UK and International Tax news

FCE Bank And Group Relief Update

Wednesday 31st October 2012

The Court of Appeal [CA] has recently given its decision in the appeal by HMRC against the previous ruling of the Upper Tribunal [UT] which had found in favour of the taxpayer in respect of its entitlement to group relief and its reliance on a provision in the double tax convention [DTC] between the UK and US.

In its decision released on 1 April 2010, the FTT had allowed an appeal by FCE Bank PLC (‘FCE’) against the refusal by the Commissioners for HMRC of its claim for group relief for its accounting period ended 31 December 1994.  HMRC appealed against that decision to the UT but, by a decision released on 13 October 2011, the UT dismissed the appeal.  

In giving its reasons for permitting a second appeal however, the UT noted that the interpretation and application of the relevant legislation raised points of general interest and importance, that an appeal had a real prospect of success and that there were therefore compelling reasons for the CA to hear it. The result of the appeal will have an impact on other appeals by FCE and other companies within the Ford group.

The legal issue was whether FCE was entitled to claim group relief in reliance on a provision in a DTC between the UK and the US which the FTT and UT had held that it was. 

FCE was a company resident in the UK as was Ford Motor Company Limited (‘FMCL’).  Both companies were owned and controlled by Ford Motor Company (‘FMC’), a company resident in the US.  FMCL had made trading losses during the relevant accounting period and claimed to surrender a proportion of them to FCE.  FCE claimed group relief which, if its claim was good, would generate a tax repayment.

HMRC refused the claim as, under existing legislation, the status of FMC as a non-UK resident company prevented it and the two subsidiaries (FCE and FMCL) from constituting a relevant ‘group’ and only a ‘group’ company was entitled to group relief.  Subject to the effect of the applicable DTC, FCE accepted that HMRC’s reading of the legislation [s.402 TA88] was correct, prior to changes brought in by FA2000.

In the CA decision, Rimer LJ referred in particular to para 19 of the UT’s judgment: ‘..that the claim had no effect at all on the tax position of the US parent, and the only relevance of the parent company was to establish (or not, as the case may be) the necessary group relationship between the two UK companies which surrendered and accepted the trading losses. It is conceptually quite irrelevant whether the US common parent is within the charge to UK corporation tax or not, in relation to the question of whether two UK tax resident companies are sufficiently connected to each other so as to form a group which permits the surrender of losses from one to another.’

The common ground between the parties was agreed that the denial to FCE of its claimed relief was discriminatory as compared with the treatment that FCE would have enjoyed if FMC had been a UK-resident company.  Given this, it was necessary to identify the ground of such discrimination.  The rival submissions were that it was because FMC was US resident rather than UK resident [as proposed by the taxpayer] and for HMRC, that it was because FMC was not a company liable to UK corporation tax.

Rimer LJ stated that in his view, the taxpayer’s submission was to be preferred. The purpose and effect of article 24(5) of the DTC were to outlaw the admittedly discriminatory tax treatment to which (but for the convention) FCE would be subject as the directly held subsidiary of a US resident company as compared with the more favourable tax treatment to which it would be entitled if it were the directly held subsidiary of a UK resident company. The only reason for the difference in treatment was the fact of FMC’s US residence and, by upholding the judgment of the UT, all three judges dismissed HMRC’s appeal.

As referred above, the group relief rules were changed in 2000 to allow group relief between UK resident companies of a group even where the parent company was non UK resident. Whilst the decision in the Marks & Spencer case may only be of assistance where there is a common EU resident parent company, with EU resident subsidiaries, reliance on a non discrimination article of a DTC may be considered where there is no EU parent company.

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