Test Claimants in the Act of GLO and Another v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | The Master of the Rolls |
| Judgment Date | 21 December 2010 |
| Neutral Citation | [2010] EWCA Civ 1480 |
| Docket Number | Case No: A3/2010/0963 |
| Court | Court of Appeal (Civil Division) |
| Date | 21 December 2010 |
[2010] EWCA Civ 1480
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
The Hon Mr Justice Henderson
Before: The Master Of The Rolls
Lord Justice Patten
and
Lady Justice Black
Case No: A3/2010/0963
Case Nos HC05C00732 and HC01C02533
Mr Graham Aaronson QC (instructed by Dorsey & Whitney (Europe) LLP) for the Appellant Claimants
Mr Ian Glick QC and Mr James Rivett (instructed by the Solicitor for HMRC) for the Respondent Defendants
Hearing dates: 9 th and 10 th November 2010
The Master of the Rolls:
This is an appeal from the decision of Henderson J, dismissing claims brought by a number of companies (“the claimants”) in three separate multinational groups, Pirelli, Huhtamaki, and Volvo, against Her Majesty's Commissioners for Revenue and Customs (“HMRC”). Each of the claimant groups had the distinguishing feature of having a parent company resident in an EU member state other than the UK —either Italy (Pirelli) or the Netherlands (Huhtamaki and Volvo) —which had received from a UK-resident subsidiary company a dividend, in respect of which Advance Corporation Tax (“ACT”) had been paid. The claims all arise from the decision of the Court of Justice of the European Communities (“the ECJ”) in Metallgesellschaft & others and Hoechst AG & Hoechst UK Limited v Commissioners of Inland Revenue and HM Attorney General [2001] ECR 1–1727 (“ Hoechst”), which was to the effect that the statutory ACT regime offended what was Article 52, then became Article 43, of the EC Treaty, and is now Article 49 of the Treaty on the Functioning of the European Union (“Article 49”), which protects freedom of establishment.
The case has an unusually complex history, having been the subject of no less than three judgments of the High Court, two of the Court of Appeal, and one decision of the House of Lords. In order to put this appeal in its proper context, it is necessary not only to explain that history, but also to say something about the domestic corporation tax and ACT regimes and relevant Double Taxation Conventions (“DTC”s), the ECJ decision in Hoechst, and a subsequent decision of the ECJ. Because the issues raised on this appeal follow on from a number of well expressed domestic judgments, I propose, unusually, to incorporate a great deal of material virtually verbatim from some of those judgments.
The domestic legislative background
The law relating to corporation tax, ACT and Double Taxation Conventions (“DTC”s) was explained in the judgment of Rimer J in what I shall call “ Pirelli II”, Pirelli Cable Holdings NV v Commissioners for HM Revenue and Customs [2007] EWHC 583 (Ch), [2008] STC 144, paragraphs 7 to 21:
The Finance Act 1965 introduced the UK system of company taxation under which corporation tax became charged on the total profits of companies, including income and chargeable gains, earned in an accounting period. The end date of the accounting period is usually chosen by the company and an accounting period typically lasts 12 months. For all periods relevant to this litigation, the general rule was that corporation tax became payable nine months after the end of the accounting period. The applicable law became consolidated in the Income and Corporation Taxes Act 1988 (‘ ICTA’). ……
Under the corporation tax system in force between 1965 and 1973, company profits were taxed separately from company distributions. In effect, the profits were taxed twice —once in the hands of the company and then again (by the deduction of income tax under Schedule F) when the profits were distributed to shareholders by way of dividend. This was known as ‘economic double taxation’, meaning the double taxation of the same funds, and became regarded as undesirable by corporation tax systems. The problem became addressed by the introduction of so-called ‘imputation’ and ‘partial imputation’ systems, which are shorthand concepts for systems under which the tax on profits borne by the corporation is either wholly or partially ‘imputed’ to its shareholders. Each shareholder was itself taxable in respect of the company's dividends (i.e. the company's distributable profits paid to it) but such systems recognised the company as pre-paying the whole or part of the shareholder's own tax liability in respect of the dividend.
The UK's chosen method was a partial imputation system, which it introduced by the Finance Act 1972, the material provisions of which became incorporated into ICTA and remained in force until 6 April 199Under that system, the company continued to pay corporation tax on all its profits, whether or not distributed, but a new system of taxation was introduced as regards any so-called ‘qualifying distribution’ (as defined in section 14(2), and it included dividends) that the company made. A company resident in the UK that made a ‘qualifying distribution’ was no longer required to deduct income tax from the distribution but was instead required to pay ACT on a sum equal to the amount or value of the distribution; and the shareholder received a tax credit corresponding to the ACT so paid. Section 14 was the main charging provision and Schedule 13 governed the collection of ACT. Section 14(1) provided:
‘Subject to section 247, where a company resident in the United Kingdom makes a qualifying distribution it shall be liable to pay an amount of corporation tax (“advance corporation tax”) in accordance with subsection (3) below.’
ACT was payable two weeks after the end of the quarter during which the dividend was paid and so it fell due for payment before (and often well before) the time that the company had to pay its corporation tax due in respect of the total profits of its accounting period during which the quarter fell. That tax on profits became known as ‘mainstream’ corporation tax (‘MCT’), although that was not a statutory term of art. The rate of ACT during the relevant period was 25%. If a company declared a dividend of £100, it would pay £100 to its shareholders and £25 ACT to the Revenue. The 25% ACT rate was lower than the MCT rate during the relevant period ….. It was this differential that made the system a ‘partial’ imputation system: as the amount of the credit was fixed at a level which was lower than the MCT rate, the company would pay a residual amount of MCT that would not be capable of being credited against the shareholder's own tax liability.
ACT paid by the company was set off against its MCT liability for the annual accounting period in which it was paid: section 239(1) [of ICTA]. If no MCT was payable for that accounting period (because, for example, the company had no taxable profits), the ACT could be carried back and set off against the company's MCT for a prior period, so entitling the company to a repayment of corporation tax: section 239(3). Any ACT not so carried back could be carried forward and set off against MCT payable for the next accounting period: section 239(4). The company could also surrender any surplus ACT to a subsidiary company: section 240. ACT that was set off against the MCT of the paying company or that of its UK resident subsidiary became known as ‘utilised’ ACT. ACT which had not been and could not be so set off was known as surplus or ‘unutilised’ ACT.
The ACT system can be perceived as yielding an apparent financial benefit to the Revenue and as imposing an apparent disadvantage upon the paying company. As for the Revenue, it received the ACT ahead of the time at which, but for the payment of the dividend, the company would pay the entirety of its MCT on its profits for the accounting period. As for the company, it was disadvantaged between those two payment dates by the loss of the use of the money it had so paid in ACT. As regards any ACT that became unutilised, the company's position was even starker: such ACT amounted, in effect, to an additional irrecoverable cost over and above the company's MCT for the accounting period in which the dividend was paid.
So far I have considered the position from the viewpoint of the company paying the dividends. As for the recipients, section 231(1) [of ICTA] conferred a tax credit for the ACT that had been paid: it was conferred both on UK resident companies and UK resident individuals which or who received a qualifying distribution – including a dividend – from a UK resident payer. The amount of the credit was equivalent to the amount of ACT payable on the dividend. Section 231(1) provided:
‘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.’
Different regimes applied according to whether the recipient of the credit was an individual or a company. A UK resident individual continued to be chargeable to income tax under Schedule F on the aggregate of the dividend and the tax credit, but he could set the tax credit against his income tax liability for the year or, if the credit exceeded that liability, could claim a repayment from the Revenue: section 231(3) [of...
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