Thursday, December 15, 2005


The European Court of Justice has at last handed down its decision in the Marks & Spencer case. The result seems to be that Marks & Spencer probably win (at least partly) but most of the other international groups that were hoping to cling onto their coat tails will fail to do so.

As is well known, Marks & Spencer’s got its fingers badly burned in its attempt to expand into Europe. It closed down its subsidiaries in Belgium and Germany and sold its French subsidiary. It then sought to re-open its UK tax affairs to offset the losses it had incurred in those three subsidiaries in the four years to 31 March 2001 against its UK taxable income for those years.

Under UK law a loss incurred by a UK subsidiary can be set against profits of another UK group company. However, as we do not tax profits of overseas subsidiaries we do not allow relief for their losses either. M & S claimed that this policy breaches the EU fundamental concept of freedom of establishment as it discourages UK companies from having subsidiaries in other European countries.

The ECJ has held that it does indeed do so. However it also held that the UK is able to justify the restriction on offsetting losses to UK companies as a general principle, but that where the UK parent company can demonstrate that there is no probability of the EU subsidiary obtaining tax relief, either currently or in the future, for the losses, or of a third party such as a purchaser of the subsidiary being able to do so, then the UK must grant relief for the losses.

It is for the UK courts to decide to what extent M&S have really won. It seems probable that they have wholly won in relation to the German and Belgian companies. They may well have lost in relation to the French company (unless it has subsequently been closed down by the purchaser) as French companies can normally carry forward losses indefinitely, so while the company remains in existence it is difficult to see how M&S can prove that the subsidiary will never be able to obtain relief in France.

The interesting point is what, if anything, Gordon Brown does now. Most VAT experts (other, one assumes, than those in the Treasury and HMRC) expected M&S to win completely. The limitations that the ECJ has placed on its victory probably means that the Armageddon scenario under which multinationals savagely undermine the UK tax base has been largely avoided. However the claims that can meet the ECJ’s tough conditions are still likely to be in the millions or not billions of pounds. There is nothing Gordon can do about the past. But what about the future? He could scrap corporation tax group relief entirely. That would be very unfair on hundreds of thousand of small businesses with no EU operations at all. He could perhaps restrict group relief to small businesses on the basis that the EU claims which such a rule would let through would be relatively tiny. However in today’s worldwide economy it would take a very brave Chancellor to discriminate against the big multinationals in such a major way. He could put a limit on the amount of group relief that could be claimed by any group. A limit of £100,000pa would probably grant full relief for small companies – particularly if the unrelieved amount could be carried forward to future years – and would put a predictable annual figure on the overall cost of group relief. It seems unlikely that he will do nothing.

On the other hand as M&S first put forward its claim in 2002, so far the Chancellor has done nothing for over three years to staunch the massive flood of tax refund claims that would be generated should M&S ultimately win. Was he that confident that they would not do so? Or is it a case of fiddling while Rome burns? Certainly the published figures on the economy do not suggest that there is sufficient cushion to absorb the tax cost that most thought likely to arise – and it is doubtful that there is even enough to absorb those which will now in fact arise.

Robert W Maas


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