Autologic Holdings Plc and Others v Commissioners of Inland Revenue; Test Claimants in Loss Relief Group Litigation v Commissioners of Inland Revenue

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLORD HOPE OF CRAIGHEAD,LORD NICHOLLS OF BIRKENHEAD,LORD STEYN,LORD MILLETT,LORD WALKER OF GESTINGTHORPE
Judgment Date28 Jul 2005
Neutral Citation[2005] UKHL 54

[2005] UKHL 54

HOUSE OF LORDS

Autologic Holdings plc

and others

(Respondent)
and
Her Majesty's Commissioners of Inland Revenue
(Appellants)
BNP Paribas UK Holdings Limited

and others

(Respondent)
and
Her Majesty's Commissioners of Inland Revenue
(Appellants)
The Future Network plc

and others

(Respondent)
and
Her Majesty's Commissioners of Inland Revenue
(Appellants)
Perkins Engines Company Limited

and others

(Respondent)
and
Her Majesty's Commissioners of Inland Revenue
(Appellants)
HJ Heinz Company Inc

and others

(Respondent)
and
Her Majesty's Commissioners of Inland Revenue
(Appellants)
British Telecommunications plc

and others

(Respondent)
and
Her Majesty's Commissioners of Inland Revenue
(Appellants) (Conjoined Appeals)
LORD NICHOLLS OF BIRKENHEAD

My Lords,

1

On these appeals the question before the House is procedural: should the principal substantive issues raised by the six claimant groups of companies be heard and decided by the High Court or by the Special Commissioners? Resolution of this question is difficult partly because of the variety ofclaims being advanced and partly because not all the claimants are in the same position. The huge number of companies involved adds a further practical complication.

The background

2

Simplified as far as possible, the background is this. On the procedural question now under consideration six groups of companies have been selected as test cases. They represent a large number of claimant companies in proceedings started in the Chancery Division against the Commissioners of Inland Revenue. This litigation is currently being managed under a group litigation order made by the Chief Chancery Master in May 2003. The claims within this order are known as the 'loss relief group litigation'. The principal substantive issues raised by these claims are issues of Community law. These issues of law are also the subject of a large number of appeals pending before the special commissioners. In many instances claimants have both appealed to the special commissioners and started proceedings in the High Court.

3

The origin of this mass of litigation lies in two decisions of the European Court of Justice: Imperial Chemical Industries Plc v Colmer (Inspector of Taxes) ( Case C-264/96) [1999] 1 WLR 108, and the combined cases of Metallgesellschaft Ltd v Inland Revenue Commissioners; Hoechst AG v Inland Revenue Commissioners (Joined Cases C-397 and 410/98) [2001] Ch 620, usually known as the Hoechst case. Stated shortly, these decisions made plain that United Kingdom legislation restricting fiscal reliefs or advantages to cases where the relevant companies are resident in the United Kingdom may be inconsistent with the E C Treaty. The I C I case concerned consortium relief. The European Court ruled that article 52, now article 43, of the E C Treaty precludes legislation of a member state which makes tax relief subject to the requirement that the subsidiaries of the holding company are established in the member state concerned. The Hoechst case concerned advance corporation tax. The European Court ruled it is contrary to article 43 for the tax legislation of a member state to afford companies resident in that state the opportunity to benefit by paying dividends without paying advance corporation tax where their parent company is also resident in that state but to deny that opportunity where their parent company has its seat in another member state.

4

Multi-national groups of companies were quick to seize on the possibility of applying the reasoning underlying these two decisions to other tax provisions. Hundreds of claims have now been made against the Commissioners of Inland Revenue amounting to many billions of pounds. One of the fiscal provisions thought to be vulnerable concerns group relief from corporation tax. Corporation tax is charged on the profits of companies. Group relief is a relief from corporation tax available when one company in a group surrenders its losses to another company in the same group, thereby enabling the latter to claim the benefit of those losses as a set off against its profits. Thus, in essence, group relief is a transfer of tax relief from one company to another. It was introduced into United Kingdom tax law in 1973. Chapter IV of Part X of the Income and Corporation Taxes Act 1988 ( ICTA) now regulates this relief. Until 2000 one of the prescribed conditions was that both the company surrendering its losses and the claimant company must be resident in the United Kingdom: section 413(5). The equivalent condition from 2000 is that both the surrendering company and the claimant company must be either resident in the United Kingdom or a non-resident company carrying on a trade in the United Kingdom through a branch or agency: section 402(3A) and (3B). The tax legislation also includes provision for the surrender of losses between companies having a consortium relationship. For present purposes it is sufficient to confine attention to group relief claims. For the purpose of these appeals there is no material distinction between group relief claims and consortium relief claims.

5

In 2002 Marks and Spencer Plc appealed against the refusal of group relief, on the ground that these statutory limitations on the territorial scope of group relief were incompatible with, and overridden by, Community law. The Special Commissioners dismissed the taxpayer's appeal: Marks and Spencer Plc v Halsey (Inspector of Taxes) [2003] STC (SCD) 70. On appeal to the High Court Park J referred questions to the European Court of Justice. Advocate General Maduro delivered his opinion on 7 April 2005. The decision of the European Court of Justice is awaited.

6

As was to be expected, other international groups of companies showed interest in following Marks and Spencer's lead. A mass of proceedings followed in the High Court. The loss relief group litigation order was made in order to manage these claims. The House was told that currently there are 95 claimants subject to this order, involving 70 corporate groups and more than 1,000 individual companies. These claims raise some difficult questions of Community law. For present purposes it suffices to note that the primary contention of substantive law is that the provisions in ICTA restricting group relief to companies resident or carrying on an economic activity in the United Kingdom are incompatible with article 43 of the EC Treaty (freedom of establishment) and article 56 (abolition of restrictions on movements of capital and payments).

7

The procedural dispute now before the House arises out of a contention by the Inland Revenue that the principal claims for relief covered by the loss relief group litigation order are not properly justiciable in the High Court. Claims for group relief should be made to an inspector of taxes. If he wrongly refuses a claim the taxpayer should appeal to the General or Special Commissioners. These appeal commissioners, as I shall describe them, will give effect to directly applicable provisions of Community law, just as much as the High Court. Over 300 groups of companies have followed this route in challenging the group relief provisions. They include 65 of the High Court claimants. That, say the Inland Revenue, is the correct way to proceed. Six test claimants were selected as the vehicle for resolving this jurisdictional dispute.

8

The first major complicating factor on this appeal can now be noted. Four different types of loss are said to have been suffered by reason of the alleged breaches of Community law. The test claimants assert they have suffered loss under at least two, and in some instances, all four headings:

  • (1) A claim for group relief. This comprises loss of profits of the UK profit-making company which should have been relieved by the losses of a non-UK resident company.

  • (2) A claim in respect of utilised reliefs. Profit-making companies used other reliefs (eg capital allowances or surplus ACT) they would not have used had basic group relief been available.

  • (3) A claim for recovery of surrendered reliefs. Other UK members of the group surrendered their own reliefs to the UK profit-making company.

  • (4) A claim for payments. Companies which would have surrendered losses, possibly for payment, had the group relief rules notbeen confined to UK resident companies seek compensation for the loss of those payments.

9

Park J struck out claims in category (1): [2004] STC 594. These are matters for the appeal commissioners. The Inland Revenue accept that the so-called 'satellite' claims in categories (2) to (4) are outside the jurisdiction of the appeal commissioners. In a characteristically lucid judgment Park J said it does not greatly matter whether the High Court lacks jurisdiction to decide the category (1) claims or has a discretion to accept or decline jurisdiction since, if the latter is the position, he would decline to exercise whatever jurisdiction he had: page 596, para 4. He said the most important factor is that 'whether it would be more convenient to commence the entire case in the High Court or not, that is not the system our law provides for the resolution of tax disputes between taxpayers and the Revenue': page 607, para 35. Further, he considered it was not 'a major inconvenience' to have two sets of proceedings when they would proceed sequentially and not simultaneously, with the High Court proceedings claiming consequential relief going ahead only if the taxpayers were successful in the proceedings before the special commissioners: page 607, para 36.

10

The Court of Appeal, comprising Peter Gibson and Longmore LJJ, allowed the taxpayers' appeals: [2005] 1 WLR 52. Peter Gibson LJ said the judge's attitude was one which would perhaps appeal to most lawyers experienced in tax matters if Community law considerations could be left out of...

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