Update - Marks & Spencer plc v Halsey (High Court)

This case is causing a stir as it has potential ramifications for many other UK businesses.

The facts

Marks & Spencer (M&S) had claimed group relief for the years ended 31 March 1998 to 2001 inclusive. The non-UK subsidiaries were each incorporated and resident in the specified jurisdiction and were owned by M&S through a UK resident subsidiary (MSIH) and via a Dutch resident holding company (MS Netherland BV).

The appellant exercised some control over the strategic location and product lines but otherwise the subsidiaries were managed and controlled locally. Each subsidiary traded only in its own jurisdiction and was tax resident there. The losses arose on activities outside the scope of UK taxation. The subsidiaries were largely unsuccessful and M&S in the UK had sufficient profits to absorb the losses and made group relief claims accordingly.

The Inland Revenue argued that for accounting periods beginning before 1 April 2000, group relief was only available between UK resident companies.

After that date, group relief should be available only to those loss-making companies which are either UK resident or trading through a branch or agency here. Accordingly, the Revenue claimed that all M&S's claims must fail.

The company argued that although as a matter of UK law the subsidiaries were not entitled to surrender losses to it, this was simply due to the residence of the subsidiaries. Discrimination amongst EU companies on grounds of residence infringed Article 43 of the EC Treaty. Article 43 had direct effect which means that it may be relied upon directly in domestic courts where there is a conflict with domestic legislation. The appellant argued that the restrictions on the right to surrender losses as a result of residency contravened these rules and the non-discrimination article must take priority.

The special commissioners had decided that the UK was not required to accord the same group relief to a foreign subsidiary as it would to a UK one. As the foreign subsidiaries were outside the scope of UK tax and not therefore in an objectively comparable situation, Article 43 need not apply.

In the High Court, Mr Justice Park has now overturned this decision and referred the matter to the European Court of Justice (ECJ) for a preliminary ruling on whether the UK provisions restricting group relief to UK resident companies contravene Article 43.

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