Trustees of the P Panayi Accumulation and Maintenance Trusts Nos 1–4
| Jurisdiction | UK Non-devolved |
| Judgment Date | 24 October 2019 |
| Neutral Citation | [2019] UKFTT 622 (TC) |
| Date | 24 October 2019 |
| Court | First Tier Tribunal (Tax Chamber) |
[2019] UKFTT 622 (TC)
Judge Barbara Mosedale
P Baker QC, instructed by Baldwins, appeared for the appellant
J Bremner QC and B Elliott, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Capital gains tax – Exit tax on trustees relocating elsewhere in EU – ECJ judgment to be applied – Whether conforming interpretation of UK legislation possible – Yes – Appeal dismissed.
The FTT has held that the exit charge legislation applicable to trusts that cease to be UK-resident can be interpreted in a way that complies with EU law.
In August 2004, the P Panayi Accumulation and Maintenance trusts Nos. 1–4 ceased to be UK-resident because two of the three UK-resident trustees were replaced by three trustees resident in Cyprus. The trustees appealed against HMRC's imposition of an exit charge under TCGA 1992, s. 80 because this provision breached UK law (freedom of establishment anywhere in the UK). In September 2017, the European Court of Justice (ECJ) ruled (see [2017] BTC 25) that the exit charge under s. 80 was in breach of EU law but could be lawful if implemented proportionately in order to allow the member state to tax gains that arose whilst the taxpayer was UK-resident. However, UK legislation lacked proportionality because the charge arising under s. 80 was based on a deemed disposal yet there was no provision to defer payment of the tax on a deemed gain that had not yet been realised.
In the light of the ECJ ruling, the parties were unable to agree how the appeal should be resolved. The two issues of law were:
- Was a conforming interpretation of UK legislation possible?
- If it was not, and UK legislation had to be disapplied, what was the effect on the trustees' appeal?
The defect in UK law that had been identified was the lack of an option to defer UK tax which meant that the imposition of an exit charge was not “proportionate”. A review of ECJ judgments revealed that an option to pay an exit tax charge in five annual installments had been held to be proportionate. However, the question arose as to whether a law that only permitted deferral of payment until realisation of the assets was proportionate (in this case, the trust assets had been sold in December 2005, before the due date for payment of the exit tax on 31 January 2006).
HMRC's preferred option was a conforming interpretation that led to the due date of payment being 31 January next following the date of realisation (31 January 2006, as the shares had been sold in December 2005). This was rejected by the FTT because if the shares had been sold by a UK-resident, tax would not have been due until 31 January 2007 and the ECJ (at para. 56 of the judgment) were quite clear that this breached the trustees' EU law rights. They also rejected HMRC's assertion that TMA 1970, s. 55(3), which allows deferral of payment where there are grounds for believing that an assessment is excessive, meant that UK law was compliant. This was because it was neither a deferral until realisation nor a deferral for a set period of years and, more significantly, because they considered that argument to be circular: if s. 55 meant that the exit charge was proportionate there would be no grounds for deferral under s. 55(3).
The FTT identified three possible conforming interpretations:
- Amendment of TMA 1970, s. 59B(4) to allow tax arising under s. 80 where the taxpayer had the right to freedom of movement to be deferred until 31 January following the tax year in which realisation took place;
- Amendment of s. 59B(4) in the same circumstances to allow payment by instalments;
- Amendment of s. 80 to give the taxpayer an option to have the tax assessed at the date of realisation
The FTT began by examining the principles of conforming legislation given by the Court of Appeal in Vodafone 2 v R & C Commrs [2009] BTC 273 (Vodafone 2) and concluded that a conforming interpretation must by definition go further than the normal rules of interpretation, but that it was necessary to establish how much further. This would be considered together with further qualifications put forward by the appellants that it was suggested limited the FTT's ability to make a confirming interpretation.
The FTT rejected the appellant's argument that the ECJ had been misled because it was not informed, for example, of the right to pay by installments (TCGA 1992, s. 281). This was because the obligation to make a conforming interpretation only arises once EU law has been elucidated by the ECJ, therefore they could not be misled by only being informed of UK law as it stood without a conforming interpretation.
The FTT concluded that para. 60 of the Advocate General's opinion (in the ECJ judgment at [2017] BTC 25 had been poorly translated and could not mean (as put forward by the appellant) that a conforming interpretation was precluded. She must have meant that the UK court must consider whether a conforming interpretation was possible because the ECJ itself requires conforming interpretations where possible and itself has no powers to interpret national laws.
The FTT rejected the appellant's argument that the FTT had any discretion over whether to make a conforming interpretation – in fact Vodafone 2 suggests that the FTT has an obligation to construe UK law as consistent with EU law if it is possible to do so.
The FTT did not agree with the appellant that only s. 80 (the provision that had been held to be inconsistent with EU law) could be the subject of a conforming interpretation, as the ECJ is not concerned with how UK legislation is structured but with its effect.
The FTT concluded that the fundamental feature of s. 80 is that there should be an exit charge and as that section itself does not provide when the tax is payable, the timing is not fundamental to the exit charge, with the result that a conforming interpretation may alter the timing of the payment.
The appellant recognised that a conforming interpretation would ordinarily be retrospective but argued that in this case the breach of EU law was the failure to offer the taxpayer an option to defer and that a conforming interpretation could not turn back the clock and give the taxpayer a choice at an earlier date – in other words the breach was incapable of remedy. The FTT disagreed, primarily because any conforming interpretation could in theory adversely affect a taxpayer who had made a decision based on the national legislation, yet EU law itself imposes the obligation for a conforming interpretation, which must mean the retrospective nature of such an interpretation cannot be a bar to making it.
After reviewing relevant case law, the FTT concluded that a conforming interpretation that had wide ramifications or that impinged on the rights of third parties should not be made, but that subject to this, the Tribunal can choose between different options. In the present case, none of the possible interpretations involved competing rights or had further consequences.
The FTT did not agree that a conforming interpretation was not possible because too much detail would be required, as the UK is obliged to comply with EU law and has the choice of how to do so. None of the proposed conforming interpretations contained more detail than was permissible.
The FTT therefore concluded that the breach of UK law was capable of remedy by conforming interpretation and that it had discretion to select which of the proposals should be adopted. The third possibility (amending s. 80, which was put forward by the appellant) would mean that the assessment to tax only took place in the year of realisation of the assets and, in the present case, this would mean that HMRC could not make an assessment as the earlier assessment had been for the year of migration (2004–05) and it was too late for a discovery assessment for the year of realisation (2005–06). However, the FTT did not agree that amendment of s. 80 was a necessary conforming interpretation as there was nothing in that section itself that breached EU law – it was agreed that the UK was entitled to assess tax in the tax year of exit. Of the remaining options, the second possibility (amending s. 59B to permit payment by instalments was most consistent with the grain of existing UK legislation). The conforming interpretation had only to go far enough to comply with EU law and no further, so a five-year deferral period should be implied. In order to keep the conforming interpretation as simple as possible, no provisions for interest, security or an obligation to pay when the assets were realised should be implied.
Although it was not necessary to consider the disapplication of the relevant UK legislation as the conclusion had already been reached that a conforming interpretation was possible, the FTT proceeded to set out its views. The Tribunal did not agree with the appellant that s. 80 should be disapplied, a this was not the offending provision. The illegality lay in s. 59B regarding payment of tax with no option to defer. However, disapplication was only required to the extent required by the ECJ and therefore it should only be disapplied such that tax did not become payable until a date that respected the taxpayer's EU law right to defer, in other words, no earlier than 31 January 2007.
The trustees' appeal was therefore dismissed on the basis that a conforming interpretation of s. 59B had been made under which the tax was payable in 5 equal annual installments...
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