R (on the application of Glencore Energy UK Ltd) v Revenue and Customs Commissioners

JurisdictionEngland & Wales
JudgeLord Justice Sales,Lord Justice Singh,Lady Justice Gloster
Judgment Date02 November 2017
Neutral Citation[2017] EWCA Civ 1716
Docket NumberCase No: C1/2017/1845
CourtCourt of Appeal (Civil Division)
Date02 November 2017
The Queen on the Application of Glencore Energy UK Limited
The Commissioners for Her Majesty's Revenue and Customs

[2017] EWCA Civ 1716


Lady Justice Gloster

Lord Justice Sales


Lord Justice Singh

Case No: C1/2017/1845





Strand, London, WC2A 2LL

Sam Grodzinski QC, James Henderson and James Segan (instructed by Freshfields Bruckhaus Deringer) for the Appellant

Timothy Brennan QC and Georgia Hicks (instructed by HMRC Solicitor's Office) for the Respondent

Hearing dates: 10–11 October 2017

Judgment Approved

Lord Justice Sales

This case concerns the relationship between judicial review in the High Court and the tax appeal system involving the First-tier Tribunal (Tax Chamber) ("FTT"). It arises in the context of a new tax called Diverted Profits Tax ("DPT") which was introduced by Part 3 of the Finance Act 2015 (" FA 2015") with effect from 1 April 2015.


The FA 2015 makes detailed provision for the procedures to be followed when the respondent commissioners ("HMRC") consider whether to make a charge to DPT and then after they issue a Charging Notice setting out DPT which they say is due to be paid in respect of an accounting period. A Designated Officer of HMRC must first issue a Preliminary Notice within 24 months after the end of the relevant accounting period setting out the tax which she has reason to believe is due. The taxpayer then has 30 days in which to make representations and the Designated Officer has 30 days in which to consider those representations and decide whether to issue a Charging Notice for DPT and if so in what amount. The taxpayer is obliged to pay the tax set out in the Charging Notice within 30 days thereafter. The Designated Officer is then obliged to review the case and the charge to DPT in the following period of 12 months ("the review period"), and may issue an amending notice to reduce the DPT or a supplementary notice to increase the DPT assessed to be due. The taxpayer has 30 days from the end of the review period to institute an appeal to the FTT. There is no right of appeal before that point. The appeal is, like other tax appeals, a full merits appeal on the law and the facts. If the taxpayer succeeds on an appeal, it will have been out of its money during the period of the review and the appeal, but the amount of the tax will be repaid with interest.


In this case HMRC made an assessment that the appellant ("GENUK") was liable to pay DPT in relation to profits arising from its oil trading business which HMRC maintained had been diverted to its parent company in Switzerland, Glencore International AG ("GIAG"), so as to constitute "taxable diverted profits" within the meaning of Part 3 of the FA 2015. According to HMRC's assessment, GENUK has diverted profits to GIAG as a result of payment to GIAG by GENUK of a charge of 80% of GENUK's net operating profits in return for services provided by GIAG to GENUK pursuant to a contract called the Risk and Services Agreement ("the RSA"). Under the RSA, GIAG undertook to insure GENUK in relation to operating losses it might suffer and to give it priority for the provision to it of facilities under GIAG's control for oil storage and transportation.


HMRC's Designated Officer (Ms Maura Parsons) issued a Preliminary Notice dated 6 September 2016 pursuant to section 93 of the FA 2015 indicating that HMRC proposed to levy DPT from GENUK in the sum of £21,129,349 (plus interest) in relation to the nine month accounting period of 1 April 2015 to 31 December 2015. Despite representations by GENUK to oppose this, the Designated Officer issued a Charging Notice dated 3 November 2016 in that amount pursuant to section 95 of the FA 2015. GENUK paid the assessed DPT amount within the relevant time and the Designated Officer commenced a review as required by section 101 of the Act.


In the meantime, rather than waiting to appeal under the statutory scheme, GENUK issued a claim for judicial review of the Charging Notice, relying on four grounds: (1) in issuing the Charging Notice the Designated Officer wrongly applied the test for issuing a Preliminary Notice rather than the stricter statutory test applicable in relation to a Charging Notice; (2) the Designated Officer failed to take account of GENUK's representations; (3) the Designated Officer failed to give any or any adequate reasons for the calculation of DPT in the Charging Notice; and (4) the calculation of DPT in the Charging Notice is irrational in two particular respects.


In a detailed judgment of 26 June 2017, Green J refused to grant GENUK permission to apply for judicial review. This is the judgment under appeal to this court. For the purposes of his judgment, Green J was prepared to accept that GENUK had arguable grounds of claim, though he regarded them as weak. However, he refused permission to apply for judicial review on the basis that GENUK had suitable alternative remedies available to it in the form of the statutory review of the charge to DPT under section 101 FA 2015 then on foot, in conjunction with GENUK's right of appeal to the FTT under section 102 of the Act if it was dissatisfied with the outcome of the review. The judge also considered that permission should be refused by reference to section 31(3C) of the Senior Courts Act 1981, on the basis that the outcome for GENUK would not have been substantially different if the conduct complained of had not occurred.


In this court, Hickinbottom LJ considered the application for permission to appeal on the papers. He considered that the case merited the grant of permission to appeal and decided that the best way in which the issues could be dealt with in this court was by granting permission to apply for judicial review under CPR Part 52.8(5) and directing that this court should retain the case and itself hear that judicial review claim with the benefit of full evidence from HMRC. The issue whether judicial review should be refused on the grounds that there is a suitable alternative remedy could be determined at the substantive judicial review hearing in this court, as could all the grounds of claim advanced by GENUK so far as that might be necessary. Also, although this court would not itself apply section 31(3C) of the 1981 Act, which only operates at the stage when permission to apply for judicial review is under consideration, the equivalent provision in section 31(2A) applicable at the stage of the substantive hearing of a judicial review claim would be relevant. That provides that if "it appears to the court to be highly likely that the outcome for the applicant would not have been substantially different if the conduct complained of had not occurred", then the court must refuse to grant relief on the application for judicial review.

The DPT regime


DPT is a tax introduced to counter the use of aggressive tax planning deployed by multinational corporate groups to divert profits which would otherwise have been subject to corporation tax in the UK away from the UK to low tax jurisdictions, thereby eroding the UK tax base. The tax becomes chargeable in relation to "taxable diverted profits" arising to a company in a relevant accounting period (section 77) under certain conditions, in an amount calculated by comparing the UK tax payable in relation to the arrangements which result in the diversion of profits with the notional tax payable in the UK if they had not been diverted. The assessment of whether the relevant conditions exist and the elaboration of the counterfactual scenario to work out the notional tax payable (i.e. the tax which would have been payable had a "relevant alternative provision" been in place between relevant parties: see section 82) can involve considerable complexity.


The judge provides a helpful summary of the statutory framework for DPT. It is not necessary to set out the full detail again here.


In this case, HMRC assesed that section 80 FA 2015 (headed "UK company: involvement of entities or transactions lacking economic substance") applied in respect of the nine month accounting period in 2015 and that DPT was payable in relation to profits which accrued to GENUK but which were paid on to GIAG pursuant to the RSA.


Section 80(1) provides:

"This section applies in relation to a company ("C") for an accounting period if—

(a) C is UK resident in that period,

(b) provision has been made or imposed as between C and another person ("P") (whether or not P is UK resident) by means of a transaction or series of transactions ("the material provision"),

(c) the participation condition is met in relation to C and P (see section 106),

(d) the material provision results in an effective tax mismatch outcome, for the accounting period, as between C and P (see sections 107 and 108),

(e) the effective tax mismatch outcome is not an excepted loan relationship outcome (see section 109),

(f) the insufficient economic substance condition is met (see section 110), and

(g) C and P are not both small or medium-sized enterprises for that period."


For the purposes of this provision, GENUK is a company resident in the UK and is "C"; and GIAG is "P". Neither were small or medium-sized enterprises in the accounting period. The RSA contains a "material provision". The relevant participation condition regarding the relationship between GENUK and GIAG is met. There is an issue between the parties whether the "insufficient economic substance condition" is met, i.e. whether the RSA is on terms equivalent to an arm's length commercial arrangement between GENUK and GIAG. HMRC's view is that the RSA satisfies the "insufficient economic substance condition", in that an arm's length commercial agreement between GENUK and GIAG would have been on materially different terms less...

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