The Philips v HMRC case has now been heard, what does this mean for your group losses?

Tax First-tier Tribunal victory for Grant Thornton client

What are the details of the case?
In 2001 - 2004 the UK branch of LG Philips Displays Netherlands (hereafter referred to as the UK branch) incurred losses, and Philips Electronics UK Limited (hereafter referred to as Philips UK) made profits. Philips UK made various consortium relief claims in order to offset its share (50%) of the UK branch losses against its profits. Philips UK was advised by Grant Thornton UK LLP.

A simplified group structure is shown below:

As defined in the legislation a 'link company' is the company which connects the consortium to the group.

What was HMRC's position?
HMRC denied the claims for consortium relief for two reasons:

• the link company, connecting Philips UK to the UK branch, was an EU resident company with no UK establishment, and therefore was not within the charge to UK corporation tax. The requirements of the legislation relating to claims for the loss were therefore not met; and
• under Netherlands tax law some of the losses of the UK branch may have been offset or could potentially be used in the future against the profits in the Netherlands.

Before the Tax Tribunal, Philips UK argued that the legislation referred to above is contrary to EU law, specifically the freedom of establishment enshrined the EC Treaty.

What did the Tax First-tier Tribunal judgment conclude?
The Tribunal concluded that both of the above requirements are contrary to EU law such that Philips UK should be entitled to offset the UK branch losses against its profits.

What does this mean for other group companies?
Groups with EU/EEA link companiesIf your group companies have previously been unable to make consortium relief claims, due to the link companies in the group being resident in other EU/EEA Member States, they should urgently consider filing claims now. This should be straight forward where time limits are open and in other cases, specific advice should be sought.

Groups with losses in UK branches of EU/EEA companies
Similarly if your group has loss making UK branches of EU/EEA companies who have previously been unable to claim group relief, and which meet the shareholding requirements for group or consortium relief, claims should be filed as above. The Tribunal noted that it did not matter what the loss relief rules in the other Member State are.

Roopa Aitken, Tax Partner, at Grant Thornton says: "This is a historic decision since it is the first time that the UK Courts have decided on a direct tax dispute on European grounds without a reference to the European Courts. It is also a common sense decision which ensures that relief for UK losses against UK profits can be obtained. Given the amounts at stake, an appeal by HMRC seems likely. In the meantime however there is an opportunity for other UK taxpayers to obtain similar relief."

Contact us if you would like further advice on any of the above