EU Commission challenges the UK's implementation of Marks & Spencer

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13 October 2008

When the ECJ decided the case of Marks & Spencer Plc v David Halsey it found that the UK group relief rules where mostly consistent with European law. However it found that the rules were too restrictive in that they prevented the surrender of losses from an overseas subsidiary to a UK parent company even in circumstances where there was no possibility of relief in the overseas jurisdiction.

Following Marks & Spencer legislation was introduced in the UK purporting to implement the ECJ's judgement in Marks & Spencer.  This took effect from 1 April 2006. At the time, the legislation was widely criticised within the tax profession on the basis that the conditions to be met in order for losses to be surrendered from an overseas subsidiary make it, in practice, all but impossible for tax paying companies to benefit from group relief in these circumstances.

It would seem the European Commission agree with the tax profession. On 18 September 2008 the European Commission announced that it had written to the UK requesting that the UK properly implement the Marks & Spencer decision. The European Commission consider that the legislation is in breach of a fundamental freedom, the freedom of establishment.  As yet the ECJ has not heard any reference in respect of this legislation. It may not need to do so. If the European Commission does not receive a satisfactory response it is highly probable that it will commence enforcement action against the UK.     

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