Trustees of the BT Pension Scheme v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 February 2013 |
| Neutral Citation | [2013] UKUT 105 (TCC) |
| Date | 28 February 2013 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2013] UKUT 105 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Warren J, Judge Timothy Herrington.
Christopher Vajda QC and Conrad McDonnell, instructed by Pinsent Masons LLP appeared for the Appellant.
Rupert Baldry QC and James Rivett, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents.
Tax credit - Foreign income dividends - Claim by Trustees of exempt approved pension scheme - FIDS received from UK-resident companies - ICTA 1988, Income and Corporation Taxes Act 1988 section 231s. 231.Tax credit - Cross-border dividends - Claims for tax credits based on ECJ decision in Re Manninen (Case C-319/02) [2007] BTC 163 - ICTA 1988, Income and Corporation Taxes Act 1988 section 231s. 231.Limitations - Tax credit claims - Whether out of time - TMA 1970, Taxes Management Act 1970 section 43 subsec-or-para 1s. 43(1).
TheUpper Tribunal confirmed a decision of the First-tier Tribunal ([2011] UKFTT 392 (TC); [2011] TC 01247) that the taxpayer'srights under EU law were infringed by the non-availability of tax credits in respect of dividendsfrom non-UK companies and foreign income dividendsof UK companies, but thatthe taxpayer's claims for reliefwere out of time by virtue of TMA 1970, Taxes Management Act 1970 section 43s. 43.
The appellant (BTPS) was the trustee of a pension scheme. The issues for the FTT and on appeal were (1) whether BTPS was entitled to payment of a tax credit under Income and Corporation Taxes Act 1988 section 231s. 231 of the Income and Corporation Taxes Act 1988 (ICTA 1988) for certain dividends elected to be foreign income dividends (FIDs) within Income and Corporation Taxes Act 1988 section 246As. 246A of ICTA 1988, which BTPS received from UK resident companies between 1 July 1994 and 2 July 1997 (the FIDs claims); (2) whether BTPS was entitled to payment of a tax credit underIncome and Corporation Taxes Act 1988 section 231 s. 231 of ICTA 1988 for dividends paid by non-UK resident companies between 1 July 1990 and 2 July 1997, on the basis of the ECJ decision in ManninenECAS (Case C-319/02) [2007] BTC 163; [2004] ECR I-7477 (the Manninen claims); and (3) to the extent that the FIDs claims and the Manninen claims were good, in principle, whether those claims had been made in time (the limitation issue).
The FIDs claims related to dividends paid by UK tax-resident companies to BTPS which were funded out of non-UK source income by the dividend-paying companies; that non-UK source income arose both from sources located within the EC and from sources located in states outside the EC (third countries), so far as the dividend-paying companies were concerned. The Manninen claims related to dividends paid by companies tax-resident within both member states and third countries.
The FTT decided both the FIDs issue and the Manninen issue in favour of BTPS ([2011] UKFTT 392 (TC); [2011] TC 01247). It held that the domestic law provisions which denied BTPS any entitlement to a payment in respect of a tax credit had to be disapplied or given a conforming construction to give effect to BTPS's rights under art. 56 of the EC Treaty. HMRC appealed against the FTT's decision on both those issues. The FTT decided the limitation issue in favour of HMRC and BTPS appealed that part of the FTT's decision.
(1) Whether the absence of a tax credit for FIDs, by reason of Income and Corporation Taxes Act 1988 section 246Cs. 246C of ICTA 1988, constituted a breach of art. 56; (2) whether the provisions of Income and Corporation Taxes Act 1988 section 231 subsec-or-para 1s. 231(1) of ICTA 1988 which restricted tax credits on dividends to dividends received from UK-resident companies were in breach of art. 56 and previously of Directive 88/361; (3) whether BTPS's claims for relief were out of time.
The Upper Tribunal (Warren J and Judge Timothy Herrington) dismissed all the appeals.
Although direct taxation itself did not fall within the scope of the legislative powers of the EC regarding the internal market, national tax legislation nonetheless had to be compatible with any relevant EC law (Skatteverket v AECAS (Case C-101/05) [2010] BTC 906; [2007] ECR I-11531 considered).
Any legislative provision which tended to discourage the exercise of an investor's rights under art. 56 was a breach of the right to free movement of capital afforded by that provision. Although the reasoning in the various discussions on free movement of capital was to the effect that the relevant domestic tax legislation 'has the effect' of 'deterring' or 'dissuading' cross-border investment and 'constitutes an obstacle' to foreign companies raising capital in the member state concerned, it was clear that those conclusions were reached without reference to any specific findings of fact as to whether any cross-border investment was actually deterred in any particular case (Hughes de Lasteyrie du Saillant v Ministere de l'Economie, des Finances et de l'IndustrieECAS (Case C-9/02) [2006] BTC 105; [2004] ECR I-6051 considered). The test for breach was applied on the basis of a priori reasoning and inference and not as part of any fact-finding or consideration of evidence.
Where the situations were objectively comparable a difference in treatment between dividends received from a domestic investment and those received from a cross-border investment could not be justified except by overriding reasons in the general interest, such as the need to safeguard the coherence of the tax system. A dividend received in one member state from a company established in another member state could not be subjected to tax in a less favourable way than a dividend received in the first member state, from a company established in that member state (Staatssecretaris van Financiën v Verkooijen (Case C-35/98) [2000] ECR I-4071; Re ManninenECAS (Case C-319/02) [2007] BTC 163; and Lenz v Finanzlandesdirektion für TirolECAS (Case C-315/02) [2007] BTC 131; [2004] ECR I-7063 considered).
The absence of a tax credit on a FID was a disadvantage to the recipients of those FIDs and prima facie that disadvantage was a breach of the free movement of capital provisions in art. 56. Where a UK resident company paid a dividend funded out of UK sourced profits the recipient obtained a tax credit under ICTA 1988, Income and Corporation Taxes Act 1988 section 231s. 231 but if a dividend was paid out of non-UK sourced profits no tax credit was available by virtue of ICTA 1988, Income and Corporation Taxes Act 1988 section 246Cs. 246C. The payment of dividends by UK resident companies funded out of UK sourced profits was an objectively comparable situation to the payment of dividends by UK resident companies sourced from non-UK profits. It was self-evident that the difference in treatment was liable to dissuade or likely to discourage investment in companies which paid FIDs. The difference in treatment therefore caused the shares in foreign companies in which UK resident companies might invest to be less attractive than shares in purely domestic companies.
Where the taxpayer made an investment in a multinational company, there was a cross-border movement of capital that was made by the taxpayer which happened through two transactions, first, its investment in the multinational and secondly the investment of the funds raised by the multinational in the overseas subsidiaries. That analysis was fortified by the nature of the FIDs regime itself, the effect of which was to provide a separate tax treatment for UK sourced dividends as opposed to dividends which were wholly derived from non-UK sourced dividends. A FID only carried the ACT benefit for the FID-paying company to the extent that it could be funded out of non-UK sourced profits and gave the UK shareholder a direct economic link with the underlying dividends received by the UK company making the distribution. Those features formed the basis of the FTT's reasoning that the absence of a tax credit for a FID by virtue of the application of Income and Corporation Taxes Act 1988 section 246Cs. 246C did not arise in a wholly internal situation.
It was clear that the nomenclature was only indicative of the matters that fell within the scope of art. 56. It could not restrict the scope of art. 56 itself. An investment in the securities of a domestic company which had a direct economic link with investment by the domestic company in a company within another member state was capable of coming within the scope of art. 56, and such a direct economic link was established where the domestic company derived a substantial part of its income from foreign subsidiaries and distributed that income through FIDs to its shareholders. The provisions of Income and Corporation Taxes Act 1988 section 246Cs. 246C denying the taxpayer a tax credit on the payment of a FID amounted to an infringement of art. 56 rights. Once Income and Corporation Taxes Act 1988 section 246Cs. 246C was disapplied, there was nothing more to be done as Income and Corporation Taxes Act 1988 section 231s. 231 could be given effect to according to its terms. There was no justification for concluding that an exempt person such as taxpayer should not be entitled to the full tax credit in the same way as a fully taxable person. (Schroder v Finanzamt HamelnECAS (Case C-450/09) [2012] BTC 420 and FII Group Litigation v IR CommrsECAS (Case C-446/04) [2008] BTC 222; [2006] ECR I-11753 considered).
The absence of a tax credit for entities such as the taxpayer which were not liable to tax on their investment income in respect of foreign sourced dividends when such a tax credit was available for UK sourced dividends was liable to discourage the taxpayer from exercising its rights under art. 56 and was therefore a breach of the right to free movement of capital afforded by that provision. The absence...
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