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

In this judgment I refer to the Appellant Company, Marks and Spencer PLC, as M&S. The case also involves three wholly owned indirect subsidiaries which are incorporated and resident in France, Germany and Belgium. I shall refer to them respectively as M&SF, M&SG and M&SB. I use the abbreviation UK for United Kingdom.

Marks and Spencer is a household name. An agreed statement of facts says that M&S is ‘the UK’s leading general retailer, selling clothing, food, homeware, and financial services’. At all relevant times M&S itself (the top company in the group and also the group company which carries on most of the UK-based trading operations) had substantial profits which, except to the extent that reliefs for losses or other forms of relief were available to set against them, would be liable to UK corporation tax. In the 1990s M&SF, M&SG and M&SB were separate companies, based in their own jurisdictions and not resident in the UK. They carried on trades which, in the later part of the decade, gave rise to substantial losses. This case is about whether M&S can set off the losses of the three Continental subsidiaries by way of group relief against the profits of its UK trade.

Under the terms of the relevant UK statute, the Income and Corporation Taxes Act 1988 (to which I refer henceforth as ICTA), the losses would not be capable of being set off in that way, since ICTA provided that only losses of a UK resident company (or of a non-resident company that carried on a trade through a UK branch, which none of M&SF, M&SG and M&SB did) could be surrendered by way of group relief. However, M&S contended that the provisions of the domestic UK statute were in that respect contrary to and overridden by rules of European Community law. It made claims for group relief in respect of the losses of the Continental subsidiaries. The Revenue refused the claims.

M&S appealed to the Special Commissioners against the refusals. In 2002 the Special Commissioners dismissed M&S’s appeals, holding that the particular provisions in ICTA which were challenged by M&S were not contrary to Community law. M&S appealed to the High Court. In 2003 the appeals came before me, and after a three day hearing I referred to the Court of Justice of the European Communities (henceforth ‘the ECJ’) the question of whether the relevant provisions of ICTA were or were not contrary to Community law. The ECJ delivered its judgment on 13 December 2005, and the case has now returned to me to be dealt with as appears appropriate in the light of the judgment.

I consider that, for the reasons which I will explain, there could be a difference between M&S’s claims for relief in respect of, on the one hand, the losses of M&SF and, on the other hand, the losses of M&SG and of M&SB. In my judgment the effect of the ECJ’s decision is that M&S’s claim for group relief in respect of the losses of M&SF must fail, and to that extent I will dismiss the appeal from the 2002 decision of the Special Commissioners. However, for detailed reasons which I cannot encapsulate now but will explain later in this judgment, it may be necessary for further investigations to be made into the status in Germany and France of the losses of M&SG and M&SB. As respects those losses I will remit the matter to the Special Commissioners for them to make further findings and then to determine the appeals in light of those findings. It may be possible for M&S and the Revenue to agree the position in the light of what I will say later, and in that case it will not be necessary for there to be a further contested hearing before the Commissioners.

As a matter of purely UK law the group relief provisions are contained in ICTA ss.402 to 413. In almost all respects I need not go into the details of them, since it is agreed that, if the Continental subsidiaries had been resident in the UK, all the conditions for their losses to be group relieved against the profits of M&S would have been satisfied. There could possibly be some detailed points to sort out about the computation of the losses, but they are not relevant to this judgment, which is concerned with more fundamental matters. Accordingly, the only provisions which I need to set out are the following:

For accounting periods ending on or before 31 March 2000:

For later accounting periods, including the last of M&S’s accounting periods involved in this case, s.402(2) has remained in force, but the part of s.413(5) quoted above was repealed and replaced by the following new subsections of s.402.

The question is whether that effect was overridden by Community law. There is little to quote by way of specific legislative provisions of Community law. The arguments for M&S all derive from the right of establishment and the case law of the ECJ about it. The right of establishment for corporate businesses arises from the combination of articles 43 and 48 (formerly articles 52 and 58).

I am not going to review the general body of case law of the ECJ about the right of establishment. It is, I think, widely understood that the court regards the right as infringed, not just by national rules which impose direct restrictions on persons who wish to establish themselves, or to establish subsidiaries, in other Member States, but also by national rules which, while leaving persons free to establish themselves, or subsidiaries, elsewhere, nevertheless attach consequences which can make it disadvantageous or undesirable to do so. In the present case there was no rule of UK law (or of French, German or Belgian law for that matter) which prevented M&S from setting up subsidiaries in France, Germany or Belgium. M&S’s argument is that the UK rules whereby it could not obtain group relief for losses made by subsidiaries established by it in other Member States although it could obtain group relief for losses made by subsidiaries established by it in the UK, operated as an indirect disincentive to establishing subsidiaries in other Member States. Therefore, so the argument ran, the UK rule under which it (M&S) could not have group relief for losses made by its subsidiaries in other Member States was contrary to the freedom of establishment, and could not be enforced against it.

The other point to make about the case law of the ECJ is that the reference of this case to that court was made against a background of earlier challenges to national provisions of several Member States which were argued to have indirect effects analogous to that of which M&S complained. Most of those earlier challenges had been upheld and very few of them were rejected. Several decisions upholding challenges to national rules were cited to me at the 2003 hearing that ended with my referring this case to the ECJ. I do not think that I need say much more about them in this judgment, since the present case has now been decided by the ECJ, and the focus of this judgment must be on what the court has now decided.

There is not much to add to what I said in the Overview at the beginning of this judgment. I repeat that M&S is a UK resident company which earns taxable profits in its large retail trade, and that the three loss-making Continental companies were indirectly owned 100% subsidiaries of M&S. Thus a group relationship existed between M&S and them, but they did not meet the condition which ICTA required, of being resident in the UK.

A statement of facts agreed for the purposes of the original hearing before the Special Commissioners in 2002 gives some details of the accounting periods concerned in this appeal. For corporation tax the relevant accounting periods are those of M&S itself. Four periods are under appeal: the accounting years ending on 31 March in 1998, 1999, 2000 and 2001. The Continental subsidiaries also prepared their accounts to 31 March in each year, thus removing one complication which sometimes arises in group relief cases. The losses in respect of which group relief is claimed are as follows:

Year ended 31 March 1998

Year ended 31 March 1999

Year ended 31 March 2000

Year ended 31 March 2001

On the basis of M&S’s figures, in respect of M&SG it claimed group relief for losses of a total of £46,409,367 extending over four years. In respect of M&SF it claimed for losses of £47,144,554 extending over three years. In respect of M&SB it claimed for losses of £5,635,180 extending over two years. The aggregate of all the losses for which group relief has been claimed is £99,186,101. The amount at stake is not that sum, but an amount equal to tax on it. But by any standards this is a big money case.

What happened to the three subsidiaries at or after the end of the periods for which I have set out the figures differs between M&SF on the one hand and M&SG and M&SB on the other. M&SF was sold by M&S (or by an intermediate holding company within the group) to a well known French retailing group, Galeries Lafayette. M&S has been informed orally that all or most of M&SF’s losses which arose in the periods for which group relief was claimed have been used within the Galeries Lafayette group, and have resulted in reductions in French tax liabilities there. M&SG and M&SB ceased to trade ‘by 31 December 2001’: the documents before me give no more precise information. Those two companies still exist and are still owned within the M&S group. There is no evidence that any of their trading losses over the four years with which I am concerned have been utilised to reduce tax liabilities in Germany or Belgium or elsewhere. Whether they ever could have been so used, and, if so, whether they still can be so used, is a matter to which I will have to come later in this judgment.

I preface an account of the judgment by the observation that it is appropriate in this case to go directly to the judgment of the court itself, and not to analyse the opinion of the Advocate General. It is the view of both parties to this case, and of myself, that it would be unsafe to assume that the court intended to adopt the whole of the reasoning and recommendations of the Advocate General. I mention that some indication of the importance of this case is that it was heard by the Grand Chamber of the ECJ. There were thirteen members of the court, or fourteen including the Advocate General.

Before I refer in detail to the parts of the judgment on which, in my view, the outcome of M&S’s appeal depends, I make some introductory comments. There have been several earlier cases in which the ECJ has evaluated rules of a national tax system against the criteria prescribed by article 43 of the EC Treaty (the right of establishment) or against other principles laid down by Community legislation. The court has consistently approached the cases in three stages, asking three questions in sequence.

Does the national ‘measure’ (a term frequently used by the ECJ in this context) constitute a restriction upon the right of establishment (or upon whatever other principle of Community law is invoked by way of challenge to the measure)?

If it does, does the restrictive measure nevertheless pursue a legitimate objective compatible with the Treaty and justified in the public interest?

If it does, is the application of the restriction proportionate to the attainment of the objective, or does it go beyond it?

I will reproduce below the passages in the ECJ’s judgment in this case which in my view are fundamental to my decision, but it may be helpful to say that, as I read the judgment, it is the way in which the court approached and dealt with question (iii) that is critical. In outline it seems to me that the answers to the three questions can be summarised as follows.

Yes, the national measure did constitute a restriction on the right of establishment. (The ‘national measure’ in question was the rule enacted in ICTA that a company resident in the UK could not obtain group relief for losses of a company that was a member of the same group but was resident outside the UK)

Yes, the national measure did pursue a legitimate objective compatible with the Treaty and justified in the public interest.

Yes, but only up to a point: the national measure did go beyond what was necessary to attain the objective, but did so only in one respect.

I now turn to the judgment in a little more detail. Paragraphs 31 to 34 address the first of the three questions. The court concluded that the exclusion of group relief for losses of a subsidiary established in another Member State was ‘of such a kind as to hinder the exercise by that parent company of its freedom of establishment by deterring it from setting up subsidiaries in other Member States. It thus constitutes a restriction on freedom of establishment within the meaning of articles 43 EC and 48 EC.’

The court then considered question (ii), which it examined in paragraphs 35 to 52. The UK government advanced three justifications for the restriction on non-resident subsidiaries surrendering losses to UK parent companies. They were: first, that in tax matters profits and losses should be treated symmetrically in order to protect a balanced allocation between states of the power to impose taxes; second, that if the losses of the subsidiary were taken into consideration in the parent company’s Member State, they might well be taken into account twice; third, that there would otherwise be a risk of tax avoidance. The court enlarged on these justifications, and accepted them. It concluded in paragraph 51 as follows:

I now come to the court’s discussion of question (iii), which is contained in paragraphs 53 to 59. This is of central importance to the present case, and I must reproduce in full paragraphs 55, 56 and 59.

the non-resident subsidiary has exhausted the possibilities available in its state of residence of having the losses taken into account for the accounting period concerned by the claim for relief and also for previous accounting periods, if necessary by transferring those losses to a third party of by offsetting the losses against the profits made by the subsidiary in previous periods, and

there is no possibility for the foreign subsidiary’s losses to be taken into account in its state of residence 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 dispositif at the end of the judgment reproduces verbatim paragraph 59, from the words ‘as Community law now stands’.

It will have been seen from the foregoing extracts from the judgment of the ECJ that the court in general accepts that a rule restricting group relief for losses of non-resident subsidiaries is not ‘precluded’ (a word often used by the court, as I shall say in more detail later) by Community law. However, the court attaches a reservation to what it says in that respect. (Advocate General Geelhoed, in his recent opinion in a case as yet undecided by the ECJ, Test Claimants in the ACT Group Litigation, Case C-374/04, describes the reservation as a ‘caveat’.) The reservation relates to a case where the Member State subsidiary has not used its losses for tax purposes in the Member State where it is established, and can no longer do so. The general thrust of the reservation, or caveat, is that losses of that nature must be capable of being surrendered by group relief to the parent company (always assuming, of course, that there are rules, as there are in the UK, under which losses of a subsidiary established in the same member state as the parent can be surrendered by group relief to the parent).

I have to consider how the decision of the ECJ applies to M&S’s claims for group relief against the background of the following three matters.

During the years which are relevant to this case the UK legislation contained a blanket ban on group relief being claimed for the losses of a non-resident subsidiary, without any exception allowing group relief after all if the losses had not been used abroad and could not be used abroad. (I should add that after the issue of the ECJ’s judgment HM Revenue and Customs issued a Press Notice which said that legislation to that effect would be included in the Finance Act 2006, and I have no doubt that it will be. At the time of writing this judgment the matter still rests on the basis of the Press Notice and another notice that was one of the many notices issued immediately after the delivery of the 2006 Budget Speech by the Chancellor of the Exchequer.)

As respects the losses of M&SF for which M&S has claimed group relief it is certain that the conditions in paragraph 55 of the ECJ judgment were not fulfilled. It was not and is not the case that M&SF had exhausted the possibilities in France of having the losses relieved against French tax. It was not and is not the case that there was no possibility of the losses being taken into account in France for future periods. On the contrary, the information received from Galeries Lafayette shows that the losses have in fact been used in France to reduce French tax liabilities.

As respects the losses of M&SG and M&SB for which M&S has claimed group relief, the position is not clear. M&S says that the losses have not in fact been used to reduce German and Belgian tax liabilities. Given that that is what M&S says I would expect it to be factually correct, but the Revenue (understandably, perhaps) do not yet feel able formally to accept it. However, in so far as the question is whether there is or ever was a ‘possibility’ (the word used in paragraph 55 of the judgment) of the German and Belgian losses being used to reduce German and Belgian tax liabilities, the facts were not specifically found by the Special Commissioners. Nor is there at present any agreement between M&S and the Revenue on that matter.

Two different readings of the ECJ judgment are put forward. I summarise them in the following two subparagraphs. Mr Aaronson says that reading (i) is correct. Dr Plender says that reading (ii) is correct.

Legislation of a Member State which imposes a blanket prohibition on intra-Community cross border surrenders of losses without allowing an exception for such surrenders in the circumstances described in paragraph 55 of the ECJ judgment is contrary to Community law and unenforceable.

Legislation of a Member State which imposes a blanket prohibition on intra-Community cross border surrenders of losses is not contrary to Community law, but, on a case by case basis, may not be applied to any case the facts of which correspond to the circumstances described in paragraph 55 of the ECJ judgment.

It falls to me, as the judge who referred the questions to the ECJ and who has to take the case forward in the light of the ECJ’s ruling, to decide which of those two readings is correct. In the hearing which preceded the preparation of this judgment there was some discussion of the case being referred to the ECJ again with a request for the court to say which reading is correct. If both parties had favoured a second reference of that kind I might have made one. But both parties do not favour a second reference, and I believe that I must decide the question myself.

That is what I will do, but there is one other matter which I should describe first. Mr Aaronson explained M&S’s present attitude to me. M&S considers that, because in its submission reading (i) of the ECJ’s judgment is correct, it (M&S) is as a matter of law entitled to group relief for all of the losses to which the appeal relates. That includes the losses of M&SF, notwithstanding that they are not the kind of losses which the ECJ, in paragraph 55 of its judgment, said should be group-relievable despite a general rule precluding group relief for losses of non-resident subsidiaries. However, M&S now knows the view of the court as to what the treatment of such losses ought to be if Community law is properly implemented in a Member State. M&S has also learned that the French losses have been used by the Galeries Lafayette group. In those circumstances, in Mr Aaronson’s words, M&S’s heart is no longer in the pursuit of UK tax relief for the losses of M&SF. It would be content to drop its claim as respects those losses, except that it does believe that it is entitled to relief for the losses of M&SG and M&SB. If the Revenue would agree to those losses being group relieved, M&S would not pursue its claim for relief in respect of the losses of M&SF. But the Revenue are not prepared to concede relief for the losses of M&SG and M&SB, so the case goes on, and M&S maintains its contention that in law it is entitled to succeed in respect of the losses of all three Continental subsidiaries.

In this section I will set out my reasons for concluding that, on the criteria laid down by the ECJ in its judgment, M&S is not entitled to group relief for the losses of M&SF. What I say may also be relevant to the losses of M&SG and M&SB, but in the case of those two companies there are also arguments revolving around the existence or otherwise of possibilities of the losses being utilised in Germany and Belgium. I will address those arguments under the next subheading. As respects the losses of M&SF the arguments do not arise, because (as I have said earlier) it appears that the losses not merely continued to be available for use in France, but also have actually been used by Galeries Lafayette.

As regards the losses of M&SF, I accept the submissions of Dr Plender that the correct reading of the critical paragraphs of the ECJ’s judgment is the reading which I sought to describe in subparagraph (ii) in paragraph 23 above, not the reading summarised in subparagraph (i). The effect is, in my view, that the rule of UK tax law that group relief cannot be claimed in respect of the losses of a group company resident outside the UK is valid and enforceable, notwithstanding the absence of a specific statutory exception for losses which have not been used in the other Member State where the surrendering company is resident and are no longer capable of being so used. The qualification to that ruling of the ECJ (the caveat, in Advocate General Geelhoed’s expression) is that, if on the facts of an individual case it can be shown that the losses have not been and cannot be used in the other Member State, the UK rule has to be disapplied to that particular case.

I take that view for several reasons.

I believe that it is clearly the correct and intended reading of paragraphs 55 and 56 of the judgment of the court. (The paragraphs have been set out in full in paragraph 19 above.) The court, having concluded in previous paragraphs of its judgment (especially paragraph 51) that ‘the restrictive measure’ (meaning in this case the rule that restricts group relief so as not to permit surrenders by non-resident companies) did pursue legitimate objectives compatible with the Treaty, said in paragraph 55 that there were two situations in which the restrictive measure went beyond what was necessary. The next question to be addressed and answered was: what was the consequence of the restrictive measure going too far in those two respects? Was the consequence that the restrictive measure could have no application at all in any circumstances? Or was it that it was generally capable of applying, but could not be applied to the two situations which the court identified? The court moved to that question in paragraph 56, and gave its answer there.

The answer in paragraph 56 is, in my opinion, plain. It is the second of the two alternatives that I have described at the end of the previous subparagraph. Paragraph 56 begins : ‘Where in one Member State [sc. in this case the UK] the resident parent company demonstrates to the tax authorities that those conditions are fulfilled …’ That is clearly addressing the individual facts of a particular case. It refers to ‘the’ resident parent company, which can only be a reference to whichever company is the parent company in an individual case. It refers to the resident parent company ‘demonstrating’ that the conditions described in paragraph 55 are fulfilled. That too can only be a reference to it being demonstrated that the paragraph 55 conditions are fulfilled on the particular facts of the claimant parent company and its subsidiary and of the specific losses for which the parent company is claiming relief. The point is underlined when one moves back one paragraph and reads again the way in which paragraph 55 formulates the two situations in which the restrictive measure goes too far. ‘The non-resident subsidiary has exhausted the possibilities in its state of residence of having the losses taken into account … There is no possibility for the foreign subsidiary’s losses to be taken into account in its state of residence for future periods …’ Those are not generic descriptions: they are specific descriptions of what have to be the actual facts of an actual case before the consequences of the restrictive measure going too far will apply.

I first read the full text of the ECJ’s judgment several weeks before I heard the submissions which Mr Aaronson and Dr Plender have since made to me. I naturally read the judgment with the facts of M&S’s case in mind. I remembered the basic facts of the case, and I thought it likely that it would return to me to be dealt with in the light of the judgment. When I first read the judgment I wrote in pencil in the margin against paragraph 56: ‘[On a case by case basis.]’ At some time in the recent hearing, having listened to the submissions of Mr Aaronson, I placed a manuscript question mark above my marginal annotation, indicating to myself that the interpretation that paragraph 56 was to be applied on a case by case basis was questioned. However, having listened to and reflected on Mr Aaronson’s submissions, I adhere to my initial interpretation.

In my opinion the analysis of paragraphs 55 and 56 which I have set out in the foregoing subparagraphs is consistent with and supported by the summary of the result in paragraph 59 and in the identically worded dispositif. There are two sentences. The first sentence deals with whether ‘provisions’ (that is statutory rules) of a Member State which restrict the availability of group relief from a non-resident subsidiary, but not from a resident subsidiary, are ‘precluded’ by articles 43 and 48 of the EC Treaty. The court’s ruling is that they are not. The second sentence does not refer to ‘provisions’ (or to some equivalent term, like ‘measures’). It identifies two situations in which it is contrary to articles 43 and 48 to ‘prevent’ a resident parent company from claiming relief for a non-resident subsidiary’s losses although the parent company would be allowed to ‘deduct’ (that is to claim relief for) the losses of a resident subsidiary. The first sentence seems to be directed to the validity or otherwise of national provisions and to say that they are valid. The second sentence seems to be directed at what national provisions, despite being valid, cannot do.

In the foregoing subparagraph I placed two words in quotation marks, one taken from the first sentence of paragraph 59 and of the dispositif, and the other taken from the second sentence: ‘preclude’ and ‘prevent’. ‘Preclude’ is a word customarily used by the ECJ in judgments concerned with the compatibility or otherwise of national statutory provisions with Community law. It is not always used in that sense: for example, in paragraph 56 of the court’s judgment in this case it is in my view used in a different way. However, it is used in that way in paragraph 27 (which summarises the question for the court) and in the first sentence of paragraph 59 and of the dispositif. In the second sentence of paragraph 59 and of the dispositif the judgment avoids the word ‘preclude’ and uses the word ‘prevent’. In my view that is an indication that the court was addressing different concepts in the two sentences.

It is true that a major part of the ECJ’s jurisdiction is to give rulings on whether particular items of national legislation are or are not contrary to Community law (the answer almost always being expressed in terms of whether the rule of Community law concerned does or does not ‘preclude’ the national measure), but it is certainly within the court’s jurisdiction also to give rulings about whether an item of national legislation may or may not be applied in a particular way. I give examples in the next two subparagraphs.

One of the earliest cases in the line of authorities in which national provisions about the taxation of companies have been challenged as contrary to Community law was ICI plc v Colmer, Case C-264/96; [1998] STC 874. The case involved a partially successful challenge to certain UK rules which restricted the circumstances in which a form of corporation tax relief (usually referred to as consortium relief, a relief closely analogous to group relief) could be claimed. The court stated in the dispositif that article 52 of the Treaty (now article 43) did ‘preclude’ legislation of a Member State which had the characteristics which the dispositif went on to describe. But in a second paragraph of the dispositif the court ruled that Treaty did not require the Member State ‘to disapply the legislation in a situation falling outside Community law’. What that meant in practice was that, in so far as the domestic UK legislation restricted consortium relief in cases where companies established in other Member States of the Community were not involved, the ECJ judgment did not prevent the legislation from taking effect according to its terms. The concept of legislation being ‘disapplied’ was, in essence, that the legislation remained in force, but that in some cases the Member State was required not to apply it.

One of the cases to which I was referred, and which I have mentioned in paragraph 15 above, was Garage Molenheide v Belgium, Case C-286/94. It was decided by the court together with two other conjoined cases. I do not have a law reports reference, but a print of the court’s judgment has been supplied to me. The case involved a challenge to a rule of Belgian VAT law by which a taxable person’s right to recover what we would call input tax was restricted in certain circumstances. The challenge was based on an article of the Sixth VAT Directive. In the first paragraph of the dispositif the court ruled that article 18(4) of the Directive did not ‘in principle’ preclude national measures of the kind at issue, but the dispositif went on to say in two subsequent paragraphs that the principle of proportionality was applicable. The court plainly had in mind that the national measure, though ‘in principle’ not in conflict with Community law, might in some cases be applied disproportionately, and that in such a case the particular application of the provision would be contrary to law. I quote an extract from the final paragraph of the dispositif (the italics being mine):

Finally, a more general point. M&S’s interpretation of the ECJ’s ruling is as follows. Unless and until a Member State whose tax law provides for tax relief in the nature of the UK’s group relief includes in its legislation provisions permitting relief in the two situations identified in paragraph 55, any provision preventing relief from being claimed in respect of losses of non-resident subsidiaries is precluded in toto by Community law. In my view, if that was the ruling that the ECJ intended to give it would have said so and made its intention clear. It has not said so.

I have one other thing to say before I move on from the losses of M&SF. As I have mentioned earlier, the UK intends to include provisions in the Finance Act 2006 which enact into UK statute law the effect of the ECJ’s judgment. Could it be argued that that is a tacit acknowledgment that the judgment itself does not have immediate effect on cases, like this one, which have arisen before the 2006 Act? In my judgment the answer is that that could not realistically be argued. And I do not think that Mr Aaronson argued it. If the UK statute appears to say something which is shown not to be correct by a decision of the ECJ, it is plainly better to bring the statute into line with the decision of the court. Otherwise there is obvious scope for confusion.

For the foregoing reasons I conclude that, in consequence of the judgment of the ECJ, M&S is not entitled to group relief for the losses of M&SF.

It follows from what I have said in relation to the losses of M&SF that M&S can be entitled to group relief for the losses of M&SG and M&SB only if those losses come within the circumstances described by the ECJ in the two indents of paragraph 55 of the judgment. Paraphrasing them in relation to M&SG: (the first indent) M&SG must have exhausted the possibilities available to it in Germany of having the losses taken into account for the accounting periods concerned by the claim for relief and also for previous accounting periods, if necessary by transferring them to a third party or by offsetting them against the profits made by ‘the subsidiary’ (presumably M&SG itself) in previous accounting periods; further (the second indent) there must be no possibility of M&SG’s losses to be taken into account in Germany for future periods either by M&SG itself or by a third party, in particular where M&SG has been sold to the third party. Mutatis mutandis the same applies to the losses of M&SB.

In submissions to me a number of questions were canvassed as to what the ECJ had in mind by the concepts which it set out in paragraph 55. I believe that it is my responsibility to interpret the judgment of the court, but if an interpretation may give rise to a question of how it would apply to the particular facts of M&SG or M&SB, that would be a matter to be determined in the first instance by the Special Commissioners. I should add that such a question could include a question of what the law of Germany or Belgium is or was about tax relief for the losses of companies.

There are a number or points which I believe that I can appropriately and, I hope, helpfully make. The first is that, in my 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. What is the relevant time could be a question of considerable importance. I will consider it later, but first I will focus on the other elements of what I have just said: possibilities legally available, the objective facts of the company’s situation at the relevant time, and the possibilities being recognised possibilities.

I start with the assumption, which is certainly correct, that the tax laws of Germany and Belgium do contain provisions under which relief for losses can be obtained in some circumstances. That, however, is not enough to mean that M&SG and M&SB could never satisfy the conditions of paragraph 55 if the ECJ judgment. In any developed tax system there will be detailed rules regulating at least the following matters: (1) what kinds of losses qualify for some form of tax relief; (2) for what form or forms of tax relief they qualify; that is what the kinds of profits or income are which, apart from the losses, would be taxable, but against which relief for the losses can be obtained; (3) what the periods are against the profits or income of which the losses can be relieved. These can be complicated matters.

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. However, the UK rules illustrate the range of potential complications. Just for trading losses there are: (a) rules which provide for the losses to be carried forward indefinitely to be set against future trading profits of the same trade (but not against other kinds of taxable income or gains); (b) rules which permit the losses to be carried back for a limited time against past profits of the same trade (but again not against other kinds of taxable income or gains); (c) rules which permit the losses to be carried across against other income or gains of any kind (not just trading profits), but only of the same accounting period; and (d) the group relief rules which permit the losses to be surrendered to other group companies and set against the taxable income or gains (of any kind) of the surrenderee company, but only for the same accounting period.

Thus the UK rules about relief for trading losses of companies are reasonably generous, but situations can arise, and frequently do, where a UK company has made trading losses but has no possibility of obtaining any tax relief for them. In particular that will be so in the following case: the company, after making the trading losses, has ceased to trade so that it can no longer carry the losses forward and use them against future profits (even if some form of taxable income arises to it in future); further, it has made all the use which was available to it of the rights (i) to carry the losses back against past trading profits, (ii) to carry them across against other taxable income or gains of its own for the current period, and (iii) to surrender them to other companies in the same group; and there is still a balance of unrelieved losses left.

I have no knowledge of how the detailed rules of German and Belgian tax law operate in relation to these matters, but the application of the criteria in paragraph 55 of the ECJ’s judgment requires an ascertainment of what forms of loss relief are provided for in Germany and Belgium and an application of them to the particular circumstances of M&SG and M&SB. I do, however, say that in my view 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. Suppose (1) that at the relevant time (which I am going to expand on below) they were still trading; (2) that, if they returned to profit in future accounting periods, their losses would, under German and Belgian tax law, have been relievable against the future profits; but (3) that evidence is given on behalf of M&S that there was little or no real likelihood of their returning to profit in the future. In that case the criteria of paragraph 55 of the judgment would not be satisfied: the objective facts were that the company was still trading and the national tax law permitted past trading losses to be set against future trading profits. With reference to the second of the two indents in paragraph 55 it would not be the case that there was no possibility for the losses to be taken into account in Germany and Belgium for future periods: the possibility would exist, even if it was unlikely that it would ever happen.

I will give one other example to illustrate the same point. Suppose that: (1) one of the companies, say M&SG, had already ceased to trade at the relevant time; (2) German tax law, unlike UK tax law, contained provisions under which M&SG’s unrelieved trading losses from its discontinued trade could be carried forward and used against future income or gains from sources other than the trade (like interest on loans); but (3) the evidence is that the M&S group in general, and M&SG in particular, had no intention that the company should ever be in receipt of other income or gains in the future. In that situation also the criteria of article 55 would not be satisfied.

Here I give an example which, if it corresponds to the facts of either M&SG’s or M&SB’s losses, would lead to the opposite conclusion. Suppose that the principles of German or Belgian tax law were in all essential respects the same as those of UK law which I illustrated in paragraph 36 above, and that the facts of M&SG or M&SB corresponded to those in that illustration. That is, suppose that at the relevant time either company had ceased to trade, that the German or Belgian law did not permit any carry forward of unrelieved losses of a discontinued trade, that all possibilities for which the German or Belgian law provided of carrying the losses back or setting them against other current income had been used, and that there was still a balance of unused losses. Those losses would in my judgment comply with the paragraph 55 conditions, and M&S would in principle be entitled to group relief in respect of them.

I have one other point to make before I move on to consider what is the relevant time for applying the tests which I have sought to describe. Part of what I said in paragraph 33 was that, in my view, ‘possibilities available’ meant recognised possibilities. I 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. 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?

However, a principle which 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. In my view the burden cast on M&S does require it to ‘demonstrate’ (the word used in paragraph 56 of the ECJ judgment) 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 does not require M&S to demonstrate more than that. In particular I do not think that M&S should be at risk of losing the case by reason of an argument that there might be some other possible way of getting relief for the losses which, despite making reasonable enquiries of German and Belgian tax specialists, it has not thought of and therefore has not eliminated.

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? The ECJ does not deal with this. It would be excessive to refer the case back to the ECJ with a request that it should give a specific answer to the question. I believe that I should form and state my own conclusion upon it.

It seems to me that there are three possibilities: (1) the end of the accounting period of loss for M&SG and M&SB, and thus also the end of the accounting period of M&S as respects which M&S has claimed group relief for the losses; (2) the time or times when M&S made the claim or claims for group relief; (3) the time when an appeal on the question is decided by the Special Commissioners.

In my opinion the relevant time should be (2): the time or times when M&S made the claim or claims for group relief. Time (1) is too soon, and would be likely to rule out virtually every case. At the end of an accounting period in which M&SG or M&SB made a loss and therefore was likely still to be carrying on its trade it is hard to imagine any case in which German or Belgian law would not provide for some possibility of relief for the losses.

Time (3) does have the linguistic support that in paragraph 56 of the ECJ judgment the word ‘demonstrates’ is in the present tense, but I do not think that the ECJ meant to say that the paragraph 56 tests fell to be determined only by reference to the circumstances which existed when a case came to appeal, however remote that time was from the underlying events which gave rise to the issue. If that was the position it would mean that a company could claim group relief at a time when relief was not available, but then spin out time before the matter came to appeal in the hope that by then the facts would have changed and the appeal would succeed.

In contrast, time (2) in my view provides a rational basis for applying paragraph 55. If a company claims group relief at a time when the paragraph 55 criteria are satisfied it should get the relief. If it applies for it at a time when the criteria are not satisfied it should not.

I move on now to consider how the case can be taken forward as regards M&S’s claim for group relief in respect of the losses of M&SG and M&SB. I make the following observations.

I will formally order that the matter be remitted to the Special Commissioners to hear further evidence and submissions and to determine the appeals in the light of them and of the judgments of the ECJ and myself.

However, I recognise that either or both of the parties may not accept all or some of the things that I have said. In that case they will no doubt consider whether to apply to the Court of Appeal for permission to appeal. If permission is to be applied for some form of directions may have to be given in relation to my order remitting the matter to the Commissioners. That will in particular be the case if permission to appeal is granted in relation to the losses of M&SF but not in relation to the losses of M&SG and M&SB.

Just in relation to the losses of M&SG and M&SB the parties may or may not be prepared to accept the principles which I have attempted to explain in this part of my judgment. If they are I imagine that in practice they would attempt to agree how the principles applied to the facts, so that, if they reach agreement, a contested hearing before the Special Commissioners would not be required.

If, however, a contested hearing before the Special Commissioners is going to be needed (for example because the parties cannot agree whether all possibility of using the losses of M&SG or M&SB had ceased to exist by the relevant time), I consider that each party should be entitled to adduce new evidence on the remitted hearing. At the original Commissioners’ hearing in 2002 there was some evidence about German and Belgian tax law presented on behalf of the Revenue (and some similar evidence about certain other tax jurisdictions as well, including France). It was an agreed fact that both M&SG and M&SB had ceased trading by 31 December 2001. The agreed statement of facts also contained this sentence:

M&S will undoubtedly want to adduce further evidence if there is to be a further hearing before the Special Commissioners. A witness statement of the present Head of Taxation at M&S was before me on the recent hearing. But I am sure that M&S would wish to reformulate its evidence in the light of the various points which I have made, and in my view it should be entitled to do so. Among other things, as regards losses of M&SG and M&SB there were four relevant claims made for group relief on three dates, as follows: on 31 March 2000 in respect of losses of M&SG for the accounting period to 31 March 1998; on 30 March 2001 in respect of losses of M&SG for the accounting period to 31 March 1999; on 24 September 2001 in respect of losses both of M&SG and M&SB for the accounting period to 31 March 2000; and on the same date (24 September 2001) in respect of losses of the same two companies (M&SG and M&SB) for the accounting period to 31 March 2001. If I am right that the relevant time was when a claim for group relief was made, the status on those three dates (31 March 2000, 30 March 2001, and 24 September 2001) of the German and Belgian losses under German and Belgian tax law could be critical on a future hearing.

In that connection, although I have said that in my view the relevant time for each claim for group relief is the time when the claim was made, I would suggest that M&S (and the Revenue if they so choose) should include evidence about what they believe the German and Belgian tax positions would have been if the relevant time is either of the other two possibilities which I identified in paragraph 43 above (the end of the accounting period concerned, and the date of any hearing on the point before the Special Commissioners). I also suggest that the parties should ask the Commissioners to make findings about whether the paragraph 55 conditions of the ECJ judgment would have been satisfied on the basis of those other dates being the relevant dates. For them to do that could be helpful if my decision on what the relevant date is is altered on appeal.

I have nothing further to add. I hope that this judgment will be helpful to the parties in moving this exceptionally substantial and important case towards a final resolution.