Losses for companies; headache for Governments?
In the UK, relief for trading losses may be surrendered by one group company to another group company only if both companies are resident in the UK or are non-resident companies carrying on a trade in the UK through a permanent establishment. However, a recent decision of the European Court of Justice (“ECJ”) – Marks & Spencer v Halsey (Case C-446/03) – indicates that that system is unlawful as a matter of Community law, if those losses were not, and could not be, taken into account in the State of residence.
By Hartley Foster
[b]What is the consequence of the decision in Marks and Spencer for retailers?[/b]
The decision of the ECJ means that now a non-UK resident group company that has not utilised (and may not in the future utilise) trading losses may surrender them to a UK resident group company. The decision applies both prospectively (with the consequence that legislative changes to the UK’s group relief system will have to be introduced) and retrospectively (with the consequence that companies will be able to seek redress from HM Revenue and Customs in the UK).
[b]Will the changes affect companies outside the UK?[/b]
Company groups which include companies resident in more than one Member State will be able to rely on this decision to allow transfer of losses between those companies in accordance with the decision.
[b]How can a company claim ‘cross-border losses’? [/b]
If the trading losses of the non-UK resident company are to be utilised by a UK resident company for a period where its tax return is open and the domestic time limit for a group relief claim has yet to expire, then the claim is made simply, in essence, as if the losses arose in a UK resident company. However, as the UK rules are not intended to apply cross-border, there are certain technical procedural rules that will be difficult to follow; a pragmatic approach should be adopted.
[b]Can a UK resident company make a claim for non-UK losses that have arisen in previous years? [/b]
Yes. The decision of the ECJ applies retrospectively, subject to any applicable limitation periods. Provided that the tax return of the UK company is open, it may claim relief for losses that have arisen in previous years provided that those losses may not be utilised by the non-resident company.
[b]Can a company make a claim even if its tax return is closed?[/b]
Yes. However, determining the most appropriate procedural route is complex, and specialist legal advice should be sought.
[b]How far back can a company go? [/b]
Whilst the exact date will depend on the procedural route that is adopted, the general rule in the High Court is that claims may be brought only within six years from the date that the “cause of action” arose. That start date is likely to be the date on which the tax in respect of which the non-UK resident losses now are intended to be set against was paid.
[b]What are the likely legislative changes?[/b]
The provisions in s402, Income and Corporation Taxes Act 1988 (et seq.) will need to be amended in order to make the UK group relief system compatible with Community law. Other analogous provisions (such as those relating to the use of capital losses, and consortium relief) that provide that the reliefs are available only between members of the same UK tax group also will need to be examined.
[b]Does this decision apply only to the UK’s group relief system?[/b]
No. The decision of the ECJ applies throughout the EU, and is relevant to EEA States as well.
[b]Hartley Foster is Head of Tax Litigation, DLA Piper Rudnick Gray Cary UK LLP[/b]
