zoe_conacher_phIn May the Supreme Court handed down its decision in the long running case of HMRC v Marks & Spencer.  The Court was asked to consider when in cross-border group relief claims the “no possibilities” test (that there must be no possibility of using the losses in the surrendering company’s territory before surrendering them as UK group relief) applies.  After considering the facts, and particularly in light of the ECJ case of A Oy (Case C-123/11), the Court decided in Marks & Spencer’s favour.  It concluded the appropriate time to apply the test was when the claim for relief was made and not at the end of the accounting period in which the relevant losses crystallised.


In the 1970s Marks & Spencer expanded its business through a number of foreign subsidiaries, including in Germany and Belgium.  By the early 2000s the German and Belgian subsidiaries were making substantial trading losses and were eventually dissolved.

Marks & Spencer first attempted to set-off these trading losses against its own profits under UK group relief rules in 2000.  HMRC claimed that this relief was not available under UK legislation, which restricted group relief claims to losses of UK resident companies and losses of UK branches of non-resident companies.  Meanwhile Marks & Spencer argued this was an infringement of their right to freedom of establishment under Article 43 EC.  However, the Special Commissioners decided in HMRC’s favour that there was no breach of that article.

Marks & Spencer appealed the decision to the High Court.   Park J on appeal decided to refer the case to the ECJ.  On 13 December 2005 the ECJ ruled that UK legislation was compatible with Article 43, except where the “no possibilities” test applied (Case C-446/03 Marks & Spencer plc v David Halsey (her Majesty’s Inspector of Taxes)).

In that judgment the “no possibilities” test was met where:

“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 or 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.”

Park J then gave effect to this ruling in the UK court.  He held that the “no possibilities” test required an analysis of the recognised possibilities legally available given the objective facts of the company’s situation at the relevant time, and that test was to be applied at the date the claim for group relief was made.

This was not the end of the matter and the case was considered, across various hearings, by the Upper and Lower Tax Tribunals, High Court and Court of Appeal, before eventually being appealed to the Supreme Court.  Five issues were identified as forming part of that appeal, the first to be heard (and the only issue decided by this judgment) was the relevant time at which to apply the “no possibilities” test.


Lord Hope gave the leading judgment and, agreeing with Park J, held the “no possibilities” test should be applied at the time the claim for group relief is made.

In reaching this decision the Court was mindful of the recent ECJ decision, in February 2013, in A Oy.  In that case, which concerned the tax affairs of a Finnish company, the ECJ made clear that the claimant company was not necessarily restricted to the extent that only matters known at the end of the accounting period could be taken into account.  Further this approach did not undermine the principle of EU law protecting the balanced allocation of taxing rights between its member states.  If the “no possibilities” test is applied properly it would ensure that there was no double use of the claim for relief.

The Court decided the exercise to be carried out was essentially a factual one and the claimant company ought to be given an opportunity to deal with it in as realistic manner as possible.  If the approach averred by HMRC was right, that the time for the “no possibilities” test was at the end of the accounting period during which the losses arose, then there was no realistic chance of any claimant being able to obtain group relief in cross-border situations.  It would be very difficult at the end of an accounting period to entirely exclude the possibility that losses might be used in the member state of the surrendering company at some point in future, unless it was precluded by local law.  Instead the Court took the more practical view that the appropriate time to apply the test was when the claim for relief was made.


The long running saga of HMRC v Marks & Spencer continues, with most of the issues between the parties still to be heard by the Supreme Court.  However for the time being this decision does have an impact for taxpaying corporations and their advisers.

The decision will have a significant impact for companies looking to obtain cross-border tax relief.  For the first time they will have some certainty as to the circumstances in which relief can be sought.  Indeed the situations in which group relief may be claimed against loss making foreign subsidiaries seem to have been relaxed by the Court’s decision to apply the “no possibilities” test at the date of the claim for relief.  At a time when the moral obligations of multinationals to pay their ‘fair share’ of tax is so topical it will be interesting to see how corporations take advantage of this decision.