VAT: post-M&S legislation open to challenge
Marks & Spencer (M&S) should be entitled to claim group relief on the losses sustained by its subsidiaries in Germany and Belgium, the High Court ruled this week, as the government is already taking steps to minimise the impact of the EU ruling in the case.
The judgment follows a ruling last December where the European court of Justice (ECJ) found that UK VAT legislation, which prevented a company claiming group relief in respect of the losses incurred by subsidiaries in other EU countries, was contrary to EU law.
HM Treasury subsequently introduced draft legislation to comply with the ruling, but Guy Brannan, head of tax at Linklaters, said that there is still room for challenge under EU law, as the proposed legislation includes restrictions which are not in the ECJ's judgment.
According to Brannan, a company seeking to benefit from group relief would be subject to further constraints, which may be regarded as contrary to the findings in M&S.
The ECJ ruled in the M&S judgment that the prohibition on a company to deduct losses sustained by EU subsidiaries of a UK company from it profits was not compatible with EU law if the company is able to show that those losses were not used in the subsidiary's country.
'The ECJ said that the UK rules were not incompatible with the freedom to provide services but that they constituted unreasonable restrictions going further than necessary if it was not possible for a company to use the losses,' said Brannan.
The High Court, which had referred the case to the ECJ, said that M&S could not claim relief in respect of the French loss-making subsidiary as its purchaser had used the losses in France.
However, Park J said that M&S could be entitled to relief for the losses of the German and Belgian subsidiaries if it could prove that the losses cannot be taken into account in those countries at the time of the claim or in future by either the subsidiaries or their purchaser. The question has been remitted to the Commissioner for a decision on the facts.
The M&S litigation is one of two major challenges brought against UK tax legislation under EU law. The Advocate General recently gave his Opinion in the FII group litigation case, suggesting that the UK rules on the taxation of the dividends of subsidiaries was contrary to the EU Treaty. The Opinion is consistent with the ECJ's case law and is likely to be endorsed by the court.
The other case is the one brought by Cadbury Schweppes, who claim that the UK rules on the taxation of controlled foreign companies is unlawful. The Advocate General Opinion in this case is expected on 6 May.