In Volkerrail Plant Limited & Ors v HMRC [2023] EWCA Civ 210, the Court of Appeal (CoA) held that the group relief rules were justified in restricting the Freedom of Establishment and the way that it was achieved was, in contrast to the Upper Tribunal's (UT) view, proportionate.

  • The UK resident companies of the Volkerrail Group (Volkerrail) claimed Consortium Relief for the years ending 31 December 2007, 2008 and 2009 against losses suffered by the UK Permanent Establishment (PE) of one of the Dutch group companies. Losses incurred by the UK PE amounted to about £38 million from 2007 to 2009.
  • 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 legislation sought to prevent the double deduction of losses (where profits were taxable in two territories) by restricting group relief for UK losses where these were 'deductible from or otherwise allowable against non-UK profits'.
  • Volkerrail appealed to the FTT on the basis that this was a breach of the EU principle of Freedom of Establishment and won but lost when HMRC appealed to the UT.
  • The UT held that :
    • s.403D(1)(c) Income and Taxes Act 1988 (ICTA) did treat non-UK resident companies operating through a PE differently to those operating through a UK subsidiary and that the two were objectively comparable. This was a restriction of the EU Freedom of Establishment.
      • HMRC appealed the fact that the two were objectively comparable.
    • The infringement was justified.
      • Volkerrail appealed against this.
    • The way in which the provision was set out was not wholly proportionate to the aim of preventing a double deduction and so some, but not all, of the UK PE's losses were to be available for group relief.
      • Volkerrail appealed this decision on the basis that it was completely disproportionate and all losses not utilised twice, including if only temporarily utilised, should be available for UK offset.
      • HMRC appealed on the basis that the section was not disproportionate at all.
    • Although the section was not proportionate, it did not need to be disregarded but instead should be read with a conforming interpretation. The section should be read as 'deducted from or otherwise allowed against'.
      • Both parties appealed the conforming interpretation.

The CoA found that:

  • There was a restriction to the Freedom of Establishment.
  • EU case law, including the M&S case, has established that a Member State 'must be able to prevent' the double deduction of losses. This justified restricting EU freedoms.
  • The UK's approach to preventing a double deduction may have been inconsistent and/or unsystematic, in that it differentiated between PEs and subsidiaries, but this did not mean it was not justified.
  • Within the UK, the PE was still able to utilise other loss reliefs and even group relief, where no possibility of use in another territory existed.
  • Member States were able to apply a margin of discretion in choosing the best method to achieve its aims. Only 'manifestly inappropriate' methods were to be challenged. The UK's choice of applying the section fell within that margin.
  • Volkerrail's far more lenient preference of making all profits available unless no there was no possibility of the loss relief being clawed back fell far short of achieving the aim at all.
  • As a result, the section was proportionate and there was no need for a conforming interpretation.

All of Volkerrail's appeals were dismissed, with no group relief available as HMRC's appeal that the section was proportionate, was upheld.

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?

What qualifies as a group for tax? How do you form a group? Which definition of a group applies for different types of tax? What are the benefits of being in a group?

External links

Volkerrail Plant Limited & Ors v HMRC [2023] EWCA Civ 210

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

Volkerrail Plant Ltd and others v HMRC [2020]  TC00476 


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