The case revolves around a claim by Marks & Spencer (M&S), the retailer to offset losses incurred by two of its European subsidiaries, Marks and Spencer Deutschland (MSD), and Marks and Spencer Belgium (MSB), against its UK corporation tax bill.
“It wasn’t an out and out victory for M&S as the court ruled in favour of HMRC in respect of certain claims that related to accounting periods pre-self –assessment where under the ‘pay and file’ regulations the group was effectively out of time for making a valid claim, said Jonathan Hornby, of Alvarez & Marsal Taxand (UK).
“In our view this is a decision that will be welcomed by taxpayers who have made similar claims and hopefully the statute book will now be amended to codify the decision and create greater certainty where this situation arises in the future,” he added.
M&S first made the claim, which was refused by HM Revenue & Customs (HMRC), more than 10 years ago.
In the 1970s M&S decided to expand outside the UK, and by 1990s had outlets, owned by subsidiaries, in more than 34 countries.
However, the retailer ran into problems at the start if the 2000s, incurring heavy financial losses, which prompted the company to close many of its European businesses.
It managed to sell off many of its outlets and subsidiaries, but was unable to find buyers for MSD and MSB.
Unanimous
The Supreme Court gave judgement on three specific issues in Commissioners for Her Majesty’s Revenue and Customs (Respondent) v Marks and Spencer plc (Appellant) [2014] UKSC11 (On appeal from [2011] EWCA Civ 1156, all of which had been considered by lower courts, in previous appeals:
Can cumulative claims be made by M&S for the same losses in respect of the same accounting period?
Are M&S able to make fresh ‘pay and file’ claims now that the ECJ has clarified when losses may be transferred cross-border for tax relief purposes? The accounting period was from March 31 1998 to 2002, and included claims for both “pay and file” and corporation tax self assessment (CTSA) periods
Whether to use M&S or HMRC’s method for calculating the losses which are to be transferred.
Supreme Court justices held unanimously that M&S was, in principle, entitled to make sequential claims in the same accounting period.
They also decided that M&S were allowed to make fresh ‘pay and file’ claims, but only if they were not time barred.
However, the court stated that such claims were time barred, striking down the appeal by M&S in the process.
“Relevant jurisprudence establishes that a member state may impose a reasonable time limit in the interests of legal certainty. The relevant pay and file claims are now time barred,” the court’s judgement said.
On the final issue, the court ruled in favour of the method of calculation put forward by M&S.
These were the issues in the case that remained on appeal after a Court of Appeal decision in November 2011. The Supreme Court already decided in May 2013 that the date of the claim, not the end of the accounting period, was the right one for Marks & Spencer to use when applying to the UK tax authorities for cross-border relief for the losses.
"The judgment confirms we are not obliged to accept out of time claims, but we acknowledge that subsequent alternative cross-border group relief claims can be made within the statutory time limits," said a spokesperson from HMRC.
“The recent judgement of the Supreme Court repeats the previous decisions of both the Upper Tribunal and the Court of Appeal. As the judgement has only just been released it would not be appropriate for us to comment further at this stage,” said a Marks & Spencer spokesperson.
M&S had appealed the Court of Appeal decision in November 2011 on the time bar point, while HMRC has appealed the same court’s verdict on the method of calculation, and whether sequential claims could be brought against them.
"This is a common-sense decision, the Supreme Court describing a key issue as a factual question which involves practical considerations.,” said Rupert Shiers, a partner of Hogan Lovells. “Except for a time-limit point where the law was fairly clear before the decision, HMRC's arguments were roundly rejected. Perhaps this will mark HMRC taking a more practical approach to the UK's obligations under EU law.”
“UK corporates with overseas subsidiaries should now be able to claim UK corporation tax relief freely, where those subsidiaries suffer losses which cannot be used locally. UK legislation introduced after the CJEU decision in 2005 will require amendment to remove restrictions now effectively declared unlawful," he added.
