Boake Allen Ltd and Others v HM Revenue and Customs

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLord Justice Mummery,Lord Justice Lloyd,Lord Justice Sedley
Judgment Date31 January 2006
Neutral Citation[2006] EWCA Civ 25
Date31 January 2006
Docket NumberCase No: C3 2004/0160

[2006] EWCA Civ 25

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

ACT GROUP LITIGATION (A3)

THE HON MR JUSTICE PARK

HC0100187 and others

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Lord Justice Mummery

Lord Justice Sedley Lord Justice Lloyd

Case No: C3 2004/0160

Between:
(1) Boake Allen Limited
(2) Bush Boake Allen Enterprises Limited
(3) Bush Boake Allen Holdings UK Limited
(4) Bush Boake Allen Inc
(5) Acushnet Limited
(6) Acushnet International Inc
(7) Nec Semi-Conductors Limited
(8) Nec Corporation
(9) Gallaher Limited
Appellants
and
The Commissioners for Her Majesty's Revenue and Customs
Respondent

Graham Aaronson Q.C., David Cavender and Paul Farmer (instructed by Dorsey & Whitney) for the Appellants

Ian Glick Q.C. David Ewart and Kelyn Bacon (instructed by Acting Solicitor to HM Revenue and Customs) for the Respondent

Lord Justice Lloyd

Lord Justice Lloyd

1

This appeal is from a judgment of Park J, one of a series of judgments arising from litigation about advance corporation tax (ACT) organised under a group litigation order, following a decision of the European Court of Justice in Hoechst v. Attorney-General, Metallgesellschaft v. Attorney-General, Joined Cases C-397/98 and C-410/98 [2001] ECR I-1727, [2001] Ch 620 (which I will call the Hoechst case).

2

The common feature of the litigation is that it concerns liability to pay ACT in connection with the payment of dividends by companies incorporated in the UK which are subsidiaries of other companies incorporated outside the UK. The distinctive characteristic of the present appeal is that the parent companies are established in countries outside the European Union.

3

3. ACT was introduced by the Finance Act 1972 and applied from April 1973 until it was abolished with effect from April 1999. The legislation required that, when a UK company paid a dividend, it also paid an amount of corporation tax, referred to as ACT, calculated by reference to the amount of the dividend. If resident in the UK, the shareholder to whom the dividend was paid received a tax credit for the corresponding amount of ACT. The company paying the dividend could set the ACT off against its ordinary liability for corporation tax on its income and capital gains, which is sometimes called mainstream corporation tax (MCT) . A non-corporate shareholder could set the tax credit off against his or its liability for income tax. A corporate shareholder resident in the UK would have received a tax credit in the form of franked investment income which franked its liability to account for ACT in respect of dividends which it paid. In some cases a Double Taxation Convention entitled a shareholder resident in a foreign territory to receive a tax credit: this is true of the USA, but not Japan.

4

If the company was a subsidiary of another UK company, however, the two companies could jointly make a group income election. Once this had been made and accepted by the inspector of taxes, the subsidiary could pay dividends without paying ACT at the same time, and correspondingly the parent did not obtain a tax credit. In its turn the parent would pay ACT when it paid dividends to its shareholders.

5

In the Hoechst case the European Court of Justice held that the requirement that the parent be a UK company in order that a group income election could be made was a breach of Article 43 of the EC Treaty, which confers the right of freedom of establishment, because it operated to the disadvantage of parent companies based in other Member States. Following that decision many claims have been made by parents or subsidiaries or both, where the parent is based in another Member State, seeking restitution in respect of ACT which it is said should not have been paid. In cases where the ACT paid by the subsidiary was later set off against the MCT liability of the company (known as utilised ACT) the claim is in respect of the fact that the company had to pay it earlier than would otherwise have been the case. If and to the extent that the ACT was not set off (known as unutilised ACT, or surplus ACT) the claim is for the amount of tax.

6

In the present cases, the parent companies are based in Japan or in the USA. They are also typical of cases where the parent is based in Switzerland. There are two aspects to the claim. First, it is said that the inability of the non-resident parent to join in a group income election is in breach of provisions of a Double Taxation Convention incorporated into UK law. Secondly it is said that that inability is also a breach of EU law, in this case under Article 56.

7

Park J decided that the legislation was a breach of the relevant Double Taxation Conventions, but that these were not part of UK law, so that this afforded no remedy. He also decided that it was clear that the legislation was not in breach of Article 56 of the Treaty, and that he should not refer to the ECJ the question whether there was such a breach. In those circumstances he did not have to consider what the position would have been as regards the consequences if the Double Taxation Convention had been both breached and incorporated into UK law, as regards the Claimants' cause of action and the remedy to which they might be entitled, and he did not deal with these questions in full. He did consider a question of limitation which arose on the pleadings, although because he dismissed the Claimants' claim this had no practical impact on the result of the case before him.

8

Since Park J decided the present case, on 24 November 2003, appeals against other decisions of his concerning the impact of the Hoechst case on questions of corporation tax have come before this court on at least four occasions before this appeal. Three are reported as: Pirelli Cable Holding NV v. IRC [2003] EWCA Civ 1849 ( Pirelli), Deutsche Morgan Grenfell Group plc v. IRC [2005] EWCA Civ 78 (DMG) and Sempra Metals v. IRC [2005] EWCA Civ 389 ( Sempra) . In the fourth, judgment was handed down by the House of Lords immediately after the conclusion of argument on this appeal: Autologic Holdings plc v. IRC [2005] UKHL 54. Pirelli and DMG are under appeal to the House of Lords as well. In each instance the cases brought before the court are sample claims typical of many others. The same is true of the present appeals, which concern four corporate groups. One of the things which we have to decide is whether to refer the questions concerning Article 56 to the European Court of Justice. Counsel's arguments about that turned, in part, on whether such a reference should be made after or before a further appeal to the House of Lords.

9

I will start by setting out such relatively few facts as need to be recorded, which I take from statements of facts which were agreed for the purposes of the trial of these cases as test cases.

The facts

10

NEC Semi-Conductors Ltd is a UK company, and a wholly owned subsidiary of NEC Corporation, a company resident in Japan. The subsidiary paid four relevant dividends to the parent, between October 1994 and March 1996, and paid the relative ACT. The dividends amounted to £163.9 million and the ACT to £40.975 million. Just over £34.1 million of the ACT was used by way of set-off against MCT, leaving some £6.8 million as surplus ACT. The periods between payment of ACT and its set-off against MCT varied between 259 and 800 days. The parent company obtained no tax credits. If a group income election had been permitted on the part of the parent and subsidiary, such an election would have been made.

11

Bush Boake Allen Inc is a company resident in the USA, and the direct or indirect parent of three relevant companies resident in the UK. Between January 1996 and April 1999 the three subsidiaries paid dividends to their direct or indirect US parents, and paid ACT accordingly amounting in all to some £10.4 million. About £8.2 million of this was set off against mainstream corporation tax, leaving £2.2 million surplus ACT. The periods between payment and set-off varied between 225 days and 1357 days. By virtue of provisions in the UK/USA Double Taxation Convention the US parent received a tax credit in respect of the dividends paid. (The effect of the decision in Pirelli is that this tax credit is irrelevant to the claim for restitution of the ACT.) If a group income election had been permitted one would have been made as between the US parents or parents and the UK direct and indirect subsidiaries.

12

Gallaher Ltd is a company resident in the UK, and at all material times a wholly-owned subsidiary of a US company, ATIC Group Inc. Between July 1995 and January 1997 Gallaher paid dividends to its parent; on one occasion within that period it made a distribution in the form of shares to its parent which counted as a qualifying distribution and therefore attracted the same liability to pay ACT as did the payment of a dividend. It paid ACT accordingly, amounting in all to £153,762,615. All of this was set off against MCT. The periods between payment and set-off varied between 261 and 717 days. If Gallaher and its parent had been able to join in a group income election, they would have done. (The agreement as to facts makes no mention of any tax credit.)

13

Acushnet Ltd is a UK resident company, and a wholly-owned subsidiary of Acushnet International Inc, resident in the US. The subsidiary paid dividends to the parent from 1989 onwards up to and including 1999. On each occasion the subsidiary also paid ACT. A limitation issue arises in respect of the ACT paid on and before 14 January 1995. The ACT so paid was all set off against MCT, most of it within no more...

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