Freedom of Establishment infringement was justified but disproportionate

In HMRC v Volkerrail Plant Ltd & Ors [2022] UKUT 00078, the Upper Tribunal (UT) found that whilst the restriction to the group relief provisions, as previously set out in s.403D ICTA 1988, did infringe upon the EU Freedom of Establishment, the restriction was justified as a matter of public interest.

• Prior to the Corporation Tax Act 2010 (CTA 10), the corporate group relief provisions were enacted in s.402 - s.413 Income and Corporation Taxes Act 1988 (ICTA 88).
• Group relief was available to UK companies wishing to offset losses against the profits of other UK companies. This applied equally to UK Permanent establishments (PEs) of non-UK resident companies.
• s.403D restricted the availability of group relief for UK PE losses where those losses were 'deductible from' or 'available against' non-UK profits.
• The UK resident companies of the Volkerrail Group claimed consortium relief for the years ending 31 December 2007, 2008 and 2009 against losses by the UK PE of one of the Dutch group companies. HMRC denied the claims on the basis that these profits were available to be offset against non-UK profits. Some but not all of the PEs losses had been offset against Dutch profits for Dutch corporate tax purposes.
• The UK companies Appealed to the FTT that the operation of s.403D infringed upon the EU Freedom of Establishment and the FTT upheld the appeal.
• The Freedom of Establishment requires Member States to treat all persons operating in that State the same, regardless of how that person was established in that State.
• The UT examined prevailing EU case law and agreed with the decision in Case C-28/17 NN A/S v Skatteministeriet (NN), EU:C:2018:526 where Danish loss relief restrictions did infringe the Freedom of Establishment unless it could be proven that they were justified as being in the public interest and proportionate in the restriction imposed.

The UT held that the UK restriction was based on a policy of preventing a double deduction of losses (if offset both in the UK and in another country). Such a policy was justifiable but a total restriction regardless of whether the profits were actually offset elsewhere or not was not proportionate. The UT agreed with HMRC's recommendation that instead of disregarding the section, it be read with amended wording that imposed a restriction only where such losses had been 'deducted' or 'allowed against' non-UK profits.

Useful guides on this topic

Losses: Trading and other losses
When can a company offset its losses? What restrictions are there? How are loss claims made? 

Companies: Permanent establishment and residence
What are the rules for determining a company's country of residence? What is central management and control? When does a company create a permanent establishment in another country?

Groups
What qualifies as a group for tax? How do you form a group? Which definition of a group applies for different types of tax? How does group relief work?

External links

HMRC v Volkerrail Plant Ltd & Ors [2022] UKUT 00078 

Volkerrail Plant Ltd and others v HMRC [2020]  TC00476