Marks & Spencer Plc v Halsey (Case C-446/03)

JurisdictionEngland & Wales
JudgeLord Justice Chadwick,Lord Justice Tuckey,Lord Justice Jacob
Judgment Date20 February 2007
Neutral Citation[2007] EWCA Civ 117
Docket NumberCase No: C3/2006/1125
CourtCourt of Appeal (Civil Division)
Date20 February 2007

[2007] EWCA Civ 117







Royal Courts of Justice

Strand, London, WC2A 2LL


Lord Justice Chadwick

Lord Justice Tuckey and

Lord Justice Jacob

Case No: C3/2006/1125


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

Mr Richard Plender QC and Mr David Ewart QC (instructed by Acting General Counsel and Solicitor of HM Revenue & Customs, Somerset House, London WC2R 1LB) for HM Inspector of Taxes (Appellant and Respondent to cross-appeal)

Mr Graham Aaronson QC (instructed by Dorsey & Whitney of 21 Wilson Street, London EC2M 2TD) for Marks & Spencer PLC (Respondent and Appellant to cross-appeal)

Hearing dates: 16 and 17 November 2006

Lord Justice Chadwick

This appeal and cross-appeal are from the order made on 11 April 2006 by Mr Justice Park on an appeal by Marks & Spencer PLC (“M&S”) under section 56A of the Taxes Management Act 1970 from the decision of the special commissioners (Dr John Avery Jones CBE and Mr Malcolm Gammie QC) dated 17 December 2002. The special commissioners had held that M&S, a United Kingdom resident company, was not entitled to group relief against its profits in respect of losses incurred by subsidiaries established and resident in Belgium, France and Germany. So far as material to this appeal, the group relief claims are those made by M&S in respect of the four accounting periods ending on 31 March 1998, 1999, 2000 and 2001. The amounts in issue are substantial.

The legislation


Group relief is made available under the provisions in Chapter IV of Part X of the Income and Corporation Taxes Act 1988 (“TA 1988”). Section 402(1) TA 1988 provides, so far as material, that:

“402(1) Subject to and in accordance with this Chapter …,relief for trading losses and other amounts eligible for relief from corporation tax may, in the cases set out in subsections (2) and (3) below, be surrendered by a company (“the surrendering company”) and, on the making of a claim by another company (“the claimant company”) may be allowed to the claimant company by way of a relief from corporation tax called group relief.”

Section 402(2) TA 1988 provides that:

“402(2) Group relief shall be available in a case where the surrendering company and the claimant company are both members of the same group.

A claim made by virtue of this subsection is referred to as a 'group claim'.”

For accounting periods ending on or before 31 March 2000 – that is to say, in relation to three out of the four accounting periods in issue in the present case – section 402(2) was to be read with section 413(5) TA 1988:

“413(5) References in this Chapter to a company apply only to bodies corporate resident in the United Kingdom; …”

That provision was repealed, by the Finance Act 2000, with effect for accounting periods ending after 31 March 2000 – that is to say, in relation to the fourth of the accounting periods at issue in the present case – but was replaced (in substance) by sections 402(3A) and (3B) TA 1988:

“402(3A) Group relief is not available unless the following condition is satisfied in the case of both the surrendering and the claimant company.

(3B) The condition is that the company is resident in the United Kingdom or is a non-resident company carrying on a trade in the UK through a branch or agency.”


The special commissioners had rejected the contention, advanced by M&S, that the group relief provisions of United Kingdom domestic law, which (on their face) had the effect of preventing a subsidiary resident in another member state of the European Union but trading outside the United Kingdom from surrendering losses to its ultimate parent resident in the United Kingdom, were in breach of articles 43 and 48 of the EC Treaty (formerly articles 52 and 58):

“43 Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.

Freedom of establishment shall include the right to take up and pursue activities as self employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of article 48, under the conditions laid down for its own nationals by the law of the country where such establishment is effected …

48 Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States.

'Companies or firms' means companies or firms constituted under civil or commercial law, including co-operative societies and other legal person governed by public or private law, save for those which are non-profit-making.”

The reference to the Court of Justice


The special commissioners had taken the view, expressed at paragraph 2 of their decision (SC 3050/02), that the relevant principles established by the case law of the Court of Justice were clear and that it was unnecessary to seek the guidance of that Court in order to reach a decision. But the judge was persuaded that, in order to decide the appeal that was before him, it was necessary to seek a preliminary ruling under article 234 of the EC Treaty. The questions referred are set out in the schedule to the order which he made on 2 May 2003. They can also be found at paragraph [26] in the judgment of the Court of Justice in Case C-446/03, reported at [2006] Ch 184.


On 13 December 2005 the Court of Justice ruled:

“As Community law now stands, Articles 43 EC and 48 EC do not preclude provisions of a Member State which generally prevent a resident parent company from deducting from its taxable profits losses incurred in another Member State by a subsidiary established in that Member State although they allow it to deduct losses incurred by a resident subsidiary. However, it is contrary to Articles 43 EC and 48 EC to prevent the resident parent company from doing so where the non-resident subsidiary has exhausted the possibilities available in its State of residence of having the losses taken into account for the accounting period concerned by the claim for relief and also for previous accounting periods and where there are no possibilities for those losses to be taken into account in its State of residence for future periods either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party.”

It is necessary, in the context of the present appeal, to have in mind the reasoning which led the Court of Justice to that conclusion. Three steps in that reasoning can be identified.


First, the Court accepted that the differential treatment, as between UK resident subsidiaries and non-resident subsidiaries, in relation to the surrender of losses for the purposes of group relief under United Kingdom domestic law, did constitute a restriction on freedom of establishment, contrary to articles 43 and 48 EC Treaty. The point is made at paragraphs [32] to [34] of the Court's judgment ( [2006] Ch 184, 214B-D):

“[32] Group relief such as that at issue in the main proceedings constitutes a tax advantage for the companies concerned. By speeding up the relief of the losses of the loss-making companies by allowing them to be set off immediately against the profits of other group companies, such relief confers a cash advantage on the group.

[33] The exclusion of such an advantage in respect of the losses incurred by a subsidiary established in another member state which does not conduct any trading activities in the parent company's member state is of such a kind as to hinder the exercise by that parent company of its freedom of establishment by deterring it from setting up subsidiaries in other Member States.

[34] It thus constitutes a restriction on freedom of establishment within the meaning of Articles 43 EC and 48 EC, in that it applies different treatment for tax purposes to losses incurred by a resident subsidiary and losses incurred by a non-resident subsidiary.”


Second, the Court accepted that such a restriction could be permissible “only if it pursued a legitimate objective compatible with the Treaty and is justified by imperative reasons in the public interest”– paragraph [35]. Three factors were advanced by the United Kingdom (and other member states which submitted observations) to justify the restriction in the present case (paragraph [43], ibid, 215D-E):

“[43] First, in tax matters profits and losses are two sides of the same coin and must be treated symmetrically in the same tax system in order to protect a balanced allocation of the power to impose taxes between the different Member States concerned. Second, if the losses were taken into consideration in the parent company's member state they might well be taken into account twice. Third, and last, if the losses were not taken into account in the member state in which the subsidiary is established there would be a risk of tax avoidance.”

The Court of Justice accepted that those three factors, taken together, did provide justification for the differential treatment of losses in relation to group...

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  • Marks & Spencer Plc v Revenue and Customs Commissioners [SC]
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    • Supreme Court
    • 22 May 2013 to the Special Commissioners, but both parties appealed against his decision. The Court of Appeal upheld the judge's findings: [2007] EWCA Civ 117, [2008] STC 526. The case then returned to the Tax Chamber of the First Tier Tribunal: Marks and Spencer plc v Revenue and Customs Commissi......
  • Trustees of BT Pension Scheme
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    ...rights from the Community Law principle of effectiveness and from observations made by Chadwick LJ in Marks & Spencer v Halsey TAX[2007] BTC 204, at paragraphs 51 and 54. The principle of effectiveness, says Mr McDonnell, permits BTPS to expect the national court, here the First-tier Tribun......
  • Marks & Spencer Plc v Revenue and Customs Commissioners (No 2)
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    • Supreme Court
    • 19 February 2014
    ...both parties appealed against his decision. The Court of Appeal, comprising Chadwick, Tuckey and Jacob LJJ, upheld the judge's findings: [2008] STC 526. The case then returned to the Tax Chamber of the First-tier Tribunal ("FTT"), which comprised Judge Avery-Jones and Judge Gammie (as they ......
  • The Claimants Listed in the Group Register of the Loss Relief Group Litigation Order v The Commissioners for HM Revenue & Customs
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    • Chancery Division
    • 11 February 2013
    ...J on the no possibilities test were substantially upheld by the Court of Appeal: see Marks & Spencer PLC v Halsey (Inspector of Taxes) [2007] EWCA Civ 117, [2008] STC 526 (" M&S (CA) I"). The leading judgment was given by Chadwick LJ, with whom Tuckey and Jacob LJJ agreed. On the timing is......
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1 firm's commentaries
  • Weekly Tax Update - Monday 24 October 2011
    • United Kingdom
    • Mondaq United Kingdom
    • 28 October 2011
    ...old in their pursuit of finality. A summary of the conclusions was: The HMRC contention in the earlier case of M&S v Halsey (see [2007] EWCA Civ 117 and ECJ case C- 446/03) that the "no possibilities" test be based on specific facts in each case rather than principles, made it difficult......
1 books & journal articles
  • Case Notes
    • United Kingdom
    • Sage Maastricht Journal of European and Comparative Law No. 22-3, June 2015
    • 1 June 2015
    ...20February 2007, Halsey (HM Insp ector of Taxes) v. Marks & Spence r plc and Marks & Spencer plc v. Hal sey (HM Inspector of Taxes) [2007] EWCA Civ 117, [2008] STC 526, para. 3 6 et seq., 41.46 First-tier Tribunal (Tax Chamber), TC00005, Judgment of 2April 2009, Marks & Spencer plc v.  e......

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