UK Set-Off of Group Losses from the European Economic Area

Monday 13 October

On 18 September 2008 the European Commission issued a formal request to the UK to properly implement rules for relieving cross border losses following the Marks and Spencer case. What does this mean for taxpayers and will there be a change in the law?

What happened in the Marks and Spencer case?

In 2005, Marks and Spencer successfully took its case, Marks & Spencer plc v Halsey (HM Inspector of Taxes) (Case C446/03), to the European Court of Justice(ECJ), appealing against the refusal of HM Revenue and Customs (HMRC) to allow a UK group relief deduction in respect of losses incurred by some of its European subsidiaries.
As such losses would have been allowable under UK law had they arisen in the UK, the tax rules which denied the ability of European losses to be offset against UK profits were held, in certain circumstances, to be contrary to the EC Treaty, specifically the freedom of establishment.

What happened next?

As a result of the ECJ decision, the UK Government introduced new legislation which allowed the deduction of overseas losses from the profits of UK companies. However, the legislation imposes various conditions on cross border group relief. Aspects of the new UK legislation which the European Commission found particularly offensive include:

• the legislation only applies to losses incurred after 1 April 2006 - clearly the UK rules before this date were also in breach of the EC Treaty and the UK Government has failed to recognise this;
  
• HMRC insisted that the time for determining whether any cross border losses were available was immediately after the end of the accounting period in which the loss arose - this is a much more restrictive criteria than is available when claiming UK domestic losses under the group relief provisions;
  
• an unnecessarily restrictive interpretation of when the losses can no longer be utilised overseas (and hence when they can be used to shelter UK profits).

In summary the legislation introduced as a response to the ECJ decision in the Marks and Spencer case has been so tightly drafted that it is virtually impossible for cross border group losses to be relieved against UK profits.

So what action has the European Commission taken?

On 18 September 2008, the European Commission issued a press release that contained a formal request to the UK tax authorities to implement the ECJ ruling in the Marks and Spencer case. They acknowledge the legislative changes already made, but consider the changes are also, by virtue of the severely limited nature of availability of the losses under these new rules, contrary to the EC Treaty.

Roopa Aitken, Tax Partner at Grant Thornton says: "This is a welcome challenge from the European Commission against an unsatisfactory legislative change that did not accurately reflect the ECJ decision. It remains to be seen what action the UK Government will take in response to the request from the European Commission."

She continues, "As noted above it should also be possible to claim cross border group relief for years before 2006. Until the on-going litigation through the UK courts in Marks and Spencer is finished and we have greater certainty on what companies will need to do in order to support any cross border loss relief claims, we would recommend that companies make protective claims incorporating losses where no relief has been obtained overseas in order to protect their position and expedite future claims."

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