U.K Tribunal Issues Judgment in Marks & Spencer

Transcription

1 Volume 54, Number 6 May 11, 2009 U.K Tribunal Issues Judgment in Marks & Spencer by Simon Whitehead Reprinted from Tax Notes Int l, May 11, 2009, p. 454

2 Reprinted from Tax Notes Int l, May 11, 2009, p. 454 U.K Tribunal Issues Judgment in Marks & Spencer by Simon Whitehead The U.K. Tribunal Judges decision of May 1 effectively represents the third stage in the resolution of the claims by Marks & Spencer seeking group relief against U.K. profits of the losses made by subsidiaries resident and trading in other EU member states. (For the decision, see Doc or 2009 WTD ) In December 2005 the European Court of Justice concluded 1 that the U.K. s group relief provisions, by not providing for the surrender of cross-border losses in some circumstances, were incompatible with European Community law. At the second stage, first the High Court the court that had referred the issue to the ECJ and then the Court of Appeal sought to interpret that ruling in judgments in April 2006 and February The latest stage represents the return of the case to the Tribunal Judges (formerly the Special Commissioners) to apply that guidance to the facts and to consider how best to apply the U.K. s provisions in a way that conforms with the overriding requirements of Community law. At this stage the focus shifts from the broad policy concerns of the ECJ level to the nitty-gritty. How does a group make a claim for the group relief of nonresident losses? When will a loss be capable of surrender? How are the losses to be computed? The decision will therefore primarily interest practitioners who have been grappling with these concerns for over four years. This article summarizes where the U.K. now stands regarding claims for the surrender of cross-border losses as a result of the first authoritative guidance on the practicalities. It also identifies some of the issues that still remain after eight years of litigation. Describing the Tribunal Judges judgment as the first practical guidance might seem an overstatement. It was preceded by the revisions introduced to the group relief 1 C-446/03, Marks & Spencer v. Halsey, [2005] ECR I-10837, Doc , 2005 WTD Marks & Spencer plc v. Halsey, [2006] All ER (D) 129; [2007] All ER (D) 232. See Doc or 2007 WTD rules by Schedule 1 of Finance Act 2006 and accompanying guidance that HM Revenue & Customs said reflected the principles of the ECJ s judgment in Marks & Spencer. Then in September 2008 the European Commission revealed that it had commenced infringement proceedings against the U.K. on the grounds that those revisions imposed too restrictive an interpretation of that ruling. Yet neither of these steps produced reliable practical guidance. HMRC s position before the Tribunal Judges in Marks & Spencer was that the 2006 changes represented a brand-new code and were not relevant to understanding how claims for periods ending before April 1, 2006, could be made. The precise aspects of the 2006 changes that the commission took issue with are not publicly known. The History By this stage of the proceedings, the claims concern the losses of German and Belgian indirect subsidiaries of a U.K. resident parent. Both subsidiaries ceased trading in 2001 after several years of mounting losses but were not put into liquidation. Claims for group relief were made between March 2000 and February 2003, covering a number of accounting periods, some under the payand-file system (that is, accounting periods ending before July 1, 1999) and some under the corporation tax selfassessment system (CTSA) (that is, subsequent periods). The distinction is important because different procedural rules govern the making of group relief claims: Schedule 17A of the Income and Corporation Taxes Act 1988 for the former and Schedule 18 of the Finance Act 1998 for the latter. The earlier of these claims, covering both payand-file and CTSA periods, were the subject of the reference to the ECJ. The ECJ judgment found the U.K. provisions disproportionate because they failed to permit the group relief of cross-border losses in circumstances when the possibilities to use the losses in the local jurisdiction for past, current, and future periods had been exhausted (the no-possibilities condition paras. 55 and 56 of the ECJ judgment). Both the High Court and Court of Appeal concluded that the time when the nopossibilities condition had to be met to enable losses to be surrendered cross-border was the date of issue of the claim. The House of Lords refused HMRC permission to further appeal that finding. After the ECJ judgment in December 2005, Marks & Spencer took steps to liquidate these two otherwise TAX NOTES INTERNATIONAL MAY 11,

3 HIGHLIGHTS Reprinted from Tax Notes Int l, May 11, 2009, p. 454 The U.K. Tribunal Judges Marks & Spencer ruling offers practical guidance on cross-border group relief. Matt Dunham/Associated Press redundant subsidiaries. Liquidators were appointed in October 2006, but the liquidations were ongoing by the Court of Appeal s judgment in February 2007 and were not actually completed until December It is at this point when the important distinctions between the rules governing pay-and-file and CTSA periods emerged. Under the pay-and-file system, claims for group relief could be made only up to six years and three months after the end of the accounting period in which the corresponding losses and profits arose. 3 That period had expired for every pay-and-file period even before the ECJ judgment was delivered and the existence of the no-possibilities condition was revealed. For CTSA periods, however, if a claim for group relief was made within two years of the end of the accounting period and there was an open enquiry or an appeal against an amendment to a return on the closure of an enquiry, a new claim for group relief could be made up to 30 days after the completion of the enquiry or appeal. 4 Because all the relevant CTSA years concerned were under enquiry, Marks & Spencer could issue new group relief claims up to and even following the final determination of the appeals and have the no-possibilities condition assessed at that time, namely when the companies were in liquidation, or perhaps even after dissolution when it was apparent the nopossibilities condition would have to be fulfilled. The Court of Appeal suggested a way to resolve this otherwise illogical dichotomy by stating that a reasonable transitional period existed to enable new claims to be made for pay-and-file periods as well, once taxpayers became aware of the requirements for making claims. No taxpayer could possibly have been aware of those requirements until the ECJ revealed that the nopossibilities condition existed (December 2005). Indeed, taxpayers continue to justifiably argue that those requirements are still not really known. 3 Para. 5(2) of Schedule 17A Income and Corporation Taxes Act 1988, unless HMRC agrees to accept the claim late. 4 Para. 74(1) of Schedule 18 of the Finance Act 1998, unless HMRC agrees to extend time para. 74(2). 2 MAY 11, 2009 TAX NOTES INTERNATIONAL

4 Reprinted from Tax Notes Int l, May 11, 2009, p. 454 Yet another issue arose for CTSA periods. Although, without the need for any transitional arrangements, the making of new claims might appear to suggest an answer to meeting the no-possibilities test for cross-border claims concerning CTSA periods, how did this address paragraph 73(2) of Schedule 18 of the Finance Act 1998: a claim for group relief may not be amended, but must be withdrawn and replaced by another claim? Did that mean that Marks & Spencer was required to abandon its earlier claims to make later ones? Given the lack of guidance on procedure and on what circumstances met the no-possibilities condition, there would be obvious risks in withdrawing accepted claims to make new ones that might encounter new procedural objections. The Battle Lines The Tribunal Judges judgment details the approach adopted. The taxpayers had issued further claims for both pay-and-file and CTSA periods shortly after the Court of Appeal s judgment in early 2007 and then periodically through the liquidation process issued the latest claims for the Belgian losses coming after formal dissolution and for the German losses a couple of days before the final step in the dissolution of that subsidiary. They issued the claims as alternative claims, without withdrawing the previous claims. Of course, accommodating claims for nonresident losses requires other changes to the formalities for making claims within the U.K. s group relief provisions, which are designed only for U.K. companies with U.K. tax inspectors and U.K. accounting periods. The parties were, however, able to agree on a formula and wording that adequately met those requirements. Instead, the grounds for denying the claims for group relief were more fundamental. HMRC contended: At the time the original claims were made in , the no-possibilities condition was not met. When the earliest claims were made, the companies were still trading. Afterwards it was always possible that the new lines of business might have been introduced, the profits from which could have been used to absorb the losses. It is not possible to make alternative claims for group relief. All subsequent claims were a procedural nullity to be ignored. The subsequent claims for the pay-and-file periods were late anyway. For German and Belgian losses, the nopossibilities condition could not be met short of the dissolution of the loss-making companies. There is nothing to stop a company being taken out of liquidation and new trades introduced. All the German claims were made before that company was liquidated and therefore must fail. While Belgian claims were made after dissolution, once a company is dissolved, it ceases to exist and HIGHLIGHTS is no longer able to consent to the surrender of its losses. Those claims therefore fail as well. It is difficult to imagine a more extreme position. The conditions to make a claim cannot be achieved short of dissolution, and by then no company exists to complete the necessary documentation. The Ruling The Tribunal Judges found largely in favor of the taxpayers. They concluded: In the objective circumstances of the taxpayers, once the companies were put into liquidation, the no-possibilities condition was met. It would be fanciful (the standard recommended by the Court of Appeal) to suggest that they might have been taken out of liquidation and new lines of business introduced at that time. On the other hand, such a step was a possibility when the original claims were issued around the time trading ceased but prior to liquidation. Accordingly, the no-possibilities condition was not met at the time the original claims were made in However, as those claims therefore did not meet the no-possibilities condition they were not valid and effective claims it follows that for the CTSA years, the claims made once the companies were in liquidation (that is, after the Court of Appeal s judgment and subsequently) were procedurally fine and succeed. For pay-and-file periods when the time for making claims had expired prior to the ECJ s decision, Community law did require the ability to make new claims once the conditions were known. This covered the subsequent alternative claims made in These subsequent claims were also unaffected by the original claims made in for the same reasons as the alternative CTSA claims the original claims were not valid because at that time the no-possibilities condition was not met. This, however, does not extend to claimants who, unlike Marks & Spencer, failed to act on their rights and only now seek to issue claims outside the period prescribed for doing so. The Tribunal Judges have also addressed the probable reason why HMRC sought to distance the current case from the 2006 changes to the rules, which were ostensibly intended to make the rules explicitly compliant with the ECJ ruling in the case. The 2006 rules permit group relief claims after the dissolution of the loss-maker by permitting the surrender to be signed by the claimant company itself. The tribunal notes this as revealing the disproportionately restrictive interpretation of the ECJ judgment offered by HMRC, a position probably inconsistent with local law anyway (the evidence suggesting that in Belgium, a liquidator could execute documents on behalf of a company after its dissolution). TAX NOTES INTERNATIONAL MAY 11,

5 HIGHLIGHTS Reprinted from Tax Notes Int l, May 11, 2009, p. 454 Implications for Other Claims The judgment naturally does not deal with other group structures in which the common parent company between profit-maker and loss surrenderer is not a U.K. resident company. The U.K. appears to deny group relief in these circumstances on the grounds that the Marks & Spencer judgment does not apply. This is a matter for other claims. On the positive side for claimants, the Tribunal Judges give some welcome guidance on how to make claims. Clearly for CTSA years, claims can be remade while enquiries remain open or appeals are pending to perfect claims without the risks of withdrawing existing claims. For pay-and-file years, provided claimants have been proactive and issued claims at the proper time, new claims should be permissible even if outside the statutory time, should the no-possibilities condition now be met. The case obviously deals with the specific facts of the Marks & Spencer claims. It concludes in those objective circumstances that the commencement of liquidation was sufficient to meet the no-possibilities test. What might meet the test in other cases presumably will rely on those objective facts. For Marks & Spencer, the tribunal has concluded that other lines of business might have been introduced to absorb the losses before liquidation. Whether or not that was correct in Marks & Spencer s case, the point would seem to be that the analysis is case by case. What, for instance, of a business continuing to trade, but with losses that will take 200 years to use? In its objective circumstances, surely there are no possibilities, whatever the company might do, of using the vast majority. More problematic for claimants is the conclusion the judgment reaches on how to compute the losses available for surrender once the no-possibilities condition is met. The taxpayer had provided detailed figures for the calculation of the losses on three bases, which produced roughly comparable results. One method took the accounting losses of the subsidiaries computed using local generally accepted accounting principles, made tax adjustments for local tax rules, and established the losses used according to local tax law. The second took the local accounting losses adjusted for local tax and distinguished those losses that would be available for group relief in the U.K. from those that would not (for example, between trading and capital losses) and established those losses that remained unused within those categories. The third method was a complete recomputation on a U.K. basis that is, adjusting the accounting losses in accordance with U.K. tax rules and establishing the amounts used in accordance with U.K. tax law. HMRC chose, in contrast, to deal with this issue of computation as one of principle only, without engaging in the actual calculation of the results. On this occasion, HMRC s approach borrowed from that used in the 2006 changes to the rules. HMRC maintained that one first needed to establish the level of local losses that remained unused under local rules and then recompute those remaining losses on a U.K. basis in order to surrender them. The Tribunal Judges have followed HMRC s approach, concluding that if this were not done a nonresident subsidiary could obtain a greater amount of relief for losses than a UK subsidiary in the same circumstances, which goes further than necessary to give effect to the no-possibilities test (paragraph 51). The taxpayer s recommended approach had not advocated a better result than would have been achieved from a domestic surrender but merely a consistent one. Indeed, the best result for the taxpayer was obtained by a purely U.K.-centric recomputation. It is also not obvious why the cross-border surrender might result in a better result than a domestic one, given that the former is limited to stranded losses incapable of local use while the latter is not. As HMRC was not required to calculate the losses on its approach, that a better result might have been produced on any of the taxpayer s suggested methods is an untested hypothesis. But a more fundamental objection arises to this worst case approach. Take the example of a German company whose results applying local principles and tax adjustments produce a loss in year 1. U.K. rules may calculate the loss in precisely the same amount but simply allocate the loss to a different period say, year 2. An obvious example would be the difference between the treatment of depreciation in other jurisdictions and capital allowances in the U.K. In this example, however, the Tribunal Judges approach produces no losses capable of surrender at all: In year 1 there are local losses but no U.K. recomputed losses and vice versa in year 2. Through nothing more than timing differences, the loss escapes the Marks & Spencer ruling even though it may be beyond any possible use. Conclusion Claimants with group structures not incorporating a common U.K. resident parent between loss- and profitmaker will still need to establish whether their group structures exclude them from the same treatment. The judgment is of considerable assistance in establishing when and how claims can be made, although for payand-file periods claimants will need to consider what steps they took to preserve their rights to rely on the conclusions the Tribunal Judges have reached. On the down side, the worst case approach to computing surrenderable losses may well, for the reasons discussed above, produce unfair and anomalous outcomes. All in all, the judgment provides welcome guidance but not a complete answer. Simon Whitehead is a partner with Dorsey & Whitney (Europe) LLP in London. 4 MAY 11, 2009 TAX NOTES INTERNATIONAL