Corporation tax – Costs – Group relief
Revenue & Customs Commissioners v Marks & Spencer Plc: ChD (Mr Justice Warren): 27 August 2010
The court was required to determine outstanding costs issues in relation to proceedings in the High Court, the Court of Appeal and the European Court of Justice in certain tax appeals.
The respondent company (M) had made group relief claims for the losses of trading subsidiaries in Germany, Belgium and France. The appellant commissioners refused the claims. M appealed in respect of some of the claims and others were the subject of a joint referral to the special commissioners. They concluded that the claims were rightly refused.
M appealed and questions were referred to the ECJ. The ECJ gave a preliminary ruling that it was contrary to the freedom of establishment to preclude the possibility for a parent company to deduct the losses incurred by non-resident subsidiaries from its taxable profits, if the parent company showed that those losses were not and could not be taken into account in the state of residence of those subsidiaries.
The case returned to the High Court and Court of Appeal. M accepted that group relief was rightly refused in respect of the losses of the French subsidiary. The appeals and referrals were then remitted back to the First-tier Tribunal. By that stage, further group relief claims had been made. The tribunal held that the later claims were valid since by that time the no possibilities test was satisfied. M submitted that the costs of the High Court and ECJ proceedings should follow the event and that the event was M’s success in obtaining group relief.
Held: (1) The correct approach in principle was to consider the appropriate costs order by reference to success on the appeals which were originally before the special commissioners and which formed the subject matter of the appeal to the High Court, the reference to the ECJ, the resumed High Court hearing and the subsequent appeal to the Court of Appeal. In applying that approach, the general rule was that the successful party got his costs (rule 44.3(2)(a) of the Civil Procedure Rules) but that rule could be displaced (rule 44.3(2)(b) of the CPR). And in deciding what order to make, the court had to have regard to all the circumstances, including whether a party had succeeded on part of his case, even if he had not been wholly successful (rule 44.3(4)(b) of the CPR). Accordingly, it did not necessarily follow from the fact that the commissioners had succeeded on all the appeals and referrals originally before the special commissioners, High Court and the Court of Appeal, that they were entitled to an order for payment of all of their costs.
(2) In the present case, the commissioners had been wholly successful in relation to the appeals and referrals which were originally before the special commissioners and to which the costs in the High Court and the costs of the reference to the ECJ were attributable. But they had not been wholly successful in relation to all of the issues which the appeals and referrals raised; nor had M been wholly successful. In particular, neither party was wholly successful on the questions which were raised by the reference. The commissioners succeeded in establishing the general principle that the group relief provisions in domestic law pursued a legitimate objective; but M succeeded in showing that the measures implemented in pursuing that objective went beyond what was necessary and that it was not permissible to exclude relief when certain conditions were fulfilled as reflected in the no possibilities test.
(3) The proceedings on the reference should not be treated as a wholly distinct matter. The fact that the commissioners had not been wholly successful on the reference did not mean that they should recover less than their full costs. The court had had to refer the questions to the ECJ to be able to deal with the appeals before it. Both parties took positions that were not fully vindicated but the commissioners were successful in the context of the actual appeals and referrals under consideration. As a result of the decision of the ECJ, M’s claims in respect of losses of the French subsidiary were finally rejected and the earlier claims for the pay and file years failed. In the circumstances, there was nothing which justified departure from the ordinary rule. Accordingly, M should pay the commissioners’ costs of the High Court proceedings and of the reference to the ECJ to be assessed on the standard basis if not agreed.
(4) As a matter of principle, the commissioners were entitled to recover such of their costs of the appeal to the Court of Appeal as were attributable exclusively to the costs of the appeals in respect of the French losses.
(5) Part 36 offers made by M did not affect the result. The offers involved the commissioners making a substantial repayment of tax. It could not be said that the outcome of the appeal process was ‘at least as advantageous’ as the offer within rule 36.14(1)(b) of the CPR where M had been wholly unsuccessful in relation to the claims actually subject to the appeals.
David Ewart QC, Sarah Ford (instructed by the in-house solicitor) for the appellant; Nicola Shaw, Paul Farmer (instructed by Dorsey & Whitney (Europe) LLP) for the respondent.