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Case Report: R & C Commrs v FCE Bank plc [2012] EWCA Civ 1290

Court of Appeal (Civil Division).

Judgment delivered 17 October 2012.

Corporation tax – group relief – double taxation treaties – non-discrimination provision – group relief not available under applicable UK legislation in respect of UK subsidiaries owned by US parent because parent required to be UK-resident - whether taxpayer entitled to claim group relief by virtue of non-discrimination provisions of 1975 UK-US double taxation convention – Double Taxation Relief (Taxes on Income) (The United States of America) Order 1980 (SI 1980/568), art. 24(5) – Income and Corporation Taxes Act 1988, s. 402, 413(5), 788(3).


Corporation tax – group relief - double tax treaties – non-discrimination – claim for group relief by UK subsidiaries of US parent – relief not available under UK legislation because parent required to be UK-resident – UK legislation overridden by non-discrimination article in 1975 UK-US double taxation convention – HMRC’s appeal dismissed - Double Taxation Relief (Taxes on Income) (The United States of America) Order 1980 (SI 1980/568), art. 24(5) - Income and Corporation Taxes Act 1988, s. 402, 413(5), 788(3).

The Court of Appeal upheld a decision of the Upper Tribunal ([2011] BTC 1,885; [2011] UKUT 420 (TCC)) that the effect of the non-discrimination article in the 1975 UK–US Double Taxation Convention was to prevent refusal of a claim for group relief as between two UK resident subsidiaries of a US parent company for the years from 1994 to 2000.


The taxpayer was a UK-resident company and subsidiary of a US parent (FMC). Another UK subsidiary of FMC had trading losses available for surrender and the taxpayer made a claim for group relief for the 1994 period. It made similar claims in the five subsequent periods. HMRC denied the claim for group relief on the basis that FMC was not a UK resident, as required by ICTA 1988, s. 413(5). The taxpayer's appeal in respect of the 1994 period was the lead case in respect of a number of similar claims involving the Ford corporate group concerning the availability of claims for group relief under ICTA 1988, s. 402 before the law was changed in 2000. After 2000 group relief became available between two UK-resident 75 per cent subsidiaries of a non UK-resident parent.

The First-tier Tribunal allowed the taxpayer’s appeal on the basis that the difference in treatment was because the direct holding company was US rather than UK resident. No other ground for the difference in treatment could be shown. That was therefore contrary to the non-discrimination provision in art. 24(5) of the UK-US double taxation treaty scheduled to the Double Taxation Relief (Taxes on Income) (The United States of America) Order 1980. The effect of the Income and Corporation Taxes Act 1988, s. 788(3) was to override the provisions of s. 413(5) to the extent necessary to allow the taxpayer's claim for group relief to succeed ([2010] UKFTT 136 (TC); [2010] TC 00445).

HMRC appealed arguing that the US residence of FMC was not the sole reason for the refusal of the claims for group relief, relying on Boake Allen Ltd v R & C Commrs [2007] UKHL 25; [2007] BTC 414, and that the real reason for discrimination was that the taxpayer and its fellow subsidiary did not have a common corporate shareholder resident in the UK. The Upper Tribunal dismissed HMRC’s appeal ([2011] BTC 1,885; [2011] UKUT 420 (TCC)). HMRC appealed to the Court of Appeal.


Whether the effect of the non-discrimination article in the 1975 double taxation agreement was to prevent refusal of the claim for group relief.


The Court of Appeal (Pill, Rimer and Black L JJ) dismissed HMRC’s appeal.

Boake Allen concerned advance corporation tax and the ability to make a group income election and was obviously distinguishable on its facts. A s. 247 election of the type there denied to the subsidiaries was one that could not be made by the dividend-paying subsidiary alone. Section 247(1) showed that a valid election required the joint participation of the paying subsidiary and the receiving parent. It was also obvious that such a joint election could only be made by two companies that were liable to corporation tax. Thus the point in Boake Allen was that, although the dividend-paying subsidiaries suffered discrimination as compared with the position of a dividend-paying subsidiary in the relevant comparator group, the denial of the right of election to the former subsidiaries was not because their capital was owned by a company resident elsewhere than in the UK but because s. 247 could have no application to a case in which the parent company receiving the dividend was not a company resident in the UK and so liable to ACT and able to join in the making of a valid election.

Boake Allen showed the need to focus on the ground for the discrimination. Beyond that, the case was of little direct assistance to the determination of the present appeal. The domestic provisions required all the companies in the putative ‘group’ to be UK-resident, including the parent company (without which there could be no group), and so the corporate structure of which the taxpayer was part was materially different. If the present case had involved the purported surrender of losses from FMC to the taxpayer, it was unlikely that the discriminatory refusal of group relief could be met with reliance on article 24(5). In such a case, Boake Allen would be directly in point and it would be said against the taxpayer that it was not suffering any discrimination on the ground that FMC was resident in the US but on the ground that such a surrender could only be made as between two group companies both resident in the UK and so both liable to corporation tax.

That, however, was not the present case. The parent company was not in any sense a relevant player as regards the surrender of losses that in fact took place, which was exclusively between the taxpayer and another subsidiary. The claim had no effect at all on the tax position of the US parent, and the only relevance of the parent company was to establish, or not, the necessary group relationship between the two UK companies which surrendered and accepted the trading losses. It was conceptually irrelevant whether the US common parent was within the charge to UK corporation tax or not, in relation to the question of whether two UK tax resident companies were sufficiently connected to each other so as to form a group which permitted the surrender of losses from one to another.

It was common ground between the parties that the denial to the taxpayer of its claimed relief was discriminatory as compared with the treatment that the taxpayer would have enjoyed if FMC had been a UK-resident company. The ground of such discrimination was because FMC was US-resident rather than UK-resident. The purpose and effect of art. 24(5) were to outlaw the admittedly discriminatory tax treatment to which, but for the convention, the taxpayer would be subject as the directly held subsidiary of a US-resident company as compared with the more favourable tax treatment to which it would be entitled if it were the directly held subsidiary of a UK-resident company. That showed that the only reason for the difference in treatment in the present case was the fact of FMC’s US residence. Accordingly, HMRC’s appeal would be dismissed.

Published 18 October 2012


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