Volkerrail Plant Ltd v The Commissioners for HM Revenue & Customs
| Jurisdiction | England & Wales |
| Judge | Lady Justice Falk,Sir Launcelot Henderson,Lady Justice Elisabeth Laing |
| Judgment Date | 01 March 2023 |
| Neutral Citation | [2023] EWCA Civ 210 |
| Docket Number | Case No: CA-2022-001053 |
| Court | Court of Appeal (Civil Division) |
[2023] EWCA Civ 210
Lady Justice Elisabeth Laing
Lady Justice Falk
and
Sir Launcelot Henderson
Case No: CA-2022-001053
CA-2022-001054
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
MR JUSTICE ROTH AND JUDGE JONATHAN RICHARDS
Royal Courts of Justice
Strand, London, WC2A 2LL
Nicola Shaw KC and Kelly Stricklin-Coutinho (instructed by Ernst & Young LLP) for the Appellants
David Ewart KC, Mark Fell KC and Harry Winter (instructed by the Solicitor and General Counsel to the Commissioners for HMRC) for the Respondents
Hearing date: 7 & 8 February 2023
Approved Judgment
This judgment was handed down remotely at 10.45am on 1 March 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
INTRODUCTION
The issue in this appeal is whether a provision in the group relief rules in force in the periods in question, s.403D(1)(c) of the Income and Corporation Taxes Act 1988 (“ ICTA”), is compatible with the principle of freedom of establishment now set out in Articles 49 and 54 of the Treaty on the Functioning of the European Union (“TFEU”), and if not, whether s.403D(1)(c) can be read with a conforming interpretation, or must be disapplied.
This question might be thought to have been answered by Case C-18/11 HMRC v Philips Electronics UK Limited [2013] 1 CMLR 6; [2013] STC 41 (“ Philips”), in which s.403D(1)(c) was held to impose a restriction on freedom of establishment which could not be justified, with the result that the national court was required to disapply it. The decision in Philips was reflected in a change in UK legislation with effect from 1 April 2013 which substantially modified the restriction as it applied within the EEA, a change which was only reversed in 2021 following the UK's departure from the EU.
However, HMRC now take the position that s.403D(1)(c) is compatible with the right of freedom of establishment, on the basis that the Court of Justice (“CJEU” or the “Court”) must be taken to have departed from Philips in a case decided in 2018, Case C-28/17 NN A/S v Skatteministeriet (“ NN”) EU:C:2018:526. HMRC's view is challenged by the taxpayers in this case, a challenge that succeeded before the First-tier Tribunal (“FTT”) in a decision of Judge Brooks released on 16 November 2020 (the “FTT decision”) but largely failed before the Upper Tribunal (“UT”) (Roth J and Judge Jonathan Richards) in a decision reported at [2022] UKUT 78 (TCC); [2022] STC 735 (the “UT decision”). The UT decided that, in the light of NN, s.403D(1)(c) should not be disapplied but could be “read down” in a manner that complied with EU law.
Both parties have appealed the UT decision. In outline the taxpayers, who were the substantial losers in financial terms, appeal principally against the UT's conclusions that, while s.403D(1)(c) did restrict freedom of establishment, it could be: a) justified; and b) subject to a conforming interpretation. HMRC appeal against the conclusions that s.403D(1)(c): a) did amount to a restriction on freedom of establishment; b) was disproportionate; or alternatively c) could be subject to the conforming interpretation adopted by the UT, as opposed to an alternative interpretation put forward by HMRC. HMRC contend in the alternative that this court should exercise its powers under s.6 of the European Union (Withdrawal) Act 2018 (“EUWA”) and the European Union (Withdrawal) Act 2018 (Relevant Court) (Retained EU Case Law) Regulations 2020 (the “EUWA Regulations”) to depart from EU law.
I will start with a relatively brief explanation of the relevant tax rules and some general comments about the CJEU's approach, before summarising the facts and the relevant case law.
THE LEGAL BACKGROUND
Group relief and s.403D(1)(c) of ICTA
In outline, the UK corporation tax system permits trading losses and certain other amounts eligible for relief from corporation tax to be “surrendered” to another member of the same group and set off against the taxable profits of that other company (the “claimant”). For these purposes a group is defined by reference to direct or indirect ownership of at least 75% of ordinary share capital by a common parent, subject to detailed rules intended to ensure that the share ownership corresponds to economic ownership and control. Relief is also available as between certain companies owned by a consortium (essentially, joint-venture companies) and consortium members or their respective groups, in which case relief is available on a proportional basis, corresponding to the percentage shareholding and economic interest owned in the consortium by the relevant shareholder. For convenience I will refer to both types of relief as “group relief”.
At the relevant time the group relief legislation was contained in Chapter IV of Part X of ICTA. Following changes made by s.97 of and Schedule 27 to the Finance Act 2000 in the light of ICI v Colmer ( Case C-264/96 and [1998] STC 874; [1999] STC 1089 (HL)), relief was made available not only to companies resident for tax purposes in the UK (“UK tax resident” companies) but to the UK branches of non-resident companies (in tax terminology, UK “permanent establishments”), which were permitted to surrender and claim group relief with effect from 1 April 2000. The changes made by the Finance Act 2000 also permitted group relationships to be established through non-UK resident companies, which had not previously been possible under the domestic rules.
Section 403D is the principal provision that was inserted into ICTA to regulate surrenders by and to UK branches of non-resident companies. In the version in force during the relevant periods, and so far as material, it provided:
“ 403D.—Relief for or in respect of UK losses of non-resident companies
(1) In determining for the purposes of this Chapter the amounts for any accounting period of the losses and other amounts available for surrender by way of group relief by a non-resident company carrying on a trade in the United Kingdom through a permanent establishment, no loss or other amount shall be treated as so available … except in so far as—
(a) it is attributable to activities of that company the income and gains from which for that period are, or (were there any) would be, brought into account in computing the company's chargeable profits for that period for corporation tax purposes;
(b) it is not attributable to activities of the company which are made exempt from corporation tax for that period by any double taxation arrangements; and
(c) no part of—
(i) the loss or other amount, or
(ii) any amount brought into account in computing it,
corresponds to, or is represented in, any amount which, for the purposes of any foreign tax, is (in any period) deductible from or otherwise allowable against non-UK profits of the company or any other person.
(2) In determining for the purposes of sections 403A and 403C the total profits for an accounting period of a non-resident company, there shall be disregarded—
(a) amounts not falling to be comprised for corporation tax purposes in the chargeable profits of the company for that accounting period, and
(b) so far as not falling within paragraph (a) above, any amounts arising from activities which are made exempt from corporation tax for that period by any double taxation arrangements.
(3) In this section ‘non-UK profits’, in relation to any person, means amounts which—
(a) are taken for the purposes of any foreign tax to be the amount of the profits, income or gains on which (after allowing for deductions) that person is charged with that tax, and
(b) are not amounts corresponding to, and are not represented in, the total profits (of that or any other person) for any accounting period,
or amounts taken into account in computing such amounts.
(4) Subsection (2) above applies for the purposes of subsection (3)(b) above as it applies for the purposes of sections 403A and 403C.
…
(7) For the purposes of this section activities of a company are made exempt from corporation tax for any period by double taxation arrangements if the effect of any such arrangements is that the income and gains (if any) arising for that period from those activities is to be disregarded in computing the company's chargeable profits.
(8) In this section ‘double taxation arrangements’ means any arrangements having effect by virtue of section 788.
(9) In this section ‘foreign tax’ means any tax chargeable under the law of any territory outside the United Kingdom which—
(a) is charged on income and corresponds to United Kingdom income tax; or
(b) is charged on income or chargeable gains or both and corresponds to United Kingdom corporation tax,
but for the purposes of this section a tax shall not be treated as failing to correspond to income tax or corporation tax by reason only that it is chargeable under the law of a province, state or other part of a country, or is levied by or on behalf of a municipality or other local body.
…”
As can be seen, s.403D(1) imposed three restrictions on the surrender of losses made by UK permanent establishments. The first two are uncontroversial and relate, broadly, to whether profits of the relevant activity would have been subject to corporation tax. The third, which is in issue in this case, denied group relief where the relevant loss, or an amount brought into account in computing it, was “deductible from or otherwise allowable against” non-UK profits of any person, as defined in s.403D(3).
Section 403D(2) was relevant where a non-resident company with a UK permanent establishment...
To continue reading
Request your trial