Revenue and Customs v Marks and Spencer plc [2013] UKSC 30

The Supreme Court held that whether Marks and Spencer could claim UK group relief for losses of its German and Belgian subsidiaries depended on circumstances at the date of the claim, not at the end of the loss-making accounting period. This rejected HMRC's approach.

Facts

Marks and Spencer plc (M&S) claimed UK group relief for losses of two subsidiaries: Marks and Spencer (Deutschland) GmbH (MSD), resident in Germany, and Marks and Spencer (Belgium) NV (MSB), resident in Belgium. M&S decided in March 2001 to withdraw from continental Europe. No buyers could be found for MSD or MSB. MSD ceased trading in August 2001 and MSB in December 2001. Both were dissolved after liquidation in December 2007.

The first claims were made between 2000 and 2003, before either subsidiary was in liquidation. M&S then made repeat claims for the same losses on 20 March 2007, 12 December 2007 and 11 June 2008. M&S contended that UK legislation restricting group relief to losses of UK-resident companies (and, after 2000, UK branches) breached the freedom of establishment under article 43 EC (now article 49 TFEU).

In Case C-446/03 Marks & Spencer plc v David Halsey (Her Majesty’s Inspector of Taxes) [2005] ECR I-10837, the ECJ held that such restrictions were generally justified. It also held, at para 55, that they were disproportionate where the non-resident subsidiary had exhausted the possibilities of having the losses taken into account in its state of residence, and there was no possibility of the losses being used there in future periods (the “no possibilities” test).

Park J ([2006] EWHC 811 (Ch)) and the first Court of Appeal ([2007] EWCA Civ 117) held that the para 55 conditions were to be tested at the date of the claim. After proceedings in the First-tier and Upper Tribunals, the second Court of Appeal (Marks and Spencer plc v Revenue and Customs Commissioners [2011] EWCA Civ 1156, [2012] STC 231) decided five issues. On the first, Moses LJ disagreed in principle with the date-of-claim approach but considered himself bound by the first Court of Appeal. Both parties obtained permission to appeal.

M&S applied for a reference to the CJEU. After the CJEU’s judgment in Case C-123/11 Proceedings brought by A Oy (21 February 2013), M&S argued that a reference was no longer necessary. The hearing therefore became a substantive hearing on the first issue only.

Issues

The first issue was whether, under Marks & Spencer v Halsey, the taxpayer must show that there was no possibility of using the losses in the subsidiary’s state:

• (a) on the basis of the circumstances at the end of the accounting period in which the losses arose (HMRC’s case); or
• (b) on the basis of the circumstances at the date of the claim (M&S’s case).

Arguments

HMRC

Mr Ewart QC argued that giving the claimant any choice, for whatever reason, as to where losses are relieved would upset the balanced allocation of taxing powers. He said this was the critical justification in Marks & Spencer, and that M&S had shown no principled reason for selecting the date of the claim. A line had to be drawn at the point when the loss crystallised.

He submitted that A Oy should be approached with caution as a pre-transaction case. He also argued that voluntary acts after crystallisation, such as liquidation, should be excluded.

M&S

Mr Milne QC accepted the need to protect the balanced allocation of taxing powers but characterised the inquiry as a practical, factual one. He relied on two features of A Oy:

• the CJEU held that a freely chosen merger did not of itself allow the parent to choose the tax regime applicable to the losses (para 48); and
• the possibility of carrying losses forward did not automatically defeat the para 55 conditions, since the national court still had to examine the facts (para 54).

During the hearing he shifted position and suggested that the facts should be examined at the date of scrutiny, effectively the first-instance hearing, rather than the date of the claim.

Judgment

Lord Hope gave the only judgment, with which Lord Neuberger, Lord Mance, Lord Reed and Lord Carnwath agreed.

The post-Halsey case law

Lord Hope reviewed three later ECJ decisions:

• Case C-231/05 Proceedings brought by Oy AA [2007] ECR I-6373;
• Lidl Belgium GmbH & Co KG v Finanzamt Heilbronn Case C-414/06 [2008] ECR I-3601;
• Case C-337/08 X Holding BV v Staatssecretaris van Financiën [2010] ECR I-01215.

He agreed with Moses LJ that these were straightforward applications of Marks & Spencer. None of them assisted, either way, on the timing question.

A Oy

Lord Hope noted that the CJEU did not follow either of Advocate General Kokott’s approaches. She had treated the merger as a free choice that engaged the objection to choosing the applicable tax scheme. The Court instead held that allowing losses to be taken into account on a cross-border merger was not a priori a free choice of tax scheme. It left it to the national court to determine whether all possibilities of using the losses had been exhausted, even though the facts suggested some possibilities might remain. Lord Hope said that A Oy made it easier to choose between the competing approaches.

Rejection of HMRC’s date

Lord Hope accepted that the exercise is factual and stated:

“I agree with Mr Milne that the exercise that is to be carried out is essentially a factual one, and the claimant company ought to be given an opportunity to deal with it in as realistic a manner as possible. The approach contended for by HMRC would mean that there would be no realistic chance of satisfying the para 55 conditions at all.”

At the end of the accounting period it would hardly ever be possible to exclude future use of the losses, unless local law prevented it. Lord Hope held that the balanced allocation principle did not require such a restrictive approach, as para 48 of A Oy made clear.

Date of claim rather than date of inquiry

Lord Hope rejected Mr Milne’s revised position. He considered that the present tense used in paras 54 and 56 of A Oy was equally consistent with facts being established as at the commencement of proceedings. Mr Milne had offered no detailed argument for the date of inquiry.

Lord Hope also noted that the date of claim had been adopted by:

• Park J and the first Court of Appeal;
• the First-tier and Upper Tribunals, in relation to the pay and file years; and
• para 69(2) of Schedule 18 to the Finance Act 1998, which refers to “at the time the claim is made”.

He added:

“On the contrary, that date has the advantage of certainty, as the facts to be inquired into will not be susceptible to change between the making of the claim and the commencement of the inquiry.”

Whether successive claims can be made, and with what effect, was expressly left to the second issue.

Choice and the liquidations

National courts must remain alert to a claimant simply choosing where to be taxed, which the para 55 conditions are designed to exclude. However, A Oy showed that the mere ability to carry losses forward does not defeat those conditions. By analogy with the merger in A Oy, the decisions to wind up MSD and MSB were not open to objection. Lord Hope observed:

“What M&S was doing can be attributed to the fact that the companies had ceased trading six years earlier, and not to the exercise of an option to choose where to seek relief for the losses that had been incurred.”

HMRC’s underlying principle must be respected, but it did not justify a date which, as Park J said, was too soon.

Implications

The decision settles, for this litigation, the date at which the Marks & Spencer “no possibilities” conditions are tested for cross-border group relief: the circumstances known at the date of the claim.

It reflects the Supreme Court’s reading of A Oy on two points:

• the theoretical availability of loss carry-forward at the end of the loss period does not of itself defeat a claim; and
• commercially explicable steps such as liquidation after the cessation of trading are not automatically treated as an impermissible choice of taxing jurisdiction.

For groups with loss-making EU subsidiaries, this offers a realistic route to showing that the conditions are met. For tax authorities, the court emphasised that national courts must still guard against forum-choosing.

The ruling is limited in several ways:

• it decides only the first issue;
• the effect of successive or cumulative claims (the second issue) remains open;
• the fourth issue (fresh pay and file claims) and the fifth issue (quantification) remain undecided; and
• the third issue fell away.

The court also proceeded without a reference to the CJEU, treating A Oy as having made the answer sufficiently clear.

Verdict: The Supreme Court unanimously (Lord Hope giving judgment) answered the first issue in M&S’s favour without making a reference to the CJEU. It rejected HMRC’s contention that the ‘no possibilities’ test is applied at the end of the accounting period in which the losses arose. It held that the question is whether the claimant can show, on the circumstances known at the date of its claim, that there has been no possibility of the losses being used in the surrendering company’s Member State in any prior period, and none in the claim period or any future period. It also rejected M&S’s alternative of the date of inquiry. The third issue consequently did not need to be answered, and the parties are to be heard on the remaining three issues at a later date.

Source: Revenue and Customs v Marks and Spencer plc [2013] UKSC 30