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The Court of Appeal recently handed down a further judgment in the case of M&S's claims to set losses in its failing European subsidiaries against  profits of its UK group by way of group relief.

Those who have followed this particular long-running saga will recall that, back in 2005, the ECJ decided that the UK's restriction of group relief to claims and surrenders between UK resident companies was broadly valid, but the UK should allow an EU subsidiary to surrender losses to its UK parent where it had exhausted the possibilities of having the losses taken into account in its state of residence for the period concerned and previous periods and there was no possibility for the foreign subsidiary's losses to be taken into account in its state of residence for future periods. 

The current case is all about how to give practical effect to the ECJ judgment. The main points arising from the recent Court of Appeal judgment are as follows.

• The first point was when the question as to whether the foreign subsidiary had exhausted the possibilities of using the losses had to be determined.  HMRC argued that the relevant time was at the end of the accounting period in which the loss arose on the grounds that any other time would allow groups to traffic in losses.  On this point, the Court of Appeal was bound by earlier precedent to find that the relevant time was the time at which the claim was made.
• It was possible for M&S to withdraw previous claims and make revised claims within relevant time limits (in the same manner as for UK group relief surrenders).
• No claim was possible if the conditions had not been fulfilled when the time limit for claims expired.  It was not necessary to permit an extension of time to allow M&S to meet the conditions (e.g. by liquidating subsidiaries) even though M&S could not have known of the EU law requirements at the time.
• Timing differences in the computation of losses should not prevent a claim.  So, for example, if on UK computational principles a loss would have arisen in the German subsidiary in a particular period, a claim could be made for that period even though the loss did not arise until a later period for German tax purposes.

This is all difficult stuff.  The courts are doing their best, but, if nothing more, this case, and the arguments in it, demonstrates the practical difficulties of allowing cross-border use of losses within the EU without a common tax base. 

The other point to note is that the case casts some doubt about the extent to which the UK legislation which was designed to implement the ECJ decision in Marks & Spencer v Halsey (now in Chapter 3 Part 5 Corporation Tax Act 2010) fulfils EU law requirements.  That legislation assumes, for example, that the relevant time to determine whether or not losses can be used is at the end of the relevant accounting period rather than the date on which the claim is made and that no claim can be made unless a loss is shown for the period under local legislation.

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