Six Continents Ltd v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Mr Justice Henderson |
| Judgment Date | 02 February 2016 |
| Neutral Citation | [2016] EWHC 169 (Ch) |
| Docket Number | Case No: HC-2003000002 |
| Court | Chancery Division |
| Date | 02 February 2016 |
[2016] EWHC 169 (Ch)
Mr Justice Henderson
Case No: HC-2003000002
(Formerly: HC03C00446)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Rolls Building
Royal Courts of Justice
Fetter Lane, London, EC4A 1NL
Mr Jonathan Bremner (instructed by Joseph Hage Aaronson LLP) for the Claimants
Mr Rupert Baldry QC and Ms Barbara Belgrano (instructed by the General Counsel and Solicitor for HMRC) for the Defendants
Hearing date: 18 January 2016
JUDGMENT ON THE AMENDMENT APPLICATION
Introduction
On 18 January 2016 I heard an opposed application by the claimants ("Six Continents") for permission to amend their particulars of claim in order to mount a challenge to the lawfulness under EU and Human Rights law of new primary legislation enacted by section 38 of the Finance (No. 2) Act 2015 and now contained in Part 8C (sections 357YA to 357YW) of the Corporation Tax Act 2010 ("Part 8C" and " CTA 2010"). Part 8C imposes a ring-fenced charge to corporation tax, at the rate of 45%, on certain payments of restitution interest made by the Commissioners for Her Majesty's Revenue and Customs ("HMRC" or "the Revenue") to claimants in legal proceedings, who will include Six Continents if their claims in the present action succeed at trial and become final (in the sense that the determination of those claims by the court could no longer be varied on appeal).
The new legislation (to which I will refer as "the Restitution Interest Tax Provisions") was first given effect by a resolution of the House of Commons on 26 October 2015, pursuant to the Provisional Collection of Taxes Act 1968. The Finance (No. 2) Act 2015 received the Royal Assent on 18 November 2015.
The Restitution Interest Tax Provisions were introduced by the Government, without prior public notice or consultation, on 23 October 2015, by way of late (post-Committee Stage) amendment to the Finance Bill 2015–16. Most of the provisions of Part 8C take effect from that date. The legislation also imposes a duty on HMRC to deduct tax, at the full rate of 45%, on payments of potential restitution interest which have not yet become final: section 357YO. This obligation, which in effect imposes a withholding tax, applies to payments of interest made on or after 26 October 2015: see section 38(10) of the Finance (No. 2) Act 2015.
For the factual and legal background to the present claim, reference should be made to the judgment which I handed down on 14 October 2015 on an application by Six Continents for summary judgment, or alternatively for an interim payment, which I had heard on 15 July 2015: see [2015] EWHC 2884 (Ch) at [1] to [19]. The upshot of this application was that I dismissed the application for summary judgment, but held that the claim for an interim payment succeeded save in relation to such parts of the 1997 Dividends as were sourced from share premium account. By my order of the same date, I directed HMRC to make the interim payment within 14 days and to pay 80% of the claimants' costs. The interim payment (in the sum of £16,014,718.29) was duly made on 19 October 2015, four days before the announcement and introduction of the Restitution Interest Tax Provisions.
The interim payment represented principal amounts of allegedly unlawful tax, together with interest on those principal sums calculated on a compound basis. Because the payment was made a week before 26 October 2015, the withholding tax obligation in section 357YO did not apply to it, and the payment was therefore received gross. I was told that it represents approximately 84% of the total amount for which Six Continents expect to obtain judgment if their claim succeeds in full at the trial of the action, which has now been set down for the first week of May 2016 with a time estimate of four days.
The Restitution Interest Tax Provisions: an Overview
For present purposes, it is unnecessary to set out the Restitution Interest Tax Provisions in detail and a summary of some of the main features of the legislation will suffice.
The new charge to corporation tax is imposed by section 357YA. It applies to "restitution interest arising to a company". By virtue of section 357YB, profits arising to a company which consist of restitution interest are chargeable to tax as income under Part 8C, regardless of whether the profits are of an income or capital nature.
"Restitution interest" is defined in section 357YC as meaning profits in relation to which Conditions A, B and C in subsections (2) to (4) are satisfied. Condition A requires that the interest is paid or payable by HMRC in respect of a claim by the company for restitution with regard to either:
"(a) the payment of an amount to the Commissioners under a mistake of law relating to a taxation matter, or
(b) the unlawful collection by the Commissioners of an amount in respect of taxation."
Condition B requires that the court has made a "final determination" that HMRC are liable to pay the interest, or that HMRC has entered into a final settlement of the relevant claim under which the company is entitled to be paid or retain the interest. A "final" determination is defined by section 357YC(8) as one which cannot be varied on appeal. Condition C requires that the interest determined to be due, or agreed upon, "is not limited to simple interest at a statutory rate".
Section 357YC(6) provides that it does not matter whether the interest is paid or payable (a) pursuant to a judgment or order of a court, (b) as an interim payment in court proceedings, (c) under an agreement to settle a claim, or (d) in any other circumstances. By virtue of subsection (7), "interest" includes amounts determined by reference to the time value of money.
Sections 357YE and 357YF provide that generally accepted accounting practice applies to determine the amounts to be brought into account, and the period in which they are to be brought into account as restitution interest in determining the company's profit and loss for the period.
Section 357YK provides that corporation tax is charged on restitution interest at the "restitution payments rate" of 45%. The new charge to tax is then "ring-fenced" by section 357YL, which excludes the application of any reliefs or set-offs against tax charged at the restitution payments rate. Amounts of restitution interest charged under Part 8C are also excluded from the company's "total profits" for the purpose of computing the basic charge to corporation tax under CTA 2010. This is reflected in section 357YV(1), which provides that:
"So far as restitution interest is charged to corporation tax under this Part it is not chargeable to corporation tax under any other provision."
I have already referred to the obligation to deduct withholding tax from payments of restitution interest in section 357YO. For this purpose, the definition of "restitution interest" is, in effect, applied without the requirement for a final determination: see subsection (1). On making such a payment, HMRC must under subsection (2):
"(a) deduct from it a sum representing corporation tax on the amount at the restitution payments rate, and
(b) give the company a written notice stating the amount of the gross payment and the amount deducted from it."
The amounts withheld under section 357YO(2) are then to be treated for all purposes as paid by the company on account of its liability, or potential liability, to corporation tax charged on the interest payment as "restitution interest": section 357YP(1).
Section 357YQ makes provision for the assessment by HMRC of amounts chargeable to corporation tax under Part 8C. The company must pay the amount assessed as payable for the relevant accounting period within 30 days of being given notice of the assessment. An appeal against the assessment may be made in the usual way to the Tax Chamber of the First-tier Tribunal ("the FTT"), pursuant to paragraph 48 of Schedule 18 to the Finance Act 1998.
An appeal may also be brought against the deduction of tax by HMRC under section 357YO: see section 357YS, which provides that notice of appeal must be given in writing within 30 days of HMRC giving notice under section 357YO(2) stating the amount of the deduction.
As will be apparent from this brief summary, the Restitution Interest Tax Provisions have a number of unusual features. The charge to tax applies only to "restitution interest" recovered by taxpayer companies in claims against the Revenue founded on a mistake of law or the unlawful collection of tax, such as (to take two obvious examples) the claims to recover unlawfully levied corporation tax and ACT in the FII group litigation, and the claims to recover compound interest on unlawfully levied VAT in the Littlewoods litigation. The charge to tax is insulated from the normal corporation tax regime by the ring-fencing provisions, and the rate of tax is more than double the current standard rate of 20%. Moreover, the charge to tax will not arise until the relevant proceedings have been finally determined or settled, which may be many years in the future, but the accounting period to which the charge relates will be determined in accordance with generally accepted accounting practice, and may therefore be much earlier than the period in which the assessment is made. Meanwhile, the effect of the withholding tax provisions is that companies are provisionally required to bear the full economic burden of the tax whenever a payment of potential restitution interest is made to them by HMRC.
In the Explanatory Note to what was then clause 8 of the Finance Bill 2015–16, the rationale of the proposed legislation was explained as...
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