Pirelli Cable Holding NV v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | Peter Gibson L.J. |
| Judgment Date | 17 December 2003 |
| Neutral Citation | [2003] EWCA Civ 1849 |
| Docket Number | Case No: C3/2003/0326 |
| Court | Court of Appeal (Civil Division) |
| Date | 17 December 2003 |
[2003] EWCA Civ 1849
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Park J.
Royal Courts of Justice
Strand,
London, WC2A 2LL
Lord Justice Peter Gibson
Lord Justice Laws and
Sir Martin Nourse
Case No: C3/2003/0326
Mr. Graham Aaronson Q.C., Mr. David Cavender and Mr. Paul Farmer (instructed by Messrs Dorsey & Whitney of Finsbury Square) for the Respondent
Mr. Ian Glick Q.C., Mr. David Ewart and Ms. Zoe O'Sullivan (instructed by The Solicitor of Inland Revenue) for the Appellants
Peter Gibson L.J. (giving the judgment of the court):
The Commissioners of Inland Revenue ("the CIR") appeal with the permission of Park J. from the order made by him on 22 January 2003 in the first in a series of test claims which Chief Master Winegarten, by a Group Litigation Order ("GLO") made on 26 November 2001, ordered to be tried. The GLO was made following a preliminary ruling of the Court of Justice of the European Communities ("the CJEC") in joined cases Metallgesellschaft Ltd. v CIR and Hoechst AG v CIR [2001] STC 452 (" Metallgesellschaft/ Hoechst").
Before we set out what Metallgesellschaft/ Hoechst decided and its relevance to the present appeal, we will attempt to explain the statutory background so far as material.
The statutory background
This case is concerned only with the system of corporation tax, called the imputation system, which applied in the United Kingdom between 1973 and 1999 to the taxation of distributions (typically dividends). Prior to 1973 the Finance Act 1965 had introduced corporation tax in a way which made the taxation of company profits entirely separate from the taxation of distributions made by a company. But under that system there was in effect double taxation of company profits, once in the hands of the company and again in the hands of the shareholders when the profits were distributed. As appears from the White Paper, Reform of Corporation Tax (Cmnd. 4955, April 1972), this system was perceived to discriminate against distributed profits, and accordingly the imputation system was introduced by the Finance Act 1972.
The features of the imputation system were:
(1) the company paid corporation tax on all its profits, whether or not distributed;
(2) income tax was no longer deducted from distributions;
(3) a company making distributions to its shareholders made a payment of Advance Corporation Tax ("ACT") in respect of distributions so made;
(4) ACT paid in respect of distributions made in an accounting period was to be set off against the corporation tax, often called Mainstream Corporation Tax ("MCT"), on the company's profits for that period;
(5) the recipient of a distribution in respect of which ACT was payable was entitled to a tax credit corresponding to the ACT.
The company was ordinarily chargeable to corporation tax on all its profits (meaning income and chargeable gains) under s. 6 of the Income and Corporation Taxes Act 1988 (" ICTA"). Under s. 14 (1), subject to s. 247 (to which we will come later), where a company resident in the UK made a qualifying distribution (defined in s. 14 (2) as meaning any distribution with limited exceptions), it became liable to pay ACT in respect of that distribution. Unlike the system operating between 1965 and 1973 when income tax under Schedule F fell to be deducted by the company from the dividends paid to the shareholders, ACT was not so deducted but was an additional payment to be made by the company to the CIR.
Schedule F continued to be the Schedule under which distributions were charged to income tax in the hands of shareholders. It was defined in s. 20 in this way, so far as material:
"1. …. income tax under this Schedule shall be chargeable for any year of assessment in respect of all dividends and other distributions in that year of a company resident in the United Kingdom which are not specifically excluded from income tax ….
2. For the purposes of this Schedule and all other purposes of the Tax Acts …. any such distribution in respect of which a person is entitled to a tax credit shall be treated as representing income equal to the aggregate of the amount or value of that distribution and the amount of that credit, and income tax under this Schedule shall accordingly be charged on that aggregate."
Individual shareholders could set off the tax credit against their personal liability to income tax.
A company which paid ACT in consequence of any distribution made by it in an accounting period was required, subject to a right of surrender, to set off the paid ACT against the company's liability for MCT for that period ( s. 239 (1) ICTA). The right of surrender was the right of a parent to surrender to its subsidiaries the benefit of ACT payments it had made. The subsidiaries then set off the surrendered ACT against their corporation tax liability ( s. 240 ICTA).
ACT was always payable well in advance of the liability to MCT against which it could be set off. ACT was payable within 14 days of the end of the quarter in which the distribution was made. MCT was payable on the chargeable profits in any accounting period 9 months after the end of that period. The effect therefore of ACT on a paying company is that the date for payment of the corresponding MCT which would otherwise be due is advanced by a period of between 8 1/2 months (if the distribution was made on the last day of an accounting period) to 1 year 5 1/2 months (if the distribution was made on the first day of an accounting period). That assumes that the company had chargeable profits such that corporation tax was payable. If and to the extent that corporation tax was not payable for the period, for example because the company had no chargeable profits, ACT could be set off against profits in subsequent periods, in which case the ACT would not be set off until the corporation tax on those profits was payable. Indeed there might never be a corporation tax liability against which the ACT could be set off. The company could also claim to carry back surplus ACT to a previous period subject to certain limitations. We have been told that very substantial sums of surplus ACT collected by the CIR have not been set off and that at the time ACT was abolished the estimated surplus ACT was as much as one billion pounds per annum.
Where a subsidiary paying a dividend and its parent (having at least 51% of the voting power in the subsidiary) were bodies corporate resident in the UK, they were given the right to what was known as a group company election ( s. 247 ICTA). Provided that both parent and subsidiary jointly elected, ACT was not payable in respect of the dividends ("election dividends") received by the parent from the subsidiary during the currency of the election. Either company joining in the election could at any time give notice terminating the election. The subsidiary remained liable to corporation tax on the profits out of which the election dividends were paid. That corporation tax was payable 9 months after the end of the subsidiary's accounting period. The advantage therefore gained from the election was one of cashflow: by not having to pay ACT, it had the use of what it would otherwise have had to pay as ACT until the time at which it was required to pay MCT.
Chapter IV of ICTA relates to tax credits. S. 231 (1) provided for certain recipients of qualifying distributions to be entitled to tax credits in this form (so far as material):
"Subject to section …. 247 …. where a company resident in the United Kingdom makes a qualifying distribution and the person receiving the distribution is another such company or a person resident in the United Kingdom, not being a company, the recipient of the distribution shall be entitled to a tax credit equal to such proportion of the amount or value of the distribution as corresponds to the rate of advance corporation tax in force for the financial year in which the distribution is made."
S. 247 (2) provided:
"So long as an election under subsection (1) above is in force the election dividends shall be excluded from sections 14 (1) and 231 and are accordingly not included in references to franked payments made by the paying company or the franked investment income of the receiving company but are in the Corporation Tax Acts referred to as "group income" of the receiving company."
The term "franked payment" was defined in s. 238 (1) as meaning the sum of the amount or value of a qualifying distribution and such proportion of that amount or value as corresponds to the rate of ACT in force for the financial year in which the distribution is made, but subject to s. 247 (2). The term "franked investment income" was also there defined as meaning income of a UK-resident company which consists of a distribution in respect of which the company is entitled to a tax credit and which accordingly represents income equal to the aggregate of the amount or value of the distribution and the amount of that credit, but again subject to s. 247 (2). By s. 241 (1) where in an accounting period a company receives franked investment income the company is not liable to pay ACT in respect of qualifying distributions made by it in that period unless the amount of the franked payments made by it in that period exceeds the amount of the income.
To return to s. 231 (1), in addition to being made subject to s. 247, it was made subject to various other statutory provisions in ICTA and subsequent Acts. Further, other provisions were enacted governing what could be done with...
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