Tax authorities lose appeal over M&S ruling

The UK tax authorities on Tuesday lost their appeal in the long-running battle over group tax relief rules spearheaded by Marks and Spencer, the retail group. 

The Court of Appeal ruling deals with the practical interpretation that should be given to a landmark ruling on group tax relief rules by the European Court of Justice in 2005, and could have implications for hundreds of companies. 

Hundreds of millions of pounds are estimated to hang on the interpretation given to the ECJ’s ruling. According to court papers, the tax authorities believe that more than 300 other companies have been waiting on the outcome of these proceedings. This is in addition to about 70 multinationals involved in a group litigation claim, which followed the much-publicised M&S test case. 

The ECJ ruling two years ago had resulted from a claim by the retailer that UK group tax relief rules – which barred a company from offsetting losses made by an overseas subsidiary against profits made in the UK for tax purposes – breached core European Union treaty principles. 

M&S had run up about £100m of losses in subsidiaries in France, Germany and Belgium before deciding to pull out of continental Europe. It wanted to offset those against its domestic profits for corporation tax purposes.  

Late in 2005, the ECJ ruled in M&S’s favour. But the court also attached some significant qualifications. In particular, the judges said that it would be legitimate for member states to impose restrictions that ensured that the tax losses in question could not be used twice – once in the foreign jurisdiction and once in the UK.

However, the court did not expand on how and when this key issue – whether all possibilities of using the losses overseas had been exhausted – was to be assessed. 

As a result, a fresh legal wrangle between the retailer and HM Revenue & Customs erupted. M&S maintained that it was simply required to provide reasonable evidence that there was no practical possibility of its overseas losses being used locally in the future. 

The Revenue, by contrast, maintained that M&S had to show that, at the moment the losses were incurred, that there was no question under local law of the losses being used in those overseas jurisdictions. 

Finally, in procedural hearings earlier this year, a High Court judge came up with a third interpretation. He decided that the issue was whether at the time that a claim for group relief was made, the taxpayer could demonstrate that there was no possibility of the overseas losses being used locally. 

Both the Revenue and M&S appealed. The Court of Appeal on Tuesday dismissed the Revenue’s appeal on the timing question, upholding the High Court judge’s approach. They formally dismissed M&S’s cross-appeal, but said that “no possibility” should be read as “no real possibility – in the sense that a real possibility is one which cannot be dismissed as fanciful”. 

They rejected, however, M&S’s application for a reference to the ECJ on a further related issue.