United Kingdom - Group relief between UK-resident companies with non-resident parent company 

Read the decision: HMRC v FCE Bank PLC

Background

Under the tax rules in force in 1994, the taxpayer was not entitled to relief for losses incurred by another UK-resident subsidiary because the two companies had no common parent resident in the UK (the parent company was a U.S.-resident company). The taxpayer claimed that this represented discrimination against the two UK companies because of their ownership by a US resident. Such discrimination is prohibited by the double taxation agreement between the UK and the United States. Both the First-tier Tribunal and the Upper Tribunal accepted this argument.

Court of Appeal decision

On appeal to the Court of Appeal, HM Revenue & Customs (HMRC) accepted that there was discrimination but argued that this was not because of the parent company's residence but because the parent company was not subject to UK corporation tax. The Court agreed with the decisions of both Tribunals in rejecting this argument, holding that the question of the parent company's liability to UK tax was not material to the rules for surrendering losses between UK-resident companies. The taxpayer was therefore entitled to relief for the losses surrendered by the other UK-resident subsidiary.

Implications

The group relief rules have been changed with effect from 1 April 2000 to allow claims and surrenders between UK-resident members of a group even when the group relationship is traced through a non-resident parent company. As a result, only claims for earlier periods will be directly affected by this decision.

The Court of Appeal's decision will, however, be helpful to companies in non-EU parented groups seeking relief in the UK for losses incurred by EU-resident members of their group. Relief for such losses can now be obtained in certain situations following a decision of the European Court of Justice in the case of Marks & Spencer Plc in 2005, but that decision does not apply where there is no common EU-resident parent company. Some companies have sought to overcome this by relying on the Marks & Spencer decision in conjunction with the non-discrimination article of a double taxation agreement, but HMRC have resisted this. This new decision should strengthen the case for such claims to be allowed.

Read an October 2012 report [PDF 127 KB] prepared by the KPMG member firm in the UK: Weekly Tax Matters (October 19)

Other topics discussed in the KPMG report include:

• Update to KPMG Guide to CCCTB
• The tax deductions "scheme" (regime) for interest
• VAT package changes - amendments to implementing regulations