FCE Bank case – Court of Appeal holds UK’s former group relief rules in breach of treaty non-discrimination article

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On 17th October 2012, the Court of Appeal dismissed HMRC’s appeal in CRC v FCE Bank Plc. (a) Facts and legal background HMRC had appealed against a decision from the Upper Tribunal that the UK’s pre-2000 group relief rules breached the non-discrimination article in the United Kingdom – United States DTAA (1975). The Upper Tribunal’s decision itself upheld that of the First Tier Tribunal. The domestic tax rules at issue provided for the surrender of losses between two companies in a 75% group. As respects the subsidiaries, the rules provided that either (a) one company should be a 75% subsidiary of the other, or (b) that both companies should be 75% subsidiaries of a third company. The rules however provided that, where both the claimant and the surrendering company were 75% subsidiaries of a third company, that third company had to be resident in the United Kingdom. Two UK subsidiaries (FCE Bank Plc and Ford Motor Company Ltd.) wished to avail of the group relief provisions. Their parent company Ford Motor Company was resident in the United States of America. HMRC had refused the claim for group relief. FCE Bank argued that the denial of group relief was based on the fact that their parent company was not UK-resident, and contended that the provision was in breach of the non-discrimination article of the 1975 United Kingdom – United States double taxation treaty. (b) Decision The Court of Appeal accepted the taxpayer’s argument. The Court did not accept HMRC’s argument that the discrimination was not as a result of the place of residence of the parent company, but rather, was because the parent company was not subject to UK corporation tax. According to the Court, the parent company’s liability to UK corporation tax was immaterial for the purposes of the group relief provisions at issue. HMRC’s appeal was dismissed.