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M&S wins Court of Appeal decision on loss relief

The Court of Appeal ruled, on 20 February 2007, that taxpayers should have more time to establish whether losses from non-UK subsidiaries can be set against UK profits. This effectively means that a company can claim group relief as long as there is no 'practical possibility' of claiming the relief in the country where it was generated.

The case dates back to the accounting periods from 1998 to 2001 when Marks & Spencer plc (M&S) claimed to offset losses generated in a number of overseas territories, namely Germany, France, Belgium, against UK profits. Claims were made for losses totalling £99m, reducing M&Sí UK tax liability by approximately £30m.

M&S claimed that the UK loss relief rules were in breach of EU law, on the basis that a UK resident company that was a member of a group might claim to offset its profits against losses incurred by another member of the same group. As the UK rules stood, only losses generated by UK group companies were eligible for offset. Non-resident UK companies did not qualify for group relief.

The M&S challenge prompted 300 similar claims to be filed against HM Revenue & Customs (HMRC), which are thought to total billions of pounds worth of tax returns. About 70 other companies are part of a group litigation order seeking tax rebates for foreign losses.

In December 2005, the ECJ ruled that the UKís group relief rules were invalid, but only insofar as they prevented cross-border claims where the possibilities of making a claim outside the UK had been exhausted. It referred the matter back to the UK courts to interpret and give effect to the ruling.

In Halsey v Marks & Spencer plc, the High Court subsequently held that the UKís group relief rules should survive, except in situations where, under the ECJís ruling, they are invalid. Both parties appealed: HMRC against the time at which the question of exhausted possibilities had to be considered; and M&S against the High Courtís strict interpretation of the exhausted possibilities test.

The Court of Appeal has essentially dismissed both appeals: it has confirmed both that the test should be considered at the time a group relief claim is made and that the High Courtís interpretation of the exhausted possibilities test conforms with the principle of effectiveness.

HMRC said it would appeal against the decision in the House of Lords.

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