Halsey (HM Inspector of Taxes) v Marks & Spencer Plc

This appeal and cross-appeal are from the order made on 11 April 2006 by Mr Justice Park on an appeal by Marks & Spencer PLC (“M&S”) under section 56A of the Taxes Management Act 1970 from the decision of the special commissioners (Dr John Avery Jones CBE and Mr Malcolm Gammie QC) dated 17 December 2002. The special commissioners had held that M&S, a United Kingdom resident company, was not entitled to group relief against its profits in respect of losses incurred by subsidiaries established and resident in Belgium, France and Germany. So far as material to this appeal, the group relief claims are those made by M&S in respect of the four accounting periods ending on 31 March 1998, 1999, 2000 and 2001. The amounts in issue are substantial.

Group relief is made available under the provisions in Chapter IV of Part X of the Income and Corporation Taxes Act 1988 (“TA 1988”). Section 402(1) TA 1988 provides, so far as material, that:

The special commissioners had rejected the contention, advanced by M&S, that the group relief provisions of United Kingdom domestic law, which (on their face) had the effect of preventing a subsidiary resident in another member state of the European Union but trading outside the United Kingdom from surrendering losses to its ultimate parent resident in the United Kingdom, were in breach of articles 43 and 48 of the EC Treaty (formerly articles 52 and 58):

The special commissioners had taken the view, expressed at paragraph 2 of their decision (SC 3050/02), that the relevant principles established by the case law of the Court of Justice were clear and that it was unnecessary to seek the guidance of that Court in order to reach a decision. But the judge was persuaded that, in order to decide the appeal that was before him, it was necessary to seek a preliminary ruling under article 234 of the EC Treaty. The questions referred are set out in the schedule to the order which he made on 2 May 2003. They can also be found at paragraph [26] in the judgment of the Court of Justice in Case C-446/03, reported at [2006] Ch 184.

On 13 December 2005 the Court of Justice ruled:

First, the Court accepted that the differential treatment, as between UK resident subsidiaries and non-resident subsidiaries, in relation to the surrender of losses for the purposes of group relief under United Kingdom domestic law, did constitute a restriction on freedom of establishment, contrary to articles 43 and 48 EC Treaty. The point is made at paragraphs [32] to [34] of the Court’s judgment ([2006] Ch 184, 214B-D):

Second, the Court accepted that such a restriction could be permissible “only if it pursued a legitimate objective compatible with the Treaty and is justified by imperative reasons in the public interest” – paragraph [35]. Three factors were advanced by the United Kingdom (and other member states which submitted observations) to justify the restriction in the present case (paragraph [43], ibid, 215D-E):

It is, I think, pertinent to examine what the Court thought were the “legitimate objectives . . . compatible with the Treaty” and the “overriding reasons in the public interest”. As to the first of the three factors identified at paragraph [43], the Court said this, (at paragraph [46])

Third, the Court emphasised that the restrictive measure must not go beyond what is necessary to attain the objectives pursued (paragraph [53]). And, in that context, it said this (ibid, 216F-H):

In the light of the ruling from the Court of Justice, the judge dismissed the appeal to the extent that it concerned the losses of the French subsidiary, Marks & Spencer (France) SA (“M&SF”). There is, now, no appeal from that part of his order. But, to the extent that the appeal related to the losses of the German and the Belgian subsidiaries – Marks & Spencer (Deutschland) Gmbh (“M&SG”)and Marks & Spencer (Belgium) SA (“M&SB”) – the judge directed that the appeal be remitted to the special commissioners “to determine it in the light of the judgment of the High Court”; that is to say, he directed the special commissioners to re-open the appeal which had been before them in 2002 and to determine that appeal in the light of the judgment ([2006] EWHC 811 (Ch)) which he had handed down on 10 April 2006. It is that direction which has given rise to the appeal and cross-appeal in this Court.

Having sought and obtained a ruling from the Court of Justice to the effect that the group relief provisions of United Kingdom domestic law which prevent an EU subsidiary resident and trading outside the United Kingdom from surrendering losses to its UK parent are not in breach of articles 43 and 48 EC Treaty, save where there are no opportunities for the non-resident subsidiary to have the losses taken into account in its state of residence, it would have been open to the judge simply to remit (without further direction) the appeal from the revenue’s refusal of group relief as a matter for determination by the special commissioners in the light of findings of fact by them on the questions whether (i) the German and the Belgium subsidiaries, respectively, had exhausted the possibilities available in Germany and Belgium (as the case might be) of having losses taken into account for the accounting period concerned by the claim for relief and also for previous accounting periods and (ii), if so, whether there were no possibilities for those losses to be taken into account in Germany or Belgium (as the case might be) for future periods either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party. The judge did not take that course.

The effect of the direction to the special commissioners that they determine the appeal before them in the light of the judgment handed down on 10 April 2006 is that the commissioners are not free to decide for themselves, on the facts, whether each subsidiary has exhausted the possibilities available to it in its own state of residence of having its losses taken into account for the relevant or previous accounting periods or (if so) whether there are possibilities in the future. The special commissioners must decide those questions on the basis of the interpretation which, it is said, the judge has put upon the “no possibilities” test adumbrated by the Court of Justice. And it is because the parties are unable to agree as to what the judge intended by his interpretation of the “no possibilities” test – or whether his interpretation is correct – that the matter comes to this Court on appeal without having, first, gone back to the special commissioners. This Court is invited to decide the issues in a vacuum – or, as the parties would put it, “in principle” – without there having been any determination on the facts. I do not find that position satisfactory. The answer to the question whether there is a possibility (or no possibility) for losses to be taken into account in a foreign state of residence is, as it seems to me, likely to be fact sensitive. It would, I think, have been much more satisfactory if this Court had been able to decide that question in the context of facts which had been determined by the tribunal to whom that task has been entrusted.

At paragraphs [26] to [30] of his judgment, the judge addressed the question whether, on the test laid down by the Court of Justice, M&S could claim group relief in respect of the losses of the French subsidiary, M&SF. He accepted, as a correct summary of the Court’s judgment, that advanced on behalf of the revenue (which he had set out at paragraph [23](ii) of his judgment):

At paragraph [31] of his judgment, the judge went on to say this:

The judge set himself the task of explaining “what the ECJ had in mind by the concepts which it set out in paragraph 55”. He recognised that “an interpretation may give rise to a question of how it would apply to the particular facts of M&SG or M&SB”. That, he said “would be a matter to be determined in the first instance by the Special Commissioners”. Nevertheless, there were a number of points to be made. Those follow at paragraphs [33] to [41] of the judgment.

First, as the judge held, “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”. That required consideration of “what is the relevant time”; a question which, as the judge recognised, could be “of considerable importance”. Before turning to that question, the judge addressed three other elements: “possibilities legally available, the objective facts of the company’s situation at the relevant time, and the possibilities being recognised possibilities”. He said this:

At paragraphs [35] and [36] of his judgment the judge illustrated “the range of potential complications” by reference to the availability of tax relief treatment for losses under the domestic law of the United Kingdom; although, as he said, “the UK rules about the availability of tax relief for losses made by companies are not directly relevant to the present case: it is the German and Belgian rules which are relevant”. He went on to say this:

The judge explained that, in pointing out (at paragraph [33] of his judgment) that ‘possibilities available’ meant recognised possibilities, he had included the word ‘recognised’ against the background “that the ECJ’s formulation effectively places on the claimant for group relief (in this case M&S) the burden of proving a negative: that there were no possibilities of obtaining German or Belgian tax relief for the losses”. He observed that: “To prove a negative is always difficult: the litigant is exposed to the risk of it being said that he has identified a number of possibilities and shown that they do not apply in his case, but who can say that there may not be other possibilities which have not been considered at all?”. And he went on:

The judge then turned to the question: “What is the relevant time as at which M&S has to demonstrate that the conditions of paragraph 55 were satisfied in relation to the losses of M&SG and M&SB?”. He thought that there were three possibilities, which he set out at paragraph [43] of his judgment:

The revenue filed an appellant’s notice on 22 May 2006, under reference 2006/1117. M&S filed its appellant’s notice on the same day, under reference 2006/1125. In each case the appeal was from paragraph 2 of the order of 11 April 2006; that is to say from so much of the order as remitted the appeal from the special commissioners, in so far as it related to the losses of M&SG and M&SB, for determination by the special commissioners “in the light of the judgment of the High Court”. It is common ground that the appeal from the special commissioners should be remitted to them for further determination. The concern, of both parties but in differing respects, is that, in making that determination, the special commissioners should not be required to proceed on the basis that the judge’s interpretation of the “no possibilities” test adumbrated by the Court of Justice is correct.

As I have said, the amounts in issue are substantial. The aggregate losses of M&SG (for which relief was claimed) over the four periods ended 31 March 1998 to 2001 were in excess of £46.4 million. The claim in respect of the losses of M&SB was limited to the third and fourth of those periods; and was in excess of £5.6 million. Permission to appeal and cross-appeal was granted on 21 June 2006.

The revenue’s quarrel is with the judge’s conclusion, at paragraphs [44] and [46] of his judgment, that the time at which M&S had to show that the conditions in paragraph [55] of the judgment of the Court of Justice (“the paragraph 55 conditions”) were satisfied was the time when M&S made the relevant claim or claims for group relief. It is said that the judge should have held that the relevant time was the end of the accounting period in respect of which M&S was claiming group relief.

Although M&S were, at first, minded to challenge the judge’s interpretation in the three respects set out in its appellant’s notice and summarised at paragraph 20 of the skeleton argument filed on its behalf, its position at the hearing of the appeal was set out in writing in a “Summary of Submissions for Marks & Spencer”. M&S accepted that the relevant dates for the application of the “no possibilities” test were “the dates on which the final claims for group relief will be made as permitted by the existing UK group relief regime”. But, on the basis that the judge’s “suggested criteria of ‘recognised possibilities’ approximated to the theoretical ability to carry forward losses under the [local] tax code”, it is said that he was in error.

Two other, more fundamental, submissions were advanced on behalf of M&S in this Court. First, it was said that the Community law principle of effectiveness required that M&S should be granted a transitional period, commencing on the date that its community rights to make group relief claims in respect of non-resident subsidiaries are clearly established, in which to make a claim for such relief and to demonstrate that, at the point the claim is made, there is no possibility that the subject losses will be used. Second, it is said that it may become necessary to consider whether the judgment of the Court of Justice requires the automatic disapplication of the rule in the group relief code which required surrendering companies to be resident in the United Kingdom (or, after 2000, carrying on a taxable trade in the United Kingdom). That question, it is said, may require a further reference to the Court of Justice for a preliminary ruling.

It is, I think, convenient to address the issue raised by the revenue’s appeal – the relevant date for the application of the “no possibilities” test – before turning to the issues raised by M&S on its cross-appeal.

Section 402(1) TA 1988 – read with section 402(2) - provides for group relief in respect of trading losses where (i) the losses are surrendered by one group company (the surrendering company) and (ii) the relief is claimed by another company in the same group (the claimant company). Claims for group relief are now to be made in accordance with the provisions of Part VIII of schedule 18 to the Finance Act 1998 (“FA 1998”): section 412 TA 1988. Those provisions have replaced the provisions in schedule 17A TA 1988 in relation to accounting periods ending on or after 1 July 1999. In relation to the first two of the accounting periods in issue in these proceedings, the provisions in schedule 17A TA 1988 apply. The provisions in schedule 17A TA 1988 (under what is described as the “Pay and File” regime then in operation) differ from those in schedule 18 to the 1998 Act (the Self Assessment regime). But, save as to the time within which a claim must be made, it is not suggested that the differences are material in the present context.

A claim for group relief must be made by being included in the claimant company’s company tax return for the accounting period for which the claim is made: paragraph 67(1) in schedule 18, replacing paragraph 6(1) in schedule 17A. The claim may be included in the return originally made or by amendment: paragraph 67(2) in schedule 18, replacing paragraph 6(2) in schedule 17A. The claim requires the consent of the surrendering company and must be accompanied by a copy of the notice of consent to surrender given by the surrendering company: paragraph 70 in schedule 18, replacing paragraph 10(1) and (8) in schedule 17A. Paragraph 71 in schedule 18, replacing paragraph 10(4) in schedule 17A, sets out the information which must be contained in a notice of consent. Paragraph 73 in schedule 18 provides that a claim for group relief may not be amended, but must be withdrawn and replaced by another claim; and that, if the claim is to be withdrawn and replaced, the company must amend its tax return. The relevant provisions in schedule 17A (paragraphs 6 and 12) are, I think, to like effect.

Paragraph 74(1) in schedule 18 prescribes the time limits within which a claim for group relief may be made under the Self Assessment regime:

The position under the Pay and File regime is governed by paragraphs 2 to 5 of schedule 17A TA 1988:

The dominant features of the group relief provisions – whether under the Pay and File regime or under the Self Assessment regime – is that the claim must be made in the claimant company’s tax return for the accounting period for which the claim is made; the return must identify the surrendering company; the surrendering company must give notice of consent in writing at or before the time the claim is made; the notice of consent must include the amount of relief surrendered, the name and tax district reference of both the surrendering and the claimant company and the accounting period of the surrendering company to which the claim relates; and the claim must be accompanied by a copy of the notice of consent. It is clear, therefore, that a claim for group relief, if made under the provisions applicable to claims under domestic law, will disclose the fact (if it be so) that the surrendering company is not resident in the United Kingdom or (in a case where section 402(3B) TA 1988 applies) does not carry on business in the United Kingdom through a branch or agency.

In the light of the ruling from the Court of Justice, it is clear, also, that the United Kingdom tax authorities are entitled to reject a claim for group relief in a case where, on the face of the claim (read with the notice of consent), it appears that the surrendering company is not resident in the United Kingdom (or does not carry on business in the United Kingdom through a branch or agency) unless the claimant company demonstrates to those tax authorities that the paragraph 55 conditions of the Court’s judgment are fulfilled. It is equally clear, as it seems to me, that the provisions of domestic law require – and are entitled to require – that that is demonstrated at the time when the claim is made. I can see no reason why the revenue should not require, at the time when the claim is made – in addition to or in lieu of a notice of consent - a notice from the non-resident surrendering company which confirms that it has exhausted the possibilities available in its state of residence of having the losses in respect of which the claim is made taken into account for the accounting period to which the claim relates or for previous accounting periods and that there is no possibility of those losses being taken into account in its state of residence for future periods, either by the surrendering company or by a third party. Further, as it seems to me, the revenue is entitled to require appropriate evidence to support that notice. The most cogent evidence, if it were available within the provisions of the tax code applicable in the state of residence, would be some form of certificate, confirmation or notification from the local tax authorities that the relevant losses could not be taken into account in the accounting period in which they were incurred and that there was no possibility of carry back or carry forward. But I do not suggest that other objective evidence could not suffice.

The issue between the parties, however, is not as to the time at which the claimant company must seek to demonstrate that the paragraph 55 conditions are satisfied; but rather as to the time at which those conditions are, in fact, to be satisfied. In other words, is it enough (as the judge held and as M&S contends) that the conditions are satisfied at the time when the claimant company makes the claim for group relief; or must it be demonstrated at the time when the claim is made (as the revenue contends) that the conditions were satisfied at the end of the accounting period for which group relief is claimed?

The revenue rests its contention, first, upon the structure and language of paragraph [55] of the ruling of the Court of Justice and, second, upon what are said to be the anomalies and inconvenience which would flow from the date chosen by the judge. The submission under the first of those heads is set out at paragraph 8 of the skeleton argument filed on behalf of the revenue in this Court:

The Court of Justice accepted that provisions of domestic law which restrict the availability of group relief in respect of losses to the losses of companies resident in the member state pursue legitimate objectives which are compatible with the EC Treaty. The Court of Justice identified those objectives in paragraph [43] of its judgment. It is pertinent to have them in mind. First, there is the need to treat profits and losses symmetrically in the same tax system in order to protect a balanced allocation of the power to impose taxes between the different member states concerned. Second, there is the need to avoid the possibility that losses are taken into account twice – that is to say, in two different member states. And, third, if the losses are not taken into account in the member state in which the loss making company is established there is a risk of tax avoidance by the transfer of losses within a group to companies established in other member states which apply higher rates of taxation. But, as the opening words of paragraph [55] itself make clear, the pursuit of those objectives by restrictive and differential provisions in domestic law must not go beyond what is necessary “to attain the essential part of the objectives pursued”. And the restriction goes beyond what is necessary in circumstances which fall within one or other of the two indents (or conditions) set out in paragraph [55].

It is not difficult to see why the Court of Justice took the view that, in circumstances which fall within the paragraph 55 conditions, the restriction goes beyond what is necessary. If (i) the (non-resident) surrendering company has exhausted the possibilities, available in its state of residence, of having the losses taken into account for the surrender period and for previous accounting periods and (ii) there is no possibility for the surrendering company’s losses being taken into account in its state of residence for future accounting periods, then: (1) full effect has been given to the power of the state of residence of the surrendering company to impose taxes on its own resident and there is no need to “protect a balanced allocation of the power to impose taxes” between that state and the state of residence of the claimant company; (2) there is no possibility that the losses of the surrendering company will be taken into account twice; and (3) there is no potential for tax avoidance – the surrendering company has been required to use its losses in its own state of residence so far as it can.

I can find no support in the reasoning which underlies the approach of the Court of Justice for the proposition that the paragraph 55 conditions must be satisfied at the end of the surrender period. It is important to keep in mind, as it seems to me, that the question whether the United Kingdom tax authorities are precluded by Community law from applying the restriction on group relief imposed by domestic law does not arise until a claim for group relief is made by the claimant company. The claim must be accompanied by a notice from the surrendering company. At the least the surrendering company must consent to the use of its losses by the claimant company; and (as I have said) it may well be that the claimant company can be required to provide some formal confirmation from the surrendering company that the losses are not available in its state of residence. The question whether the United Kingdom tax authorities are precluded by Community law from applying the restriction on group relief imposed by domestic law turns on whether the paragraph 55 conditions are satisfied. I can see no reason in principle why the latter question – whether the paragraph 55 conditions are satisfied – should not be answered by reference to the facts as they are when the former question arises.

As I have said, the revenue contends that to answer the question whether the paragraph 55 conditions are satisfied by reference to the facts as they are when the claim for group relief is made will give rise to anomalies and inconvenience. The revenue seeks to support that contention by two illustrative examples: one based on the position under the Pay and File regime and the other based on the position under the, current, Self Assessment regime.

The revenue points out, correctly, that the effect of schedule 17A TA 1988 (applicable to the Pay and File regime) is that the time limits for making group relief claims were linked to the times within which an assessment could be made and had become final. It is said that that was deliberate: “In the case of a group of companies it might well be convenient for assessments and final group relief claims only to be made once the figures for all the companies in the group were agreed”. So, it is said, the latest time at which a group relief claim could be made would depend on (i) whether the circumstances were such that the inspector decided to make an early assessment rather than wait until figures were agreed and (ii) whether the inspector made enquiries into the figures in the returns, and the speed of agreement of figures both in the claimant company and across the group. Those factors (which, if the judge were correct, would determine the time at which it would be necessary that the paragraph 55 conditions were satisfied) “might be completely unconnected with the relievability of the loss of the foreign surrendering company”.

Under the Self Assessment regime, the time limits for making group relief are governed by schedule 18 FA 1998. So, it is said, the latest time at which a group relief claim could be made (and the time at which, if the judge is correct, it would be necessary that the paragraph 55 conditions were satisfied) would depend on whether the revenue decided to make enquiries into the figures in the returns and the speed of agreement of the figures submitted by the claimant company. Further anomalies arise (it is said) where the claimant company adopts a period of account in excess of 12 months.

For my part, I do not find it surprising that the ruling of the Court of Justice – that there are circumstances in which the United Kingdom tax authorities would be in contravention of Community law if they were to refuse group relief to a United Kingdom resident company on the basis that the losses in respect of which that relief was claimed were the losses of a company resident in another member state – may give rise to anomalies and inconvenience. The United Kingdom domestic tax code in relation to the taxation of companies in the same group is based on the assumption that group relief is only available as between companies which are subject to that code. It may be expected that, if relief is to be given in respect of the losses of a company which is not subject to that code, the circumstances will not sit easily within the code.

The ruling of the Court of Justice requires, as it seems to me, that in cases where the restrictions on group relief in respect of the losses of non-resident companies go beyond what is necessary in the pursuit of legitimate objectives compatible with the EC Treaty, those losses are to be treated, so far as possible, in the same way as losses of resident companies. Differential treatment is to be avoided. The decision of a resident company to surrender its losses – and to give notice of consent – can be made at or up to the time when the claimant company makes its claim for group relief; and so can be made on the basis of facts as they are at the end of the period within which the claimant company is permitted to make a claim for group relief. It is, I think, plain that the decision of a non-resident company to surrender its losses – because they cannot be used in its own state of residence – can be made at or up to the time when the claimant company makes its claim for group relief. I can see no reason why that decision, also, should not be made on the basis of facts (including facts which go to the question whether or not the paragraph 55 conditions are satisfied) as they are at the end of the period within which the claimant company is permitted to make its claim.

It follows that I would dismiss the revenue’s appeal. I should add that I do not see the judge’s decision on this point as providing opportunities for abuse. The Court of Justice made clear, at paragraph [57] of its judgment, that the United Kingdom tax authorities are entitled to adopt or maintain in force rules having the specific purpose of precluding from a tax benefit wholly artificial arrangements whose purpose is to circumvent or escape national tax law. The effect of artificial arrangements made by the non-resident company for the purpose of enabling it to be said that the paragraph 55 conditions are met can be addressed if and when reliance is placed upon such arrangements. It is not suggested that this is such a case.

The M&S challenge to the judge’s interpretation finds expression in two passages taken from the skeleton argument filed on its behalf in this Court. First, it is said (at paragraph 60) that:

For my part, I doubt whether Mr Justice Park’s interpretation of the “no possibilities” test, as it is to be applied in relation to the availability, under the local law, of loss relief in relation to the surrender period or previous periods, is inconsistent with the understanding of the test which M&S has set out in the passage (at paragraph 60 of its skeleton) to which I have referred.

The first of the two paragraph 55 conditions requires that the non-resident subsidiary should have exhausted the possibilities available in its state of residence of having the losses taken into account for the surrender period or for previous accounting periods. The condition envisages that losses may be taken into account under the local law “by transferring those losses to a third party” or “by offsetting the losses against profits made by the subsidiary in previous periods”. It is clear, therefore, that the Court of Justice had in mind that, under the local law, losses incurred by company A in the surrender period might be taken into account (i) in the computation of the taxable profits of that company for the surrender period, (ii) by way of relief (carry-back) against the profits of company A in a previous accounting period or periods or (iii) by transfer to another company, company B, who could use them to obtain relief against its taxable profits in a period corresponding to the surrender period or in a previous period or periods. Mr Justice Park plainly had that well in mind when making the observations which he did at paragraphs [34] and [35] of his judgment.

As I have said, at paragraph [33] of his judgment Mr Justice Park explained that “possibilities available” meant “recognised possibilities legally available given the objective facts of the company’s situation at the relevant time”. The judge explained what he meant by “recognised possibilities” at paragraphs [40] and [41] of his judgment. It was necessary to demonstrate that “none of the generally recognised means of obtaining tax relief in Germany or Belgium for a company’s trading losses existed as possibilities at the relevant time”. It was not necessary to show that there was not “some other possible way of getting relief for the losses which, despite making reasonable enquiries of German and Belgian tax specialists, [M&S] has not thought of and therefore has not eliminated.” But subject to that (with which, I think, M&S can have no quarrel) and, perhaps, to the judge’s emphasis that the possibilities must be legally available (by which he meant available within the domestic law – a point with which, again, M&S can have no quarrel) there seems to me no material difference between the expression used by the judge - “possibilities . . . available given the objective facts of the company’s situation at the relevant time” - and that used by M&S in the skeleton argument - “the actual possibility of use in the light of both the taxpayer’s situation and the theoretical possibilities available under the local law”.

There is, perhaps, rather more force in the criticism of the judge’s interpretation of the “no possibilities” test as it is to be applied in relation to the availability, under the local law, of loss relief in relation to future periods. At paragraph [37] of his judgment, when addressing the second of the two paragraph 55 conditions (no availability of carry-forward relief), the judge observed that: “the particular circumstances of M&SG and M&SB do not for these purposes include the degree of probability or improbability of them returning to profitability in future”. He illustrated that view, at paragraphs [37] and [38], by examples. I have set out the text of those paragraphs out earlier in this judgment; but it is convenient to refer, again, to the material passages (with emphasis added):

The judge was clearly correct, if I may say so, to recognise that a possibility can exist even if it is unlikely that it will ever happen. It is, I think, plain that the Court of Justice did not intend that the test posed by the second of the paragraph 55 conditions would be satisfied if the claimant did no more than demonstrate that it was improbable or unlikely, or that there was little or no real likelihood, or that the claimant (or the surrendering company) had no intention, that losses could or would be set against future profits. In my view the examples which the judge gave cannot be said to be flawed. The danger, I think, is that more may be read into the judge’s observation that “the particular circumstances of M&SG and M&SB do not for these purposes include the degree of probability or improbability of them returning to profitability” than, perhaps, he intended.

In my view M&S is correct in its contention that there is no reason to think that the test under the second condition is of a different nature from that under the first; that is to say, that there is no reason why the test under the second condition should not have regard to “the objective facts of the company’s situation at the relevant time”. So that, if on an objective appraisal of the surrendering company’s situation, the proper conclusion is that there is no real possibility for losses incurred in the surrender period to be taken into account in its state of residence for future periods, either by the surrendering company or by a third party, then the second of the paragraph 55 conditions is satisfied. Given the context, the phrase “no possibility” in the second condition is to be read as “no real possibility”; in the sense that a real possibility is one which cannot be dismissed as fanciful. It is, perhaps, unnecessary to add that a test of “no real possibility” is not to be equated with a test of “little or no real likelihood”. As I have said, the judge was correct in his view that a possibility may exist even where there is little or no real likelihood that the event will happen.

It is because – and only because – I think that there is some danger that more may be read into the judge’s observation that “the particular circumstances of M&SG and M&SB do not for these purposes include the degree of probability or improbability of them returning to profitability” than, perhaps, he intended that I would allow the M&S appeal to the extent of varying the order of 11 April 2006 by deleting the words “to determine it in the light of the judgment of the High Court” from paragraph 2

As I have said, the submissions advanced by M&S in this Court went beyond the issues which had been addressed by the judge. First, it was said that the Community law principle of effectiveness requires that the period during which M&S is permitted to make a claim for group relief - and to demonstrate that, at the time when the claim is made, there is no possibility that the losses of the surrendering company will be used in the state of residence – be extended so far as necessary to allow a claim for relief to be made within a reasonable time after the date on which its community right to make group relief claims in respect of non-resident subsidiaries was established. It is accepted, I think, that (prima facie at least) that date would be the date (13 December 2005) on which the judgment of the Court of Justice in Case C-446/03 was handed down; although M&S may seek to argue for a later date – being the date on which “it is made aware of the precise nature of [the paragraph 55] requirements”. M&S relied, in support of that submission, on observations in this Court in Condé Nast Publications Ltd v Customs and Excise Commissioners [2006] EWCA Civ 976, in particular at paragraph [49].

It appears from paragraph 9 of the agreed Statement of Facts appended to the decision of the special commissioners that the group relief claims at issue in the present case were made by M&S on 31 March 2000 (for 1998), on 31 March 2001 (for 1999) and on 24 September 2001 (for 2000 and 2001). The claims were rejected by the revenue by decisions dated 13 August 2001(for 1998 and 1999) and 2 November 2001 (for 2000 and 2001). M&SG and M&SB had each ceased trading by 31 December 2001 (paragraphs 5 and 7 of the agreed statement of facts).

I have explained, earlier in this judgment, that (both under the Pay and File regime and under the Self Assessment regime) a claim for group relief may be withdrawn and replaced by another claim: paragraph 6 in schedule 17A TA 1988, paragraph 73 in schedule 18 FA 1998. Time limits apply: paragraphs 2 to 5 in schedule 17A, paragraph 74 in schedule 18. But, under both the Pay and File regime and the Self Assessment regime, the revenue has power to extend time (paragraph 4 in schedule 17A, paragraph 74(2) in schedule 18). It may be that, by the date that the decision of the Court of Justice was handed down on 13 December 2005, M&S was out of time to make new claims for group relief in respect of the accounting periods ending on 31 March 1998 and 1999. But the point has not been argued and I do not decide it. We do not know whether M&S has sought to make new claims in the light of the judgment of the Court of Justice; nor what (if M&S has done so) the revenue’s response has been.

For my part, I would accept that the decision of this Court in Condé Nast does provide support for the proposition that the Community law principle of effectiveness requires that the period during which M&S is permitted to make new claims for group relief be extended so far as necessary to allow those claims to be made within a reasonable time after 13 December 2005. If M&S is permitted to (and does) make a new claim (or claims) for group relief, then it follows from the conclusion that I have reached earlier in this judgment that M&S will have the opportunity to demonstrate that, on the facts as they are at the date that the new claim (or claims) is or are made, there is no possibility that the losses of the surrendering company will be used in the state of residence.

We were invited to vary the order made on 11 April 2006 so as to direct that “as a minimum Marks and Spencer must be given a reasonable period following the time it is made aware of the precise nature of the [paragraph 55] requirements in which to meet them”. I do not think it appropriate to include a direction in those terms. First, as I have said, we do not know whether M&S has sought to make new claims in the light of the judgment of the Court of Justice; nor what (if M&S has done so) the revenue’s response has been in relation to time limits. Second, we were informed that the decision of this Court in Condé Nast was the subject of an appeal to the House of Lords. And third, we do not know whether or not the special commissioners will take the view that, on the facts as they were when the claims which are in issue were made, the paragraph [55] conditions are satisfied. It seems to me more sensible to leave the matter on the basis that the special commissioners will decide the appeal (when remitted to them) – and any application by M&S to bring in new claims on the appeal – on the facts which are then before them and with such guidance as they may obtain from the judgments in this Court and (of course) the decision of the House of Lords in the Condé Nast appeal.

By way of what, I think, may fairly be described as its “fall-back” position, M&S submitted that the judgment of the Court of Justice requires the automatic disapplication of the rule in the group relief code which required surrendering companies to be resident in the United Kingdom (or, after 2000, carrying on a taxable trade in the United Kingdom). It is said that the issue raises “a very important general question as to the impact of Community Law where domestic legislation is not compliant”. That question, it is said, was not addressed by the Court of Justice in Case C-446/03; and may require a further reference to the Court of Justice for a preliminary ruling.

In my view it is not arguable that the judgment of the Court of Justice requires the automatic disapplication of the rule in the group relief code which requires that the surrendering company be resident in the United Kingdom (or to be carrying on a taxable trade here). The Court of Justice has held, in terms, that the rule is not incompatible with the EC Treaty. The position is stated, correctly, by the revenue in the skeleton argument filed on its behalf on 8 November 2006. After referring to paragraph [56] in the judgment of the Court of Justice, it is said (at paragraph 19):

I would reject the application made on behalf of M&S for a further reference to the Court of Justice. For my part, I think that the position is now clear in this Court. The House of Lords will have the opportunity to seek a further ruling on the point (if it thinks it necessary) in the context of the appeal in Fleming which is now before it.

I would dismiss the revenue’s appeal. I would dismiss the M&S appeal, save to the extent which I have indicated. I would decline to make a further reference to the Court of Justice.

I agree.

I also agree.