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M&S group relief: Fiscal meltdown fears 'unfounded'

Fears of a European Court decision prompting EU-wide "fiscal meltdown" are likely to be unfounded, according to experts at Chiltern, the professional services group.

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."

'Biggest victory'
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".

Andrew Goodall
Editor, TaxZone

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Another success for the tax avoidance industry

AnonymousUser | | Permalink

Why should M&S, having disastrously invested overseas, have those losses offset against profits they have made in the UK? Why should the UK taxpayer be disadvantaged because M&S can't manage their overseas affairs?

As anyone who has ever written a software program knows, no matter how carefully you frame your code there is always some user out there who will find a way to use it that you did not think of.

The government needs to introduce a concept of "evasion through avoidance" where any activity that is not clearly indicated in law as acceptable for mitigating tax liability is deemed to be evasion unless the practitioners can prove that the avoidance is a fair and reasonable action within the spirit of the law.

Andrew Goodall's picture

'Enormous implications'

Andrew Goodall | | Permalink

The ICAEW Tax Faculty said the Advocate General's opinion "will have enormous implications for the UK and the other Member States if it is followed by the European Court of Justice itself when it delivers is judgement. This is now expected in October."

It added: "In his conclusion the Advocate-General states:

'Articles 43 and 48 EC preclude the tax legislation of a Member State, such as that at issue in the main proceedings, which prohibits a parent company established in a Member State from benefiting from the right to group relief on the ground that its subsidiaries are established in other Member States, whereas that relief would be granted if those subsidiaries were resident in that Member State.'

"The Advocate-General went on, however, to opine that Articles 43 and 48 do not preclude national legislation from making entitlement to group relief subject to the condition that it is established that the losses of subsidiaries resident in other Member States cannot be accorded 'equivalent tax treatment' in those Member States. However, the UK legislation does not currently contain any such provision.

"The Advocate-General considers that 'equivalent tax treatment' is where the losses of foreign subsidiaries are either capable of being transferred (to another legal person) or carried forward in the state of establishment.

"Earlier in the week Michel Aujean, Director of Tax Policy and Analysis, at the European Commission, wrote to the President of FEE (Fédération des Experts Comptables Européens) in relation to the FEE paper on cross border losses which was submitted to the Commission in January 2005. Mr Aujean considers that the provision of a solution to the lack of [relief for] cross-border losses within the European Union is one of the most pressing matters within the internal market."

Andrew Goodall
Editor, TaxZone