Revenue and Customs v Marks and Spencer plc [2014] UKSC 11

M&S sought UK group relief for losses of its German and Belgian subsidiaries. The Supreme Court held sequential cross-border loss relief claims are permissible within statutory time limits, pay and file claims were time-barred, and Method E was the correct method of calculating surrenderable losses.

Facts

Marks and Spencer plc (M&S) expanded into Europe from 1975 but decided to withdraw from continental European activity in March 2001. It could not find purchasers for its German subsidiary (MSD) or Belgian subsidiary (MSB). MSD ceased trading in August 2001 and MSB in December 2001; both were dissolved following liquidation in December 2007. M&S sought UK corporation tax group relief for losses sustained by MSD (from 1997) and MSB (from 1998).

M&S made first group relief claims between 2000 and 2003 when neither subsidiary was in liquidation. Three further claims in respect of the same losses were made on 20 March 2007, 12 December 2007 and 11 June 2008. Claims for years from 2000 onwards were governed by the self-assessment rules in Schedule 18 to the Finance Act 1998; earlier claims were governed by the pay and file rules in Schedule 17A ICTA 1988.

The case had already generated nine prior hearings, including the ECJ ruling in Case C-446/03 Marks & Spencer plc v Halsey [2006] Ch 184, which established the ‘no possibilities test’ at paragraph 55: cross-border relief must be permitted only where the non-resident subsidiary has exhausted possibilities of using the losses in its state of residence and there is no possibility of future use. In an earlier Supreme Court hearing, Lord Hope resolved issue one, holding that the no possibilities test is applied at the date of the claim.

Issues

Three issues remained for determination:

Issue 2

Whether a claimant company can make sequential/cumulative/alternative claims for the same losses of the same surrendering company for the same accounting period, provided the statutory time limit remains open.

Issue 4

Whether the principle of effectiveness required M&S to be allowed to make fresh pay and file or self-assessment claims once the ECJ had identified the applicable test.

Issue 5

The correct method of calculating losses available for surrender: whether Method E (convert unutilised losses determined under local rules to UK principles) or Method F (take the lower of amounts calculated under local rules or after conversion to UK rules).

Arguments

HMRC argued that under paragraph 73(2) of Schedule 18 FA 1998 a claim for group relief may not be amended but must be withdrawn and replaced, and that the original claims had not been withdrawn; only the original claims were valid. HMRC contended that permitting sequential claims offended the principles of legal certainty and preservation of balanced allocation of taxing rights, and that under Method F no principle of EU law required German losses to be relieved to a greater extent than in Germany.

M&S argued that the domestic legislation contemplated successive claims and that some remoulding was required to give effect to EU law rights. It contended that Method E ensured equal treatment with a UK-resident group and that its later claims were made in the alternative, with the earlier claims to be withdrawn if unnecessary.

Judgment

Issue 2 – sequential claims

Lord Clarke (with whom Lord Neuberger, Lord Mance, Lord Reed and Lord Carnwath agreed) rejected HMRC’s construction of the domestic legislation. The provisions of Schedule 18 FA 1998 were inconsistent with the proposition that only one claim could be made. Paragraph 73(2) expressly contemplated that a claim may be withdrawn and replaced, and the time limits in paragraph 74 would be inconsistent with a single-claim rule. The Court approved the Upper Tribunal’s conclusion that the scheme was ‘flexible and dynamic’.

In the EU context, some remoulding was required under Autologic plc v Inland Revenue Comrs [2006] 1 AC 118 to give effect to Community law rights. The Court approved the Upper Tribunal’s approach of disregarding paragraph 69(2) and endorsed its summary that a claimant company could make successive claims within the paragraph 74 time limit, with validity of a later claim depending on facts at the time of that later claim. The FTT was entitled to proceed on M&S’s undertaking that if first claims failed they would be withdrawn.

The FTT’s factual findings that the no possibilities test was not satisfied at the date of the first claims (companies still trading or capable of doing so) but was in principle satisfied at the second, third and fourth claims (during and after liquidation) could not be challenged. There was no inconsistency with the balanced allocation of taxing rights, since M&S was not choosing where to be taxed but responding to the fact that the companies had ceased trading years earlier.

Issue 4 – time limits

The Court upheld the Upper Tribunal’s and Court of Appeal’s conclusion that the pay and file claims were time-barred. The principle of effectiveness is concerned with ensuring recognition and effect of existing Community law rights, not with allowing a claimant time to bring about a new state of affairs (such as placing subsidiaries into liquidation) so as to create rights it did not previously have. At the time M&S made its pay and file claims, it had no Community law right to relief because the paragraph 55 conditions were not satisfied. The six-year and three-month time limit was reasonable and not discriminatory.

Issue 5 – method of calculation

The Court approved Method E. It applied local rules first to identify unutilised losses, then converted them to UK principles. This ensured equal treatment: M&S obtained the same relief a UK-resident group would obtain, no more and no less. The re-allocation of losses to different accounting periods was merely the application of UK tax rules; it did not give M&S greater relief than a wholly UK-resident group. Method F would deprive M&S of relief that would have been available had the subsidiary been UK-resident.

Implications

The decision consolidates the framework for cross-border group relief claims following the ECJ’s ruling in Marks & Spencer v Halsey. Three important principles emerge on the facts of this case:

First, within the statutory time limits, a claimant company may make sequential claims for cross-border group relief in respect of the same losses of the same surrendering company for the same accounting period, with the validity of each claim assessed by reference to whether the no possibilities test is satisfied at the date of that particular claim. This affords realistic recognition that the factual position of the surrendering company (particularly in relation to liquidation and dissolution) may change over time.

Second, the principle of effectiveness under EU law does not require a Member State to give a taxpayer time to construct facts which would generate a Community law right. Reasonable time limits laid down by a Member State may lawfully preclude claims even where the ECJ’s articulation of the applicable test post-dates the claim, provided the time limits are not discriminatory and do not render the exercise of Community rights virtually impossible or excessively difficult.

Third, Method E is confirmed as the appropriate method for computing surrenderable losses: apply local rules to identify unutilised losses, then convert those losses to UK tax principles. This maintains parity with the position of a wholly UK-resident group and does not offend the balanced allocation of taxing rights.

The decision matters to multinational groups with cross-border loss profiles, HMRC and advisers on group relief. It clarifies the practical machinery for asserting Marks & Spencer-type claims, though the sequential-claims analysis is grounded in the specific interplay between the self-assessment regime and the EU law right, and the pay and file conclusion illustrates the strict limits of the effectiveness principle where domestic time bars have already expired. Lord Clarke observed that where multiple inter-related legal issues arise, it may be preferable to determine them together rather than serially.

Verdict: HMRC’s appeals on issues 2 and 5 were dismissed; M&S’s appeal on issue 4 was dismissed. Issue 2 was answered in the affirmative: M&S is entitled to advance all its self-assessment claims. Under issue 4, the relevant pay and file claims are time-barred. Under issue 5, the correct method of calculation is Method E.

Source: Revenue and Customs v Marks and Spencer plc [2014] UKSC 11