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CIOT Calls On UK Government To Implement EU Request

by Robin Pilgrim, LawAndTax-News.com, London

23 September 2008

The Chartered Institute of Taxation (CIOT) called on Monday for the UK government to agree last week's request from the European Commission to implement in full the European Court of Justice's judgement in the Marks and Spencer case on cross-border loss compensation.

In the legislation, meant to implement the Marks & Spencer ruling, the United Kingdom imposes conditions on cross border group relief which make it virtually impossible for taxpayers to benefit from the relief, says the Commission.

The Commission considers that this is contrary to the EC Treaty.

The request is in the form of a ‘reasoned opinion’ under Article 226 of the EC Treaty. If the United Kingdom does not reply satisfactorily to the reasoned opinion within two months, the Commission may refer the matter to the European Court of Justice.

Ian Menzies-Conacher, Chairman of CIOT’s Technical Committee, commented:

“The CIOT welcomes the European Commission request. Taxpayers require certainty in order to operate their businesses successfully and this requires that the UK law should be properly aligned with our international tax obligations. We very much hope that the government will amend the law as soon as possible and without the need for further ECJ involvement. We consider that there are other areas, such as the taxation of Controlled Foreign Companies and dividends, where the UK has not fully implemented the judgments of the ECJ."

In the Marks & Spencer ruling in 2005, the ECJ ruled that the UK ban on cross border loss relief was disproportionate, in so far as it denied loss relief where a non-resident subsidiary had exhausted all possibilities for relief in its state of establishment.

Following this ruling, the UK should have, in principle, granted relief for definitive losses of a subsidiary established in another member state.

Last week, the Commission highlighted the following concerns regarding the UK tax regime:

  1. An unnecessarily restrictive interpretation of the condition that there should be no possibility of use of the loss in the state of the subsidiary (paragraph 7 of Schedule 18A of the Income and Corporation Taxes Act (ICTA) 1988);
  2. the date for determining whether the condition that there should be no possibility of use of the loss in the state of the subsidiary is met is set immediately after the end of the accounting period in which the loss arises;
  3. the time limit to claim for group relief for losses made by subsidiaries established in other Member States is set at twelve months (extended in case of enquiries by the Revenue) after the filing date for the company tax return of the claimant company;
  4. the legislation states that it applies only to losses incurred after April 1, 2006.

According to the Commission, these conditions make the new legislation incompatible with the freedom of establishment guaranteed by Articles 43 and 48 of the EC Treaty and Articles 31 and 34 of the EEA Agreement.

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