Cross-border group relief appeal dismissed

Background to the First-tier Tribunal case

Lloyds Asset Leasing Limited (LAL), a subsidiary of Lloyds Banking Group (LBG), claimed cross-border group relief (CBGR) for the period ended 31 December 2010. HMRC denied its claim on the basis that the qualifying loss condition in section 119 Corporation Tax Act 2010 (CTA 2010) was not met, and/or that section 127 CTA 2010 operated to bar the claim as the ‘main purpose or one of the main purposes’ of the arrangements by which the relevant losses – those of Bank of Scotland Ireland Limited (BOSI) - were to be surrendered was to secure the surrender of the amount in question by way of group relief. LAL appealed to the First-tier Tribunal (FTT), where HMRC also sought to rely on the precedence condition in section 121 CTA 2010 in resisting LAL’s appeal.

LBG had acquired BOSI during the 2008-9 global financial crisis as part of its acquisition of Halifax Bank of Scotland. BOSI was a full-service bank operating in the Republic of Ireland and Northern Ireland, with extensive exposure to the Irish property sector. BOSI incurred substantial losses due, in part, to its exposure to this sector. By 2010, LBG was actively considering various options for restructuring its Irish operations, including asset transfers, capital injections, and potential sales of parts of the business. Following LBG’s exit from the Irish market by way of cross border merger of BOSI with LBG in the UK, LBG submitted claims for CBGR, seeking to offset BOSI’s losses against the taxable profits of other LBG subsidiaries.

Arguments raised at the Tribunal

LAL argued that:

The losses satisfied the qualifying loss condition in section 119 CTA 2010 as the losses could not be taken into account in calculating the taxable profits or gains of BOSI or any other person for Irish tax purposes (the ‘no possibilities test’ (NPT)), or otherwise be relieved in any future period for Irish tax purposes, at the time immediately after the end of the EEA accounting period (as by this point BOSI had no assets or sources of income and had ceased to exist);
Further, there was no company resident outside the UK that owned ordinary share capital in BOSI at the time the precedence condition was to be applied, so the precedence condition in section 121 CTA 2010 was also met; and
HMRC's interpretation of section 127 CTA 2010 was too restrictive and inconsistent with EU law (which applied due to the timing of the transaction). The purpose of the arrangements had been to exit from the Irish market in a manner meeting LBG’s commercial requirements; it was a commercial transaction not driven by tax considerations. The main purposes of the arrangement were to be tested by reference to the purposes of the ultimate ‘decision makers’ unless they had ceded control to other persons (which was not the case here); the possibility of obtaining CBGR was a potential benefit but not a main purpose.

HMRC argued that:

Parliament had not intended to create a broader scheme of CBGR as articulated in M&S. The UK’s response to the judgment of the CJEU in M&S had already been challenged (in C-172/13 Commission v UK and that challenge had been rejected). The NPT should be applied immediately prior to the dissolution of BOSI. The liquidation of a subsidiary which had essentially ceased trading was not itself sufficient to support the assumption that there was no possibility for relief in its state of residence so as to give rise to final/definitive losses;
There was no reason to suggest that losses could be surrendered to an intermediate holding company (such as the Dutch holding company present until 17 September 2010) only to the extent of that holding company’s profits; section 121 CTA 2010 therefore applied; and
The restructuring was designed to meet the conditions for CBGR. In assessing whether section 127 CTA 2010 operated to disallow CBGR, it was appropriate to consider what was in the minds of senior individuals and advisors involved in the implementation of the arrangements for the exit from Ireland, not just the directors.

The Tribunal’s decision

The FTT made extensive findings of fact in relation to the application of the main purpose test in section 127. On the facts as found, the FTT held that the main purpose or one of the main purposes of the arrangements for LBG’s exit from Ireland by way of cross-border merger was to claim CBGR for BOSI’s losses, and section 127 therefore applied. Section 127 CTA 2010 and the manner in which it was applied were both compliant with EU law. As such LBG’s appeal failed (Lloyds Asset Leasing Ltd v HMRC [2025] UKFTT 57 (TC)).

Section 119 CTA 2010, in the FTT’s view, was intended to comply with the principles set out in M&S and not to ‘gold-plate’ them. Nonetheless, the FTT rejected HMRC’s arguments and accordingly, in the circumstances, it was satisfied.

The FTT also dismissed HMRC’s arguments in relation to the precedence condition in section 121 CTA 2010. If HMRC had been correct, the prior existence of an intermediary company, regardless of when it had been removed or dissolved, would always prevent a taxpayer from satisfying the section 121 condition. The precedence condition was to be applied at 31 December 2010, and at that time there was no intermediate holding company.

In considering the qualifying and precedence conditions, the FTT largely rejected HMRC’s arguments as to the interpretation and effect of the relevant case law subsequent to M&S.

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