The Advocate General (AG) has today (7/4/05) recommended to the European Court of Justice (ECJ) finding in favour of the taxpayer, in a case which has been watched closely by international business and Finance Ministers across Europe. 

“This is a partial victory for M&S - they have won on a point of principle, but it is still not clear that they, and companies like them, will necessarily be successful in their claims,” comments Adam Craig, head of the EU tax practice at Deloitte in the UK. “The AG opinion, if followed by the ECJ, gives room for Member States to protect their revenues. The AG opinion says that the UK must give tax relief for foreign losses, but only if those losses cannot be used abroad. Governments will point out that in many circumstances the foreign losses can be used abroad – and so, in practice, UK tax relief need not be given.

“We can expect changes in UK tax law should the court adopt the AG’s opinion and decide in favour of M&S – although perhaps not as major as had been feared. The cost of existing loss relief claims is not fully known, but could exceed £1 billion. The final ECJ decision can be expected in approximately 6 months time.”

M&S has claimed £30 million of tax relief refund in the UK for losses made by subsidiaries in other European countries (see notes to editors).  The Inland Revenue has refused to allow tax losses from its overseas subsidiaries to be offset against its UK profits, based on current UK domestic law. Over one hundred international groups have made comparable claims for loss relief in their UK tax returns and they will now need to consider whether they are still entitled to a windfall.

If the AG’s opinion is followed by the court, UK law will need to change to give effect to it. The Government would need to bring in measures to limit loss relief, so as to prevent companies from double dipping their losses i.e. get relief for the same losses twice.

The BBC World Business Report
Here more about Mark & Spencer's claim for cross-border loss relief at the European Court from Adam Craig, head of the EU tax practice at Deloitte.

Ends

Notes to Editors

Group relief for losses
The relevant UK group relief legislation is in Taxes Act 1988 as amended by Finance Act 2000. Prior to April 2000, only companies resident in the UK are eligible for group relief. Since April 2000, both the surrendering and claimant company have to be UK resident or carrying on a UK trade. 

M&S case and other loss relief claims
M&S opened its Paris store in 1975 and over the next 20 years expanded throughout continental Europe. By the late 1990s the European operations were making substantial losses and in 2001 a decision was taken to withdraw from France, Belgium and Germany. The losses which are the subject of the appeal are for 1998, 1999, 2000 and 2001 and arose in companies resident for tax purpose outside the UK.

The Marks & Spencer loss relief claim was rejected by the Special Commissioners in 2002.  M&S then appealed to the High Court which referred the case to the European Court of Justice (ECJ) for a preliminary ruling in 2003.  There was a hearing on 1 February, following a written procedure in which the parties, the European Commission and seven other Member States put their argument in writing for the court. 

M&S was supported by the European Commission.  The Revenue was supported by Germany, Greece, France, Ireland, Netherlands, Finland and Sweden.  Germany requested a limitation of the effect of the decision in the event that M&S should succeed.  The Advocate General's Opinion was given on 7 April 2005 and an ECJ ruling may be expected perhaps in six months’ time.

Advocate General Maduro’s opinion is a recommendation to the court on how to decide the case.  A panel of 13 ECJ judges will then decide the point of interpretation of EC law and the case will come back to the UK’s High Court for it to issue its judgment, perhaps by the end of 2006.

Over a hundred international groups have made comparable claims for loss relief in their UK tax returns.

GLOs
The Marks & Spencer case is not part of the loss relief group litigation order (GLO).

Over 60 groups have made claims directly to the High Court, and the cases are automatically joined to a class action under a Group Litigation Order (GLO) applied for by the claimants.  The question is still open as to whether the High Court should accept jurisdiction to hear those claims.

The first GLO for tax was applied for by the Revenue in the wake of the Hoechst case. A number of similar claims were made for damages and restitution before the High Court, and the Revenue applied for a GLO to manage the process efficiently.
Five further GLOs have been made in respect of other corporate tax claims.  The six GLOs cover:

• Cross-border loss relief
• Thin capitalisation
• Controlled foreign companies and foreign source dividends
• Franked investment income
• Foreign income dividends
• Advance corporation tax, group income elections and treaty tax credits.

Further details have been published on the Revenue website.

The issue of jurisdiction is common to all the GLOs.  These cases and the detailed rules governing how the legal remedy would operate to compensate those making EC law related claims are currently making their way through the courts.

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

Deloitte & Touche LLP is the UK's fastest growing major professional services firm based in 21 UK locations, with over 10,000 staff nationwide and fee income of £1,246 million in 2003/2004. It 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.

Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.

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