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<b>Tax News:</b> HMRC close down group relief loophole. By Nichola Ross Martin

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21st Feb 2006
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Following the judgment of the European Court of Justice in December 2005 in the case of Marks & Spencer Plc v David Halsey Case C-446/03, H M Revenue and Customs have announced changes to group relief for losses.

The court found that Mark & Spenser was allowed to offset losses from group companies resident in other member states against profits earned in the UK. The Revenue considers that this interpretation will open the doors to creative tax avoidance schemes. Tax advisors are once again blamed as the villains of the piece, rather than the companies who are trying to mitigate their tax liabilities. The announcement goes on to say:

'It has come to the Government's attention that some tax advisers have been suggesting that groups that have loss-making companies resident in another State should engineer their circumstances so as to preclude the possibility of a loss making company obtaining relief in its State of residence by, for example, liquidating that company whilst transferring its business to another company."

The Government will therefore be introducing legislation to deny loss relief where there are arrangements which either:

  • result in losses becoming unrelievable outside the UK that were otherwise relievable, or
  • give rise to unrelievable losses which would not have arisen but for the availability of relief in the UK,

if the main purpose or one of the main purposes of those arrangements is to obtain UK relief.

UK group relief rules allow a company to claim tax relief for the losses (and certain other tax reliefs) of another company if both companies are members of the same group. Before the judgment in the Marks & Spencer case, only companies within the UK corporation tax regime (that is, those which are resident in the UK or trade here through a permanent establishment) could share group relief.

In their case, Marks & Spencer Plc submitted that the UK rules were not compatible with EU law because companies outside the charge to UK corporation tax are not able to surrender losses to a UK parent in the same way as companies within the charge to UK corporation tax.

In the light of the Court's judgment, the High Court will now resume consideration of the Marks & Spencer case. Other claims made by companies that have followed Marks & Spencer in seeking cross-border group relief will be dealt with through the appropriate legal processes.

This legislation will be included in the 2006 Finance Bill and will apply to all arrangements that give rise to unrelievable losses or make losses unrelievable effective from 20 February 2006.

Nichola Ross Martin

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