UK Tweaks Loss Relief Rules Following ECJ Decision

by Jason Gorringe, Tax-News.com, London

21 February 2006

The United Kingdom government has announced that it will introduce legislation in Finance Bill 2006 to amend the UK loss relief rules in response to a landmark judgment by the European Court of Justice last year in a case brought by the retail group Marks and Spencer plc.

M&S successfully argued that UK provisions on group tax relief are 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.

In a December 2005 ruling, the ECJ said that M&S can claim tax relief for losses outside its home market, with the proviso that the loss-making subsidiaries are unable to claim tax relief in their country of establishment.

According to the UK government, the ECJ considered that the country's group loss relief rules are in principle compatible with European law, meaning that the system of group relief can be kept broadly as it is now, although the Court also held that, in some very limited circumstances, relief should be available in the UK for the otherwise unrelievable losses of some group companies resident in other States.

However, the government fears that groups with loss-making companies resident in another state could "engineer" their circumstances so as to preclude the possibility of a loss making company obtaining relief in its state of residence by, for example, liquidating that company whilst transferring its business to another company.

In response, the government is introducing legislation to deny loss relief where there are arrangements which either: result in losses becoming unrelievable outside the UK that were otherwise relievable, or; give rise to unrelievable losses which would not have arisen but for the availability of relief in the UK, if the main purpose or one of the main purposes of those arrangements is to obtain UK relief.

The proposed legislation will be effective from Monday, February 20.

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