M&S group relief: Fiscal meltdown fears 'unfounded'
The ECJ Advocate General issued his Opinion in the Marks & Spencer group relief case on 7 April.
He recommended that M&S should be allowed to claim UK tax relief for losses incurred in subsidiaries in other EU countries. Many commentators believe that the European Court of Justice will follow his recommendation.
Chiltern said: "This decision could well lead to the government being forced to make tax refunds running into hundreds of millions, if not billions of pounds, as many UK-based companies with overseas subsidiaries have already submitted similar claims.
"Many commentators have speculated on what the Inland Revenue's reaction to an M&S victory is likely to be, with such dramatic measures as the abolition (or at least substantial reform) of group relief being put forward as possibilities.
"Such moves could have a catastrophic effect on businesses prompting a range of unwieldy and costly corporate restructurings."
But Chiltern said it believes that this is unlikely, as the Advocate General "has actually suggested a solution which the Revenue could easily implement".
It added: "In a subtle comment towards the end of the Opinion document, the Advocate General has highlighted a way for the UK government (and other national EU governments) to change local laws to prevent future tax relief for foreign losses.
"In his ruling, the Advocate General states:
'Where the State in which the foreign subsidiaries are established enables those subsidiaries to impute their losses to another person or to carry them forward to other financial years, the UK is entitled to oppose a claim for the transnational transfer of those losses.'
"As virtually every EU country permits the carry forward of tax losses, this potentially means that the Inland Revenue could make a minor change to the UK group relief rules (essentially writing the above entitlement into law), and thereby legitimately prevent future tax relief for the vast majority of overseas losses. A similar approach has already been adopted with regard to the treatment of UK branches of overseas companies."
Andrew Shilling, Chiltern plc's director of international tax, said: "The Advocate General's opinion is very clever because he provides the UK Government with a 'get out of jail free' card, enabling the Government, after some minor tweaking to tax legislation, to retain a group relief system that will comply with EU law, but will not permit relief for the vast majority of foreign losses.
"This avoids the nightmare scenario of the abolition of group relief, a course of action that the Government might otherwise have been forced to take and which could have prompted a fiscal meltdown in the UK and across the EU.
"This is good news for UK corporates, who value certainty and assuredness in the management of their tax affairs."
Shilling added that companies that have already submitted "M&S-type" claims are still likely to receive tax refunds in due course, as "the past is the past".
"Furthermore, there is no reason at present why further claims cannot be submitted (subject to time limits) where these have not already been made. However, such claims should be made as soon as possible because, following today's opinion, the Inland Revenue may take action to time-bar any new claims."
KPMG said that, assuming the ECJ confirms the AG's opinion position when delivering its final judgement, the case "will represent the biggest victory to date for taxpayers relying upon EU rights to challenge discriminatory tax rules".
It could also lead to "fundamental changes" to the UK tax system, the firm said.
Chris Morgan, KPMG's head of EU Law, said: "The significance of the Opinion is huge. Whilst not binding on the ECJ, the vast majority of judgements follow the Advocate General's Opinion. As predicted we should expect Marks and Spencer to now go on to win the case.
"Interestingly, in his Opinion the Advocate General considers that rules which prevented a double use of losses would be EU compliant but that the current rules which apply a total prohibition are unlawful. This shows why there should be an urgent review of UK law to ensure there is no discrimination against cross-border investment while maintaining safeguards to prevent potential abuse."
Mark Whitehouse of McGrigors tax litigation practice said companies should act quickly to make claims now, as "there must be a possibility that the ECJ will place temporal limits on the effects of its judgement given its potential financial significance in all Member States".