Marks & Spencer (M&S) won a victory over the UK government in the European Court today (13/12/05).  The decision enables them to offset losses made in other EU Member States against UK profits, but only if the losses cannot be used in the other Member State against current or earlier profits, and there is no possibility of the losses being used that way in the future.

The European Court of Justice accepted that the UK’s “group relief” legislation, which prevents foreign losses being set against UK companies’ profits, pursues legitimate objectives which are compatible with the EC Treaty.  However the Court has decided UK law goes too far. 

Bill Dodwell, tax partner at Deloitte, comments:

“Today’s ruling makes it clear that companies should not be able to claim tax relief on losses in two countries. However UK law was seen to have gone too far because it didn't allow M&S to claim tax relief in the UK, even when it couldn't claim it overseas because it had closed its foreign subsidiary.

The case will now go back to the British courts for review, and M&S is expected to renew its claim for a tax refund of up to £30 million.

“A number of companies (including Ford, Lloyds TSB, Carphone Warehouse, ASDA and Toyota) may not be able to take advantage of today’s ruling because they still have ongoing operations in Europe, and will need to claim tax relief on losses where they occur.

"Today’s decision will lead to some small tax rebates, but governments won't be paying out billions that have been speculated."

- ENDS -

Notes to Editors

Marks & Spencer claimed UK tax relief for losses incurred buy its Belgian, French and German subsidiaries. M&S claimed that UK restrictions broke European law.

The UK Government’s first argument was that an EU company would not normally be liable to tax in the UK until it paid dividends back here.  Therefore it should not be able to set its losses against UK companies’ profits.  Secondly it said that if the foreign losses were used in the UK they might be used twice if they were also used in the other Member State.  Thirdly the UK Government argued there would be a risk of tax avoidance if foreign losses could be used in the UK.

Broadly the European Court of Justice accepted the UK Government’s arguments but said the UK legislation went too far in denying relief where there was no possibility of the EU subsidiary obtaining relief itself.  It makes clear that a sale to a third party who might use the losses also means the losses cannot be used against UK profits.

The precise effect for Marks & Spencer is not clear from the facts disclosed in the decision, but at least some of its EU losses appear likely to be eligible for offset against UK profits.  More widely, however, the decision is likely to restrict the number of effective claims. 

The case will now go back to the UK courts for Marks & Spencer’s claim to be assessed in the light of the ECJ’s decision.

Going forward, the UK Government will need to change the UK group relief rules to give effect to the judgement. It will be open to the Government to decide whether or not to extend the benefit to losses incurred by subsidiaries outside the EU. The Government will also need to decide upon the detailed rules for claims, including the precise method of calculating losses.

Many other groups had made similar claims to Marks & Spencer.  However, unlike Marks & Spencer many have gathered together in a Group Litigation Order.  Group Litigation Orders (GLO’s) are broadly the English equivalent of US class actions.  The cross-border loss relief Group Litigation Order is the one which follows the initial claim made by Marks & Spencer.  Participants will need to decide how and whether to pursue their claims, taking account of the judgement and their individual facts.

A number of other GLOs have been formed to make claims that other aspects of UK tax law are also contrary to the EU Treaty and have sought damages or restitution before the High Court.  The six GLOs to date concern:

• Cross border loss relief (see above);
• Thin capitalisation;
•  Controlled foreign companies and foreign sourced dividends;
• Franked investment income;
• ACT, group income elections and treaty tax credits;
• Foreign income dividends.

About Deloitte

In this press release references to Deloitte are references to Deloitte & Touche LLP.

Deloitte & Touche LLP is a member firm of Deloitte Touche Tohmatsu, a leading professional services organisation, delivering world class audit, tax, consulting and corporate finance services, with around 120,000 people in over 140 countries. Deloitte Touche Tohmatsu is a Swiss Verein, and each of its national practices is a separate and independent legal entity.

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The information contained in this press release is correct at the time of going to press.