Boake Allen Ltd and Others v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judge | LORD HOFFMANN,LORD WOOLF,LORD NEUBERGER OF ABBOTSBURY,LORD MANCE,LORD WALKER OF GESTINGTHORPE |
| Judgment Date | 23 May 2007 |
| Neutral Citation | [2007] UKHL 25 |
| Court | House of Lords |
| Date | 23 May 2007 |
[2007] UKHL 25
HOUSE OF LORDS
Appellate Committee
Lord Hoffmann
Lord Woolf
Lord Walker of Gestingthorpe
Lord Mance
Lord Neuberger of Abbotsbury
and others
Appellants:
Graham Aaronson QC
David Cavender
Hugh Mercer
(Instructed by Dorsey & Whitney)
Respondents
Ian Glick QC
David Ewart QC
Kelyn Bacon
(Instructed by Solicitor to Her Majesty's Revenue and Customs)
My Lords,
Between 1973 and 1999 a company resident in the United Kingdom which paid a dividend was liable to pay advanced corporation tax ("ACT"). This payment could be set off against its liability for corporation tax on its profits ("mainstream corporation tax" or "MCT"). The recipient of the dividend was entitled to a tax credit for the ACT. If the recipient was a company, the dividend and the tax credit constituted franked investment income and could be distributed to its own shareholders without further payment of ACT.
The economic purpose of this system was to ensure that a company's profits were not taxed twice: first as profits earned by the company and then again as dividends received by the shareholders. The payment of tax by the company was partially imputed by means of a tax credit to the shareholders. But the system also had to ensure that credit was given only for tax which had actually been paid. Hence the requirement that ACT be paid at the time of the distribution and then set off against MCT.
Section 247 of the Income and Corporation Taxes Act 1988, like many other of its provisions, recognised the unity of a group of companies which are in law separate persons but economically a single enterprise. It provided that a parent and subsidiary, both resident in the United Kingdom, could jointly elect that the subsidiary would pay dividends free of ACT and the parent would receive them without the benefit of a tax credit. The dividends would not be franked investment income and the parent would be liable for ACT when it passed them on as dividends to its own shareholders. The advantage to the group was that money could be moved from subsidiary to parent, either with a view to subsequent distribution or for some other purpose, without attracting an immediate liability to ACT.
In Metallgesellschaft Ltd v Inland Revenue Comrs (Joined Cases C-397 and 410/98) [2001] Ch 620 ("the Hoechst decision") the European Court of Justice decided that the denial of the advantage of a similar right of election to a group with a parent company resident in another member state was a restriction on the latter's freedom of establishment, contrary to article 43 of the EC Treaty. Such groups were entitled to compensation from the United Kingdom for having had pay ACT which could have been avoided by an election.
The question in this appeal is whether a similar claim to compensation can be made by groups with parent companies resident in countries outside the European Community. Such groups obviously do not enjoy freedom of establishment under article 43 but they put their claim in two ways. First, the United Kingdom has entered into double taxation conventions ("DTCs") with many foreign countries. These are based on a model drafted by the Organisation for Economic Cooperation and Development ("OECD") and contain a standard article prohibiting various forms of discrimination by the tax laws of the one contracting state against nationals or residents of the other. The denial of a right of election on the ground that the parent company is not resident in the United Kingdom is alleged to constitute such discrimination. Secondly, the foreign groups claim that section 247 infringes article 56 of the EC Treaty, which prohibits restrictions on the movement of capital and restrictions on payments, not only between member states but also between member states and third countries.
This appeal arises out of test cases brought by groups of companies with parent companies resident in the United States and Japan. Both countries have entered into a DTC with the United Kingdom. The current Japanese DTC dates from 1970 (see the Schedule to the Double Taxation Relief (Taxes on Income) (Japan) Order 1970 ( SI 1970 No 1948), that is to say, from before the introduction of ACT. The US DTC was redrafted after the introduction of ACT with that tax very much in mind: see the Schedule to the Double Taxation Relief (Taxes on Income) (The United States of America) Order 1980 ( SI 1980 No 568). But the relevant non-discrimination article is in the same terms in both. In the US DTC, it is article 24(5) and in the Japanese DTC it is article 25(3):
"Enterprises of a contracting state, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other contracting state, shall not be subjected in the first-mentioned contracting state to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned state are or may be subjected."
Both Park J [2004] STC 489 and the Court of Appeal [2006] STC 606 held that section 247 infringed this provision because it subjected an enterprise in the UK, namely the subsidiary of a US or Japanese parent, to taxation (namely, payment of ACT) which a similar enterprise, namely a subsidiary of a UK parent, would (if they had made an election) not have had to pay.
The next question was whether this infringement of the DTC gave rise to any (and if so, what) remedy in English law. An international treaty does not give rise to any rights in English domestic law unless incorporated by legislation. The EC Treaty is so incorporated, in its entirety, by the European Communities Act 1972. But with DTCs the position is more complicated. Section 788 of the 1988 Act provides that Her Majesty may by Order in Council declare that arrangements made by a DTC shall "have effect". But the result is not to make the whole DTC part of English law. By section 788(3), the arrangements have effect "notwithstanding anything in any enactment":
"in relation to income tax and corporation tax in so far as they provide-
(a) for relief from income tax, or from corporation tax in respect of income or chargeable gains; or
(b) for charging the income arising from sources, or chargeable gains accruing on the disposal of assets, in the United Kingdom to persons not resident in the United Kingdom; or
(c) …
(d) for conferring on persons not resident in the United Kingdom the right to a tax credit under section 231 in respect of qualifying distributions made to them by companies which are so resident."
Again, both Park J and the Court of Appeal agreed that, except for the implied reference to ACT in the provisions about tax credits in paragraph (d) (which was added when ACT came into force), the section did not give effect in domestic law to any arrangements which a DTC might make about liability to ACT. "Corporation tax in respect of income or chargeable gains" in paragraph (a) meant mainstream corporation tax, not ACT. The infringement of the DTCs therefore gave rise to no cause of action in English law.
As for the claim under article 56 of the EC Treaty, Park J was willing to accept that discrimination against a subsidiary of a company resident in a foreign state could be a restriction on the movement of capital or the making of payments between that state and the United Kingdom. But article 57(1) provides that:
"The provisions of article 56 shall be without prejudice to the application to third countries of any restrictions which exist on 31 December 1993 under national or Community law adopted in respect of the movement of capital to or from third countries…"
The claimants argued that while article 57(1) might prevent them from claiming that section 247 fell within the prohibition of restrictions on the movement of capital, it did not exempt it from the prohibition on restrictions on payments. Park J thought it was obvious that article 57(1) disapplied the whole of article 56. The Court of Appeal regarded the point as doubtful but left to your Lordships' House the question of whether a reference to the Court of Justice should be made.
The result was that the claims failed. Both Park J and the Court of Appeal went on to discuss what remedies the claimants might have been entitled to if they had succeeded and whether the claims had been properly pleaded but these questions did not need to be decided.
The claimants appeal against the ruling that the DTCs were not incorporated into English law and seek a reference on a question said to arise under article 56. The Revenue support the decision of the Court of Appeal on incorporation and the view of Park J on article 56. But their chief argument is that both the judge and the Court of Appeal were wrong in holding that the denial of a right of election to groups with foreign parents infringed the non-discrimination articles of the DTCs.
The reasoning of the judge and the Court of Appeal was that article 24(5) of the US DTC (for example) requires one to compare the positions of the UK-resident subsidiary of a US parent and the UK-resident subsidiary of a UK parent. If the latter can elect under section 247 and the former cannot, that is discrimination contrary to article 24(5). It is irrelevant that an election would transfer liability for ACT to the UK parent but not to the US parent. The DTC is concerned with the taxation of enterprises in the UK and not with the tax position of their foreign-resident shareholders. The authoritative commentary on the equivalent article of the OECD Model convention with respect to taxes on income and on capital 1963...
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