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Challenging HMRC's view on cross-border 'final loss' relief claims

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In Commission v United Kingdom (C-172/13) (reported in Tax Journal, 6 February 2015), the CJEU decided that it was not disproportionate that the requirement in CTA 2010 s 119(4) for a cross-border ‘final loss’ claim for periods from 1 April 2006 onwards should be made by reference to the position immediately after the end of the loss period, on the evidence submitted by the Commission. HMRC has now written to taxpayers regarding claims for final losses for periods prior to 1 April 2006, saying that: 

‘We believe that a (UK) tribunal or court would be bound to follow the CJEU ruling rather than the (Marks and Spencer) Supreme Court decision as to when the "no possibilities" test (i.e. the "final loss" test) should be applied, since this is a matter of EU law.’

It is indeed a matter of EU law. However, cases such as A Oy (C-123/11), decided in February 2013, show that the time and events with regard to which a loss can be demonstrated to be final can be several years after the end of the base loss period. In A Oy, a Swedish subsidiary which had suffered losses from 2001 to 2007 and ceased to trade in 2008 was to be merged into its Finnish parent company. It then would cease to exist due to the merger (‘liquidated’ per para 51). However, Finnish law prohibited the carry-over of tax losses in the case of cross-border (as opposed to domestic) mergers. The merger would lead to the losses no longer being available for use in Sweden. The CJEU held that the Finnish denial of loss carry-over on the cross-border merger was unlawful, provided that the merger was not done wholly for Finnish tax reasons, and the Finnish tax authorities subsequently accepted that was not the case and that the losses were indeed final. Therefore, A Oy shows that (Swedish) losses suffered in 2001 to 2007 could be demonstrated to be final with respect to a subsequent merger in 2013, which barred the use of the losses in Sweden and cross-border loss relief claims made in Finland with regard to such a 2013 merger, could be accepted on the implementation of the CJEU decision under the Finnish advance ruling system.

In Commission v UK, the UK itself submitted to the CJEU and the CJEU accepted that claims for periods prior to 1 April 2006 were ‘governed by the legislation applicable to those earlier periods, construed in accordance with EU law following the judgment in Marks & Spencer (C 446/03), as was the intention of the Supreme Court of the UK in its judgment of 22 May 2013’ (para 43). That legislation contained no such rule as s 119(4).

Therefore, all that the Commission v UK decision says is that a provision such as s 119(4) may be proportionate (and, indeed, on the evidence was held to be so). Such a rule is not a requirement of EU law, however; otherwise, A Oy would have been decided differently.

The s 119(4) timing rule for demonstration of the finality of statutory cross-border loss relief claims is not an EU law requirement; accordingly, it should not be treated as a requirement for cross-border loss relief claims for periods before 1 April 2006. In other words, it should not be ‘read down’ into the pre-FA 2006 group relief regime. 

Section 119(4) was extant in May 2013, when the Supreme Court held in Marks and Spencer [2013] UKSC 30 that for losses prior to 1 April 2006, the time at which the final loss test had to be demonstrated to be met was the time of the operative group relief claim. In reaching this decision, the Supreme Court was well aware of the s 119(4) rule for statutory claims for losses for 1 April 2006 onwards. However, following A Oy (the CJEU ruling was given only shortly before the Supreme Court April 2013 hearing, in February 2013), the Supreme Court held that the requisite time was that of the operative group relief claim.

With respect to when the ‘no possibilities’ test should be applied, HMRC is correct in its assertion that the CJEU ruling should be followed rather than the Supreme Court judgment, in relation to periods from 1 April 2006 when the s 119(4) timing rule was included in the legislation. However, given that this timing rule is not a requirement of EU law, it is not correct to apply it to periods before 1 April 2006 when it was not included in UK legislation. Therefore, for these periods the Supreme Court judgment should still be followed.