Vodafone 2 v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | The Chancellor,A,B,Or,Lord Justice Longmore,Lord Justice Goldring |
| Judgment Date | 22 May 2009 |
| Neutral Citation | [2009] EWCA Civ 446 |
| Docket Number | Case No: A3/2008/2235 |
| Court | Court of Appeal (Civil Division) |
| Date | 22 May 2009 |
[2009] EWCA Civ 446
Before: The Chancellor of the High Court
Lord Justice Longmore and
Lord Justice Goldring
Case No: A3/2008/2235
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT, CHANCERY DIVISION
MR JUSTICE EVANS-LOMBE
CH 2007 APP0603
MR D ANDERSON QC, MR D EWART QC and MS SARAH FORD (instructed by HM Revenue & Customs Solicitors' Office) for the Appellant
MR I GLICK QC & MS K BACON (instructed by Linklaters LLP) for the Respondent
Hearing dates: 6 & 7 May 2009
Introduction
In March 2000 Vodafone Group plc, one of the leading mobile telecommunications companies, acquired Mannesmann AG through its wholly owned subsidiary Vodafone 2 Ltd (“V2”), a company incorporated and resident in England. For that purpose a company incorporated and resident in Luxembourg, Vodafone Investments Luxembourg SARL (“VIL”), was interposed between V2 and Mannesmann as the wholly owned subsidiary of the former to hold the shares in the latter and other European telecommunication companies. In the accounting period ended 31st March 2001 VIL derived substantial income from its various assets and, no doubt, accounted for it to the tax authorities in Luxembourg.
In November 2002 HMRC gave notice to V2 of its intention to enquire into its tax return for that accounting period and sought further information designed to entitle it to assess V2 to tax in the United Kingdom on the income of VIL, giving credit for the tax paid by VIL in Luxembourg. The statutory basis for such an assessment is contained in the Controlled Foreign Companies (“CFC”) legislation in Chapter IV of Part XVII of the Income and Corporation Taxes Act 1988 (“ ICTA”). V2 contended that such legislation, to which I shall refer in some detail later, did not apply for a number of reasons, one of which was that the imposition of UK tax on V2 in respect of the profits of VIL would constitute an unlawful restriction on V2's freedom of establishment conferred by Art 43 EC. Its request for a closure notice was refused and it appealed to the Special Commissioners.
By then the same issue had arisen between Cadbury Schweppes plc and HMRC in respect of which, on 29th April 2004, the Special Commissioners had referred various questions to the European Court of Justice (“ECJ”). In the event the judgment of the ECJ in respect of that reference, given on 12th September 2006 (see [2006] ECR I-7995 (“ Cadbury Schweppes”)), rendered a similar reference made by the Special Commissioners in the appeal of V2 redundant. Accordingly it is unnecessary to refer to the various appeals and applications in the appeal of V2 before the substantive hearing before the Special Commissioners (John Walters QC and Theodore Wallace) in March 2007.
The issue with which the Special Commissioners were then concerned relevant to this appeal was whether the CFC Legislation could be interpreted, as required by s.2(4) European Communities Act 1972, in a manner which did not unlawfully restrict V2's freedom of establishment, as declared by the ECJ in Cadbury Schweppes. One of them, Mr Walters QC, thought that it could; the other of them, Mr Wallace, concluded that it could not. As the former was in the chair he was entitled to a second or casting vote and his view prevailed.
V2's appeal to the High Court came before Evans-Lombe J. He agreed with the view of Mr Wallace. He held that it is not possible to interpret the CFC Legislation so as to conform to the freedom of establishment of V2 under Article 43 EC as declared by the ECJ in Cadbury Schweppes. In those circumstances he “disapplied the CFC Legislation as contrary to Community Law”. This is the appeal of HMRC from the order of Evans-Lombe J. It is common ground that the freedom of establishment of V2 under Art 43 EC, as declared in Cadbury Schweppes, is of direct effect and that, pursuant to s.2 European Communities Act 1972, the CFC Legislation must be either construed or, if that is not possible, 'disapplied' so as not unlawfully to restrict that freedom. Thus there are two issues:
(1) Is it possible to interpret the CFC Legislation so as not unlawfully to restrict V2's freedom of establishment? And if not
(2) To what extent (and in what manner) should it be 'disapplied'?
I will deal with those two issues in due course. First it is necessary to describe in some detail the CFC Legislation, the conclusions of the ECJ in Cadbury Schweppes and the consequences of that conclusion.
The CFC Legislation
Part XVII of ICTA is headed “Tax Avoidance”. Chapter IV of that part contains the CFC Legislation. As provided by s.747 the Chapter applies:
“(1) If in any accounting period a company—
(a) is resident outside the United Kingdom, and
(b) is controlled by persons resident in the United Kingdom, and
(c) is subject to a lower level of taxation in the territory in which it is resident,”
The concept of residence is expanded in s.749, control in s.747(1A) and territories with a lower level of taxation in s.750. Such a company is defined in s.747(2) as a controlled foreign company (“CFC”). It is not disputed, for the purposes of this appeal at least, that VIL is such a company and is controlled by V2.
If the Chapter applies the consequence is that under s.747(3) HMRC is entitled to apportion the chargeable profits of the CFC and the tax paid in the lower tax territory to all those who are interested in the CFC, whether resident in the UK or not, in accordance with the provisions of s.752. It is not disputed that V2 is interested in VIL for the purposes of any such apportionment. S.747(4) imposes a charge to a sum equal to corporation tax at the appropriate rate on such apportioned chargeable profits but gives credit for the tax on those profits paid in the lower tax territory. But the ability to apportion and consequently the liability to tax are “Subject to section 748…”.
S.748 is headed “Cases where s.747(3) does not apply. S.748(1) provides:
“No apportionment under section 747(3) falls to be made as regards an accounting period of a controlled foreign company if –”
There follow in paragraphs (a) to (e) a series of exceptions. They relate to the CFC and may be summarised as those CFCs as pursue (a) an acceptable distribution policy, (b) engage in exempt activities, (c) satisfy a public quotation condition, (d) make profits of less than £50,000 or (e) are resident in a territory specified in regulations to be made by HMRC subject to any conditions HMRC might specify. The exceptions specified in paragraphs (a), (b) and (c) are further elaborated in the applicable parts of Schedule 25. It is clear that these exceptions are not mutually exclusive.
The exception in paragraph (d) is self-explanatory. With regard to the exception in paragraph (e) regulations were made by HMRC in December 1998 entitled Controlled Foreign Companies (Excluded Countries) Regulations 1998/3081. The schedule to the regulations has two lists of specified territories. The other conditions to be satisfied in order to be entitled to the benefit of this exception differ according to which list the territory falls in to. A number of member states of the EU come within the first list. Luxembourg and other member states fall within the second but the relevant conditions are not satisfied by VIL.
Section 748(3) confers a further exception in these terms:
“(3) Notwithstanding that none of paragraphs (a) to (e) of subsection (1) above applies to an accounting period of a controlled foreign company, no apportionment under section 747(3) falls to be made as regards that accounting period if it is the case that –
(a) in so far as any of the transactions the results of which are reflected in the profits arising in that accounting period, or any two or more transactions taken together, the results of at least one of which are so reflected, achieved a reduction in United Kingdom tax, either the reduction so achieved was minimal or it was not the main purpose or one of the main purposes of the transaction or, as the case may be, of those transactions taken together to achieve that reduction; and
(b) it was not the main reason, or, as the case may be, one of the main reasons for the company's existence in that accounting period to achieve a reduction in United Kingdom tax by a diversion of profits from the United Kingdom.”
Thus the exception conferred by s.748(3) differs from those contained in subsection (1) paragraphs (a)-(e) in that it depends on the subjective intention behind the relevant transactions or the existence of the CFC, not the objective existence of specific circumstances.
In view of the submissions made to us it is necessary to set out the facts, the opinion of the Advocate-General and the judgment of the ECJ in some detail. Cadbury Schweppes Overseas Ltd (CSO) was a wholly owned subsidiary of Cadbury Schweppes plc and the holding company of, amongst others, Cadbury Schweppes Treasury Services Ltd (“CSTS”) and Cadbury Schweppes Treasury Services International Ltd (“CSTI”). Those subsidiaries had been incorporated and were resident in the Republic of Ireland. HMRC sought to apportion the chargeable profits of CSTS and CSTI to their parent company CSO and to charge the latter with corporation tax thereon, giving credit for the lower rate of tax payable in the Republic. CSO disputed the right of HMRC to do so and appealed to the Special Commissioners on the ground, amongst others, that the CFC Legislation is contrary to the freedom of...
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