The Claimants Listed in the Group Register of the Loss Relief Group Litigation Order v The Commissioners for HM Revenue & Customs

JurisdictionEngland & Wales
JudgeMr Justice Henderson
Judgment Date11 February 2013
Neutral Citation[2013] EWHC 205 (Ch)
Docket NumberCase No: HC02C03866 & OTHERS
CourtChancery Division
Date11 February 2013

[2013] EWHC 205 (Ch)



Rolls Building

Royal Courts of Justice

Fetter Lane, London, EC4A 1NL


Mr Justice Henderson

Case No: HC02C03866 & OTHERS

The Claimants Listed in the Group Register of the Loss Relief Group Litigation Order
The Commissioners for Her Majesty's Revenue & Customs

Mr Graham Aaronson QC and Mr David Cavender QC (instructed by Dorsey & Whitney (Europe) LLP) for the Claimants

Mr David Ewart QC, Ms Maya LesterandMr David Yates (instructed by the General Counsel and Solicitor to HMRC) for the Defendants

Hearing date: 21 November 2012

Mr Justice Henderson

Introduction and background


The basic question which I have to decide on this application by the claimants in the Loss Relief Group Litigation Order ("the Loss Relief GLO") is whether the High Court should at this stage in the group litigation make a reference to the Court of Justice of the European Union ("the CJEU", formerly the European Court of Justice ("the ECJ")) for a preliminary ruling under Article 267 TFEU on the question whether claims for cross-border group relief could in principle be made by UK-resident claimant companies at the relevant times in various forms of corporate group structure which differ from the simple structure (surrender of losses by an EU or EEA resident subsidiary to its UK resident parent company) which was considered by the Grand Chamber of the ECJ in its seminal decision in Case C-446/03 Marks & Spencer PLC v Halsey (Inspector of Taxes) [2005] ECR I-10837, [2006] Ch 184, [2006] STC 237 (" M&S v Halsey").


In M&S v Halsey the UK resident parent company of the group, Marks & Spencer PLC, sought to offset losses incurred from the later 1990s to 2001 by its subsidiaries in France, Germany and Belgium against its UK profits, by way of claims for group relief from corporation tax under section 402 of the Income and Corporation Taxes Act 1988 (" ICTA 1988"). Under the relevant UK statutory provisions, the claims to group relief could not succeed, and were accordingly rejected by the Revenue, because only losses of a UK resident company (or, after 2000, losses of a non-resident company that carried on a trade through a UK branch) could be surrendered by way of group relief. It was this territorial restriction on the scope of group relief which M&S challenged as infringing the rights to freedom of establishment and free movement of capital then contained in Articles 43 and 56 of the EC Treaty, and now contained in Articles 49 and 63 TFEU.


The challenge enjoyed a limited measure of success, although quite how limited remains a subject of acute controversy. Before describing the main areas of disagreement about the effect of the ECJ's ruling, I will first summarise what the ECJ actually decided. First, it held that the territorial restriction of group relief to UK companies constituted a restriction on the right of establishment of a UK resident parent company such as M&S (paragraphs 27 to 34 of the judgment of the Court). Next, the ECJ considered the factors relied upon by the UK and other member states which had submitted observations as justifying the restriction. Those factors were, in brief, (a) the need to protect a balanced allocation of taxing power between the member states concerned, with profits and losses being treated symmetrically; (b) the risk of losses being taken into account twice, if they were relievable in the parent company's member state; and (c) the risk of tax avoidance if the losses were not taken into account in the subsidiary's state of establishment (see paragraph 43). The Court discussed and gave its endorsement to each of these factors in paragraphs 44 to 49, before concluding in paragraph 51:

"In the light of those three justifications, taken together, it must be observed that restrictive provisions such as those at issue in the main proceedings pursue legitimate objectives which are compatible with the Treaty and constitute overriding reasons in the public interest and that they are apt to ensure the attainment of those objectives."


Finally, the Court considered whether the restriction "goes beyond what is necessary to attain the objectives pursued" (paragraph 53), or in other words the question of proportionality. The Court's reasoning and main conclusion on this issue were as follows:

"54. Marks & Spencer and the Commission contended that measures less restrictive than a general exclusion from group relief might be envisaged. By way of example, they referred to the possibility of making relief conditional upon the foreign subsidiary's having taken full advantage of the possibilities available in its member state of residence of having the losses taken into account. They also referred to the possibility that group relief might be made conditional on the subsequent profits of the non-resident subsidiary being incorporated in the taxable profits of the company which benefited from group relief up to an amount equal to the losses previously set off.

55. In that regard, the Court considers that the restrictive measure at issue in the main proceedings goes beyond what is necessary to attain the essential part of the objectives pursued 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, if necessary by transferring those losses to a third party or by offsetting the losses against the profits made by the subsidiary in previous periods, and

—there is no possibility for the foreign subsidiary's 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.

56. Where, in one member state, the resident parent company demonstrates to the tax authorities that those conditions are fulfilled, it is contrary to arts 43 EC and 48 EC to preclude the possibility for the parent company to deduct from its taxable profits in that member state the losses incurred by its non-resident subsidiary."


It was accordingly only at this final stage in the analysis that the challenge to the UK's group relief regime succeeded, and then only to the extent of the cumulative test enunciated in paragraph 55. This test has come to be known as the "no possibilities" test. It was repeated by the ECJ, in materially identical words, in paragraph 59, and again in the dispositif at the end of the judgment.


The first main area of dispute generated by the judgment in M&S v Halsey concerns the interpretation of the no possibilities test: what exactly does it mean, and at what date does it have to be applied? The main stages in the evolution and resolution of this dispute, to date, have been as follows.


The reference to the ECJ was made by Park J, on the hearing of an appeal by M&S from the Special Commissioners who had upheld the Revenue's refusal of the claims to group relief. When the case returned to Park J after the ECJ had given its judgment on the reference, he heard argument on and decided a number of questions of principle before remitting the matter to the Special Commissioners for them to make further findings of fact and finally determine the appeal: see Marks & Spencer PLC v Halsey (Inspector of Taxes) [2006] EWHC 811 (Ch), [2006] STC 1235 (" M&S (Chancery)").


In relation to the no possibilities test, Park J held that when the ECJ referred to "possibilities available" it meant "recognised possibilities legally available given the objective facts of the company's situation at the relevant time": see paragraph [33]. He then gave some helpful examples at paragraphs [37] to [39]. As to the relevant time, he considered that there were three possibilities: the end of the accounting period of the subsidiary in which the loss was made; the time or times when M&S made the claim or claims for group relief; and the time when the appeal on the question was decided by the Special Commissioners (paragraph [43]). Park J came down in favour of the second possibility, holding that the first was "too soon", because it would probably rule out group relief in every case, while the third would allow the parent company to "spin out time before the matter came to appeal in the hope that by then the facts would have changed and the appeal would succeed" (paragraphs [44] and [45]). By contrast (see paragraph [46]):

"… time (2) in my view provides a rational basis for applying para 55. If a company claims group relief at a time when the para 55 criteria are satisfied it should get the relief. If it applies for it at a time when the criteria are not satisfied it should not."


The reasoning and conclusions of Park 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 issue, Chadwick LJ relied on the fact that the question of the compatibility of the domestic group relief regime with EU law "does not arise until a claim for group relief is made by the claimant company" (paragraph [36]). As to the type of possibility which the test involved, he considered that "no possibility" meant "no real possibility", in the sense of one which could not be dismissed as fanciful; and that the test was not to be equated with a test of "little or no likelihood", because "a possibility may exist even where there is little or no real likelihood that the event will happen" (paragraph [49]).


The issue came before the Court of Appeal for a second time in 2011, on appeals and cross-appeals by the Revenue and M&S...

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