions [the no-possibilities test] are fulfilled, it is contrary to Articles 43 EC and 48 EC to preclude the possibility for the parent company to deduct from its taxable profits in that Member State the losses incurred by its non-resident subsidiary."

It is not contrary to article 43 to preclude the parent company from deducting more than the foreign losses. The effect of group relief in a wholly domestic situation can be that losses caused by timing differences are unrelieved.

7. We consider that the principle by which the full relief should be given is clear. The difference in the amount and timing of the losses between local tax law (Method A) and UK tax law (Method C) is a necessary consequence of the ECJ's decision. The no-possibilities test has to be applied to the local law losses, and the conversion of the losses to which the no-possibilities test applies is necessary to ensure that greater losses are not available than would be the case if the losses were incurred by a UK resident subsidiary. If the subsidiary had been in identical circumstances but had been UK resident the losses would fall in the periods shown by Method C. 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 timing of recognition to UK timing of recognition. The difference in the total losses for all relevant years is a difference caused by differences in computation that has to be accepted. The timing difference that Mr Ewart contends denies group relief is not an ordinary timing difference that might result in denial of group relief in a wholly domestic situation, for example because there are no profits in the parent company against which the subsidiary's loss can be relieved; it arises because the company has chosen to establish a foreign subsidiary rather than a UK subsidiary.  If losses are not allowed in these circumstances there is a difference in treatment of the two situations according to whether you establish a UK or a German subsidiary.  That is precisely the restriction that the ECJ said was a breach of Article 43.  If the losses have been identified as no-possibilities losses, it must be an unjustified restriction to prevent their relief because of different German and UK recognition rules.
8. Accordingly we do not agree with Mr Ewart's contentions that only the lower of the local and UK amount of losses for each year is allowable, which we consider is too literal a reading of what the ECJ decided. For example, it results in no group relief for DSG for the period ended 31 March 2002 when the UK equivalent amount of losses is over £15m. The simplest way of removing the restriction is to apply Miss Shaw's Method E which is closely based on our previous decision, and which we consider is the right approach. We attach a spreadsheet setting out the figures resulting from the application of this Method.
9. In our previous decision at [8] we said:

It is now common ground that if the losses available for group relief are calculated on a local basis (that is to say by applying local tax rules) the effect of using the losses shown in Schedules 2 and 3 of the Agreed Statement of Facts on a first in first out basis is that there are no remaining losses of MSG for the years ended 31 March 1996 and 1997…

In consequence of this we dismissed the appeals against the refusal of claims for the period ended 31 March 1997. This now causes a problem because the UK computed loss for that period is larger than the German losses that have been used in Germany, resulting in an amount of loss available for group relief. On the basis of our decision we would have wished to allow this but we are doubtful whether this is "any clerical mistake or other accidental slip or omission in a decision" within rule 37. However, since our previous decision is under appeal we assume that if our reasons on the figures are upheld the Upper Tribunal can allow the relief for this period.

10. The Appellant claims costs, which it is common ground we do not have any power to award under domestic law, on the ground that this breaches the principle of effectiveness. Miss Shaw derives some support from Opinions of the Advocate General in D Case C-376/03 and N Case C-470/04, but the point did not arise in view of the decisions of the ECJ. Mr Ewart contends that the costs rule did not render it impossible or excessively difficult for the Appellant to exercise its Community law rights. The costs are likely to be small in comparison to the losses claimed. In any event if costs were to be awarded the Appellant failed in it claims made prior to 20 March 2007 and so HMRC would be entitled to the costs up to that date.
11. As the ECJ has never given any decision on this point we would have wanted to refer the issue before making any decision. Miss Shaw requested that if that was our view we should not make a reference as our previous decision is already under appeal and possibly other references will be made in the course of such appeal. Accordingly we make no order for costs on the ground that we have no power to do so.
12. Miss Shaw reserves a point on compound interest (if we have power to award interest at all) pending the decision of the Upper Tribunal in a VAT case, John Wilkins (Motor Engineers) Limited.
13. HMRC have a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules. The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.

JOHN F. AVERY JONES

MALCOLM GAMMIE

TRIBUNAL JUDGES

RELEASE DATE: 24 August 2009

M&S Proposed Computational Methodology based on Tribunal Decision- Method E
		A	B	C	D	E	F	G	H
		Loss / (profit) calculated on overseas tax computation basis	Local use of overseas tax basis losses against overseas basis tax adjusted profits MEMO ONLY	Reverse Overseas tax basis tax computation adjustments	Accounting loss/(profit) per the overseas statutory accounts	Make UK tax basis computations tax adjustments	Loss / (profit) on UK tax computation basis	Deduct use on local basis on a first in first out basis	Amounts available for Group Relief after utilisation of overseas losses		Tax
GERMANY
1996		873,033	(873,033)	0	873,033	0	873,033	(873,033)	0
1997		6,601,459	(6,601,459)	0	6,601,459	668,395	7,269,854	(6,875,917)	393,937		122,120
1998		4,439,205	(274,458)	0	4,439,205	46,345	4,485,550	0	4,485,550		1,390,521
1999		17,483,008		23,843	17,506,851	2,054,778	19,561,629	0	19,561,629		6,064,105
2000		30,725,152		(6,955)	30,718,197	(15,084,082)	15,634,115	0	15,634,115		4,690,235
2001		26,082,933		(8,132)	26,074,801	(7,577,650)	18,497,151	0	18,497,151		5,549,145
2002		(2,429,251)		(5,256,901)	(7,686,152)	23,536,093	15,849,941	0	15,849,941		4,754,982
2003		(3,826,830)
2004		1,079,433
	*	(2,034,322)
2006		54,226
2007		2,410,650
		81,458,696	(7,748,950)	(5,248,145)	78,527,394	3,643,879	82,171,273	(7,748,950)	74,422,323		22,571,108
*Under German law £541,453 of these profits could not be set against losses brought forward (see PWC German expert report)
BELGIUM
1998		577,988	(577,988)	40,400	618,388	1,534,922	2,153,310	(2,153,310)	0
1999		4,445,158	(4,445,158)	26,352	4,471,510	(431,410)	4,040,100	(4,040,100)	0
2000		3,029,357	(3,029,357)	15,887	3,045,244	(704,328)	2,340,916	(2,340,916)	0
2001		15,716,115	(861,960)	27,234,020	42,950,135	(30,829,557)	12,120,578	(380,137)	11,740,441		3,522,132
2002		(7,879,004)		1,270,568	(6,608,436)	4,292,060	(2,316,376)	0	0
2003		1,161,968
2004		(1,004,502)
2005		54,486
2006		35,236
2007		(30,957)
2007 (Dec)		85,100
		16,190,945	(8,914,463)	28,587,227	44,476,841	(26,138,313)	18,338,528	(8,914,463)	11,740,441		3,522,132
Total for Germany and Belgium		97,649,641	(16,663,413)	23,339,082	123,004,235	(22,494,434)	100,509,801	(16,663,413)	86,162,764		26,093,240