Marks & Spencer Plc v David Halsey (HM Inspector of Taxes)

JurisdictionEngland & Wales
Judgment Date02 May 2003
Neutral Citation[2003] EWHC 1945 (Ch)
Docket NumberCH/2003/APP/O181
CourtChancery Division
Date02 May 2003

[2003] EWHC 1945 (Ch)



The Honourable Mr Justice Park


Marks & Spencer PLC
David Halsey (HM Inspector Of Taxes)

UPON the parties having agreed facts in accordance with the statement attached to this order


AND UPON HEARING leading counsel for the appellants and respondents


AND UPON READING the documents recorded on the court file as having been read


AND UPON the court finding that a preliminary ruling of the European Court of Justice concerning the interpretation of the Treaty Establishing the European Community (“the EC Treaty”) is necessary to enable it to give judgment




1. that the questions set out in the schedule to this order be referred to the European Court of Justice for a preliminary ruling pursuant to Article 234 of the EC Treaty;


2. further proceedings be stayed pending that preliminary ruling;


3. costs be reserved.






After hearing counsel for the appellant and the respondent the court considers that, in order to determine the dispute, it is necessary to seek a preliminary ruling from the Court of Justice under Article 234 of the EC Treaty on the following questions:


1. In circumstances where:

• provisions of a member state, such as the UK provisions on group relief, prevent a parent company which is resident for tax purposes in that state from reducing its taxable profits in that state by setting off losses incurred in other member states by subsidiary companies which are resident for tax purposes in those states, where such set off would be possible if the losses were incurred by subsidiary companies resident in the state of the parent company;

• the member state of the parent company:

subjects a company resident within its territory to corporation tax on its total profits, including the profits of branches in other member states, with arrangements for the availability of double taxation relief for those taxes incurred in another member state and under which branch losses are taken account of in those taxable profits;

does not subject the undistributed profits of subsidiaries resident in other member states to corporation tax;

subjects the parent company to corporation tax on any distributions to it by way of dividend by the subsidiaries resident in other member states while not subjecting the parent company to corporation tax on distributions by way of dividend by subsidiary companies resident in the state of the parent;

grants double taxation relief to the parent company by way of a credit in respect of withholding tax on dividends and foreign taxes paid on the profits in respect of which dividends are paid by subsidiary companies resident in other member states;

is there a restriction under Article 43 EC, in conjunction with Article 48 EC? If so, is it justified under Community law?


2. (a) What difference, if any, does it make to the answer to question 1 that, depending on the law of the member state of the subsidiary, it is or may be possible in certain circumstances to obtain relief for some or all of the losses incurred by the subsidiary against taxable profits in the state of the subsidiary?

(b) If it does make a difference, what significance, if any, is to be attached to the fact that:

• a subsidiary resident in another member state has now ceased trading and, although there is provision for loss relief subject to certain conditions in that state, there is no evidence that in the circumstances such relief was obtained;

• a subsidiary resident in another member state has been sold to a third party and, although there is provision under the law of that state for the losses to be used under certain conditions by a third party purchaser, it is uncertain whether they were so used in the circumstances of the case;

• the arrangements under which the member state of the parent company takes account of the losses of UK resident companies apply regardless of whether the losses are also relieved in another member state?

(c) Would it make any difference if there were evidence that relief had been obtained for the losses in the member state in which the subsidiary was resident and, if so, would it matter that the relief was obtained subsequently by an unrelated group of companies to which the subsidiary was sold?




A background note which has been agreed between the parties to the case and which explains the particular circumstances which have given rise to this reference is annexed hereto.






Reference is made to the Court of Justice for a preliminary ruling in the course of an appeal by Marks & Spencer PLC against a decision of the Special Commissioners, the first-instance tax tribunal in the United Kingdom. The issue before the Special Commissioners was whether the UK group relief provisions were in breach of Articles 43 and 48 of the EC Treaty in so far as they prevented a subsidiary resident and trading in another member state from surrendering losses to its ultimate UK parent company (or another member of the UK group). In their decision the Special Commissioners found against Marks & Spencer PLC, who appealed to this Court.




Marks & Spencer PLC are represented by Graham Aaronson QC and Paul Farmer, counsel, instructed by Dorsey & Whitney of 21 Wilson Street, London EC2M 2TD, telephone: 020 7588 0800, fax: 020 7588 0555, reference Simon Whitehead/Alison Last.


David Halsey (HM Inspector of Taxes) is represented by Dr Richard Plender QC and David Ewart, counsel, instructed by the Solicitor of Inland Revenue of Somerset House, Strand, London WC2R 1LB, telephone: 020 7438 7956, fax: 020 7438 6246, reference Nora O'Flaherty.




The following excerpt from the Special Commissioners' decision (pages 4–7, paragraphs 9–20) provides an account of the relevant UK legislation.


“Liability to UK corporation tax 1


9. Corporation tax is charged on the profits of companies that are either resident in the United Kingdom or conduct trading activities in the United Kingdom through a branch or agency (s 6(1), 11(1)). A resident company, such as the appellant, is charged to corporation tax in respect of its worldwide profits (s 8(1)). A non-resident company is charged to corporation tax only in respect of the profits attributable to its UK branch or agency (s 11(1)). In the case of the foreign subsidiaries, the United Kingdom has entered into bilateral double taxation conventions with each of France, Belgium and Germany. Accordingly, the foreign subsidiaries as non-resident companies are only within the scope of UK corporation tax in respect of their trading activities if those activities are conducted in the United Kingdom through a permanent establishment within the treaty definition. As we noted in paragraph 5 above, none of the foreign subsidiaries was resident or maintained a permanent establishment in the United Kingdom or otherwise conducted its


trading activities there. They were accordingly outside the scope of the UK corporation tax.


10. The appellant, however, as a UK resident company, is subject to corporation tax on its worldwide profits. Unlike many European countries, the United Kingdom adopts a tax credit system of relieving double taxation. It is not the United Kingdom's policy to exempt UK residents from tax (whether through domestic provision or by agreement under a treaty) in respect of their foreign profits. The principle that underlies this system is capital export neutrality, ie that the appellant's profits should be taxed in the same way whether it earns its profits in the United Kingdom or abroad. Thus, the appellant must bring its foreign profits into charge to UK tax. It is then entitled to credit any foreign tax suffered on those profits against its liability to UK tax on the same profits. (Alternatively, the foreign tax may be deducted in computing profits if that would be more beneficial, for example if as a result of UK losses there is no UK tax liability against which to credit the foreign tax).


11. There are two aspects of this system that are relevant to our decision. First, if the appellant (or any of its UK subsidiaries) were to conduct trading activities in any of France, Belgium or Germany through a branch in those countries, the United Kingdom would tax the profits attributable to that establishment and credit any foreign tax against the UK tax on the branch profits (or allow the foreign tax to be deducted in calculating branch profits or losses for UK tax purposes). The branch trading profits would be calculated on UK tax principles. If a trading loss arose that loss could be set against the appellant's profits. Any unrelieved loss would be carried forward. The fact that the loss may also be relieved in the foreign jurisdiction against the branch's future profits does not affect the relief against UK profits.


12. Secondly, if the appellant chooses (as it did) to establish in France, Belgium and Germany through foreign (non-resident) rather than UK subsidiaries, any dividends paid to the appellant (or in this case MSIH) by those foreign subsidiaries are taken into account as part of its profits in the year of receipt. With a foreign subsidiary (instead of a branch), a UK resident parent company is not taxed on the profits of the foreign subsidiary as they arise, nor is relief given for any losses. The only exception to that rule is where the UK's controlled foreign company legislation applies, in which case the income of the foreign subsidiary is attributed to the UK parent and taxed with relief for foreign tax paid by the subsidiary. Consistently with the treatment of foreign income generally, if and when the foreign subsidiary pays a dividend to its UK parent that...

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2 cases
  • Marks & Spencer Plc v Revenue and Customs Commissioners [SC]
    • United Kingdom
    • Supreme Court
    • 22 May 2013
    ...Marks and Spencer plc v Halsey (Inspector of Taxes) [2003] STC (SCD) 70. Park J on appeal decided to refer the matter to the ECJ: [2003] EWHC 1945 (Ch). He sought a preliminary ruling on two questions. The first was the compatibility of the UK provisions with article 43 EC. The second was w......
  • Marks & Spencer Plc v Revenue and Customs Commissioners (No 2)
    • United Kingdom
    • Supreme Court
    • 19 February 2014
    ...breach of that article: Marks & Spencer plc v Halsey [2003] STC (SCD) 70. On appeal, Park J decided to refer the matter to the ECJ: [2003] EWHC 1945 (Ch). He sought a preliminary ruling on two questions, namely (1) the compatibility of the UK provisions with article 43 EC and (2) what diff......

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