Mr.
Hoban: These amendments deal with two different areas
within the judgment of the European Court and particularly refer back
to the judgment of Mr. Justice Park on 10 April 2006, where he tackled
a couple of the issues that were perhaps ambiguous in the ECJ’s
original judgment. I should like to deal first with amendments Nos. 5,
6, 7 and 9. One of the issues that was left outstanding in the minds of
Marks & Spencer and their advisers, and on which they sought
clarification from Mr. Justice Park, was the use in the ECJ judgment of
the word “possibility”.
Mr. Justice Park’s
judgment states at paragraph 33 that in his view when the ECJ refers to
possibilities available, it means recognised possibilities, legally
available, given the objective facts of the company’s situation
at the relevant time. Some of the sub-paragraphs of the schedule refer
to every possibility, rather than trying to be more specific about the
nature of those possibilities.
Two issues emerge from Mr.
Justice Park’s ruling. First, there are the legally recognised
possibilities and whether those are available, given the objective
facts at relevant times. Mr. Justice Park states that while there may
be legal possibilities for group relief, the fact that they are
available does not necessarily preclude losses in other EEA countries
offsetting UK tax or profits. He goes on to discuss what is meant by
objective facts at the relevant time and uses two examples to
illustrate that. The first is where the overseas business is
loss-making and still trading. He said that although the parent company
might argue that the overseas subsidiary will not return to profit, the
fact that it could—thereby offsetting its losses against future
profits—would mean that those losses could not be used to offset
UK taxes. His other
example was of a loss-making overseas company that had been closed. The
losses had been fully utilised in that country, and a balance of
unrelieved losses remained that could be offset against UK taxable
profits. He said that the objective facts in that case proved that the
losses could be relieved in no other way than against UK taxable
profits. 12
noon Paragraph
6(4) of schedule 1 refers to “every step”, but what does
that mean? Will HMRC examine what a UK parent company has done to turn
around a subsidiary prior to closing it, in order to ensure that every
step has been taken? What is the objective measure of any step? In the
case of Marks & Spencer, the French subsidiary was sold to Galeries
Lafayette, which then used the losses. If M&S had not tried to sell
the business to Galeries Lafayette, would it still have satisfied the
“every step” criterion? If it had not been able or had
not tried to sell the business, would Revenue and Customs have said
that the UK parent had not tried every
step? With the idea of
every step, the Government are asking UK parent companies to know what
purchasers have done with their losses. In the M&S case, it was
known that Galeries Lafayette had used those losses to reduce its
taxable profits, but most groups retain a degree of confidentiality
about their tax affairs. There is no legal basis on which a parent that
disposes of companies can find out what the acquirer has done with the
losses. My concern is
that phrases such as “every step” and “by any
other means” are poorly defined. In the effort to give better
guidance to taxpayers, perhaps they should be either changed or
qualified. That is why amendment No. 6 would insert the word
“reasonable”. Amendments Nos. 5, 6, 7 and 9 seek to
clarify what actions a claimant might take to meet the conditions for
losses to qualify for offset against UK tax by defining more tightly
the issue of possibility left hanging by the ECJ
judgment. The second
issue that I shall tackle is that of timing, which is dealt with by
amendment No. 8. The Government say in paragraph 7 of schedule 1 that a
group relief claim should be made at the end of the current period. It
is important for the Committee to know that UK companies claiming UK
tax losses are allowed two years after the end of the current period to
make a group relief claim. In defining so clearly the timing of the
group relief payment for overseas losses, the Government are opening up
a mismatch between the treatment of UK losses and the treatment of
losses arising elsewhere in the European economic area.
In his judgment, Mr. Justice
Park sought to elaborate on the ECJ judgment, which I understand was
silent on the issue of when the group reliefclaim should be
made. He identified three points at which the claim could be made. The
first, in line with the Government’s new clause, is at the end
of the accounting period when the loss was made. The second is at the
time or times when the group relief claim is made by the
parent—effectively a later date. The third is when the matter is
dealt with by the special commissioners. I shall deal with the first
two
options. Schedule
1 as it is drafted reflects the first option, yet it and the third
option were ruled out by the High Court. In paragraph 44 of his
judgment, Mr. Justice Park said that
“option 1 is too soon, and would
be likely to rule out virtually every
case.” He went on to
say: “At the
end of an accounting period in which M&SG and M&SB made a loss,
and therefore was still likely to be carrying on its trade it is hard
to imagine any case in which German or Belgian law would not provide
for any possibility of relief for
losses.” So
there could be a situation in which a business continues to trade at
the end of a period. Say the financial year ends at 31 December and the
business is still trading in Germany or Belgium, under schedule 1 any
claim for group relief on those losses should be made. Given that the
business is still trading at that point, and is likely to trade on into
the next year, there is still the possibility in
German or Belgian law—assuming that they allow for such
possibilities—for those losses to be relieved against future
profits. The only way in which a claim for group relief could be made
in those circumstances would be if the business had closed during the
current accounting period, so that it was known that there would be no
future trade against which the losses could be offset, if they were
unable to be offset in that year or in previous accounting
periods. The ECJ
judgment is that, where possible, losses should be relieved in that
country first, before being made available to offset in the UK company.
If the decision had to be made at the end of the financial year, the
company would know that there had been losses, but not whether there
would be profit in future years against which that year’s losses
could be offset. Because the possibility still existed to offset those
losses against future trading profits, they could not be offset against
UK taxable profits. In a way, the timing in schedule 1 makes it
virtually impossible for a business to make a valid claim, because
unless it is closed down in the course of the year, it will still be
trading, so there will still be the possibility at the end of that
financial year to make a claim.
Mr. Justice
Park decided that the decision to make a claim for the use of losses
should be made at the time at which the group submitted its claim for
group relief. Such claims can be made up to two years after the end of
the accounting period in which the losses were made. In those
circumstances, a UK parent company could have much greater certainty
about the possibility that the losses could not be relieved in the
country in which the subsidiary was resident. For example, it could
have closed a loss-making subsidiary, so it would know that there would
be no tax on profits against which the tax losses could be
offset. If the
Committee were to accept amendment No. 7, schedule 1 would reflect Mr.
Justice Park’s judgment on the matter. My concern is not merely
to achieve certainty for businesses and clarity on the timing,
but—having seen Mr. Justice Park’s ruling, and the fact
that he chose option
2— “the time or
times when the group relief claim was made by the
parent”, that some UK
companies might seek to take the Government to court again to get them
to comply with Mr. Justice Park’s original judgment.
The Government might say,
“That is fine. We must go through that process and take it
through the House of Lords and to the European Court.” However,
asMr. Justice Park said in paragraph 41 of his
judgment, “A
principle that runs through the whole of community law and has been
enunciated by the ECJ in numerous cases is the principle of
effectiveness: procedures in Member States must not render practically
impossible or excessively difficult the exercise of rights conferred by
Community Law”. It
appears to me that the drafting of schedule 1 ignores Mr. Justice
Park’s judgment and the principle of effectiveness. It will
leave the Government and taxpayers open to further challenge in the
courts.
Stephen
Hesford: Is it the hon. Gentleman’s view that all
that Mr. Justice Park said was necessary in that case, or was much of
it not necessarily directly relevant to what we are now considering? It
is an opinion, but it is
not necessarily one that the Government need to take as black-letter law
at this time.
Mr.
Hoban: The hon. Gentleman opens up a can
of worms in questioning the legal status of Mr. Justice Park’s
judgment. To an extent, that goes back to the stand part debate, and
the remarks of my hon. Friend the Member for South-West Hertfordshire
about the primacy of Community law. If Mr. Justice Park’s
judgment were seen as fleshing out the ECJ’s original judgment,
should it be part of Community law? If it is part of Community law,
will it have primacy over this legislation? I suspect that some people
will go back to the ECJ about that. There is an important legal issue
here about the status of Mr. Justice Park’s judgment in
elaborating on the ECJ judgment. If we go down his route, we are saying
that the Finance Bill overrides that judgment. However, as my hon.
Friend has said, we know that parliamentary sovereignty is subservient
to Community law. If Mr. Justice Park’s judgment is seen as
elaborating on Community law, that may well prove ultimately to have
primacy over the
Bill.
Stephen
Hesford: It was potentially an interesting, wider question
that the hon. Member for South-West Hertfordshire asked. However, I am
asking a very narrow question. Did Mr. Justice Park need to say, when
he made the judgment in that case, what he said, or did he just go on,
because he felt like going on to elaborate on areas that he did not
need to elaborate on for the purposes of the case? If the latter, his
comments were obiter, and therefore unnecessary as part of the letter
of the
law.
Mr.
Hoban: The hon. Gentleman, who was a
barrister, would find it valuable to look at the
judgment.
Stephen
Hesford: You have got
it.
The Chairman:
Order. Remarks must be made through the
Chair.
Mr.
Hoban: My understanding is that Marks & Spencer went
back to Mr. Justice Park for a ruling on the issues, and that he was
specifically asked to clarify those points. In the detail of the
judgment, he refers to representations made on the issues by counsel
for both Marks & Spencer and HMRC. What he was saying on the matter
was therefore relevant, and not simply some asides that we should not
take into account in dealing with this
schedule.
John
Healey: Like you, Mr. Benton, I wanted to ensure that all
members of the Committee had a chance to contribute if they so wished.
These amendments would remove some protections in the legislation that
ensure that relief is consistent with Government policy and the
relevant European law, as expressed in the Marks & Spencer
judgment. It is clear that the ECJ, in the Marks & Spencer case,
intended relief to be given for foreign losses only in very limited
circumstances, where all possibilities of relief had been exhausted
elsewhere. The Court went out of its way to note that Governments are
free to adopt measures to prevent artificial arrangements seeking to
obtain a tax benefit.
I shall deal, as the hon. Member
for Fareham did, with amendments Nos. 5, 7 and 9 together. They would
undermine the purpose of the new schedule, which is to ensure that if
losses have to be, or could be, relieved in future in another state,
the UK is not obliged to give relief for
them. We still want to
ensure that if a foreign company gets relief elsewhere, it cannot do so
here. That is why a general description of other possibilities of
obtaining relief is necessary in the legislation. The alternative would
be an attempt to describe all the possible ways in which other
countries provide relief for losses. Such a description would have to
be updated each year. It would be burdensome for us to do and
burdensome for business to follow, and it would carry the obvious risk
that not all the possibilities of obtaining relief in the other EU
member states had been
identified. 12.15
pm As for the
second issue raised by the hon. Gentleman, amendment No. 8 would change
the date at which a determination must be made on whether a loss is
potentially relievable for a future period in another state. He
proposed an alternative approach and, in so doing, made reference to
Justice Park’s recent High Court decision on Marks &
Spencer. There is indeed a difference between the approach in Justice
Park’s decision—members of the Committee might wish to
know that that might not be the final word on the subject—and
that in the Finance Bill as to the relevant time at which tests of
unrelievability of foreign losses are to be
applied. The
difference in position comes about because there are two different and
distinguishable scenarios. The judgment of Justice Park applies only to
the circumstances of Marks & Spencer. It applies in the context
when the United Kingdom legislation does not contain provisions to
allow relief on the losses of foreign subsidiaries. We are dealing
under the schedule with legislation that, first, reflects the European
Court’s decision in December last year and, secondly, translates
that decision into UK legislation. In doing so, the Government have
decided that the relevant time should be immediately after the end of
the period in which the losses were incurred by the foreign
subsidiary. In setting
out the legislation in such a way, we are relying on paragraph 55 of
the European Court’s decision in the Marks & Spencer case.
That paragraph sets out the conditions where, exceptionally, group
relief should be extended to foreign losses. Our view is that those
conditions are restrictive; that view was supported by the
Advocate-General in another European case. When giving his opinion on
class IV of the ACT group litigation case, he
said: “The
court held that, in exceptional circumstances...a home State must
extend domestic group
relief”, but that that
extension “should be
applied extremely
restrictively”. The
amendment would make the relief not restrictive, but more generous.
However, it would not make it more equitable. In short, these
amendments would remove important protections under the Bill, so I hope
that, having said that they are probing, the hon. Gentleman will not
press them.
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