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Date cross border group relief claim is made, not end of accounting period, will determine claim success, says Supreme Court

The date when a claim for cross border group relief is made should form the basis of a decision about one of the tests for granting that relief under EU law and not the date of the end of the accounting period in which the claim was made, the Supreme Court has ruled. 24 May 2013

The Court said (16-page / 141KB PDF) that if the end of the accounting period were used then there would be "no realistic chance" of satisfying the conditions at all.

The case involved retailer Marks and Spencer and one aspect of its attempts to offset losses made by now-closed Belgian and German subsidiaries against UK profits by claiming group relief.

Group relief enables a loss incurred by one group company to be offset against profits in another group company. M&S had argued that it should be allowed to offset losses under EU rules protecting freedom of establishment. The long-running case was referred to the Court of Justice of the European Union (CJEU) and the Supreme Court ruling relates to the application of a ruling in a second CJEU case involving other parties but covering similar ground.

At the time that M&S made the offset claims UK legislation restricted group relief to losses of UK resident companies and losses of UK branches of non-resident companies. It did not allow the losses of a group company that was tax resident in another EU member state to be offset against the profits of a UK resident group company. M&S argued this was contrary to the EU principle of freedom of establishment.

The CJEU ruled that it is contrary to EU law to prevent a parent company from deducting from its profits the losses incurred by its non-resident subsidiary where two conditions are satisfied.

The first condition was that the non-resident subsidiary has exhausted the possibilities available in its EU member state of residence of having the losses taken into account for the accounting period in which the relief arises and also for previous accounting periods.

The second condition is that there was no possibility of the foreign subsidiary’s losses being taken into account in its state of residence for future periods either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party. This is sometimes referred to as the "no possibilities test".

When UK courts were asked to apply the CJEU ruling Court of Appeal decided against M&S on the issue concerning the time at which the 'no possibilities' test should be decided. The Court of Appeal said it should be at the end of the accounting period in which the loss arose and not, as M&S contended, when the claim was made.

The Supreme Court has reversed that ruling, relying in part on a further CJEU ruling, 'Case C-123/11 Proceedings brought by A Oy', in its ruling.

HM Revenue and Customs (HMRC) argued that if the no possibilities test was decided at the time the claim was made this would give groups a large degree of flexibility to make sure that the conditions were fulfilled, such as by beginning the liquidation of the overseas subsidiary, essentially enabling them to choose whether the losses should be transferred cross border. HMRC argued that this would "upset the balanced allocation of the power to impose taxes".

The Supreme Court said that the 'no possibilities' test should be applied at the date of the claim. Lord Hope said that if the test was applied at the end of the accounting period in which the loss arose there would be "no realistic chance" of satisfying the conditions at all. "It would hardly ever be possible, if regard is had only to how matters stood at the end of the relevant accounting period, to exclude entirely the possibility that the losses is question might be utilised in the Member State of the surrendering company unless, of course, this was prevented by its local law," he said.

"The principle that lies behind HMRC's approach must, of course, be respected. But it does not justify the choice of date for which they contend which is too soon to give the claimant company a reasonable opportunity of showing that the para 55 conditions are satisfied," Lord Hope said

Jake Landman, a tax expert at Pinsent Masons, the law firm behind Out-law.com, said that the Supreme Court's decision was not surprising in view of the A Oy case.

"Although A Oy involved different facts to M&S the legal issue was the same: can the circumstances which mean there is no possibility be brought about through actions chosen by the taxpayer?" he said.

"Although this is a victory for M&S it is not the end of the road. There are still a number of issues remaining which will be considered at further Supreme Court hearings," Landman said. "In addition even when the M&S case concludes there are issues around whether the principles apply in the same way to companies with different group structures."

Following the CJEU decision the UK amended its group relief rules to allow losses incurred in European Economic Area (EEA) countries to be group relieved in the UK provided conditions are fulfilled.

"In terms of long term ramifications the UK will need to make sure that its group relief rules are compliant with the ultimate outcome of the case and more flexibility for companies claiming losses cross border seems inevitable," Jake Landman said.

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