UK Government Has 'Loophole' In M&S Case, Chiltern Suggests

by Robin Pilgrim, LawAndTax-News.com, London

11 April 2005

Following the delivery last week by ECJ Advocate General, Poiares Maduro of his opinion on the tax dispute between UK retailer, Marks & Spencer and the Inland Revenue, professional services group Chiltern has suggested that fears that it may prompt a radical shakeup of tax legislation surrounding group relief may be unfounded, as he seemed to be suggesting a way out for the government.

Marks & Spencer had argued that UK provisions on group tax relief were in breach of European law, as they prevent an EU-based parent company from offsetting losses incurred by subsidiary companies in other member states, thus violating the principle of freedom of establishment, a reading of the situation with which Mr Maduro agreed.

If the ECJ decides to follow the Advocate General's opinion (as is usually the case), the UK and other European governments could be faced with the prospect of making costly tax refunds to companies in the same situation as Marks & Spencer.

However, in a statement, Chiltern observed that:

"Many commentators have speculated on what the Inland Revenue’s reaction to an M&S victory is likely to be, with such dramatic measures as the abolition (or at least substantial reform) of group relief being put forward as possibilities. Such moves could have a catastrophic effect on businesses prompting a range of unwieldy and costly corporate restructurings."

"Chiltern believes that this is unlikely as the Advocate General has actually suggested a solution which the Revenue could easily implement. In a subtle comment towards the end of the Opinion document, the Advocate General has highlighted a way for the UK government (and other national EU governments) to change local laws to prevent future tax relief for foreign losses."

Drawing attention to the section of his opinion in which the Advocate General stated that where the State in which the foreign subsidiaries are established enables those subsidiaries to impute their losses to another person or to carry them forward to other financial years, the UK is entitled to oppose a claim for the transnational transfer of those losses, Chiltern suggested that:

"As virtually every EU country permits the carry forward of tax losses, this potentially means that the Inland Revenue could make a minor change to the UK group relief rules (essentially writing the above entitlement into law), and thereby legitimately prevent future tax relief for the vast majority of overseas losses. A similar approach has already been adopted with regard to the treatment of UK branches of overseas companies."

Andrew Shilling, the firm's director of international tax observed that:

“The Advocate General’s opinion is very clever because he provides the UK Government with a “get out of jail free” card, enabling the Government, after some minor tweaking to tax legislation, to retain a group relief system that will comply with EU law, but will not permit relief for the vast majority of foreign losses.”

“This avoids the nightmare scenario of the abolition of group relief, a course of action that the Government might otherwise have been forced to take and which could have prompted a fiscal meltdown in the UK and across the EU.”

Recommended