DECISION
1. We
are asked to determine certain questions on a joint referral pursuant to
paragraph 31A of Schedule 18 to the Finance Act 1998 in the course of enquiries
into the tax returns of certain companies in the Hutchison Whampoa group.
2. The
Hutchison Whampoa group is a worldwide group of companies headed by Hutchison
Whampoa Limited, a company resident for tax purposes in Hong Kong. The
referral arises out of claims for group relief by the relevant Hutchison
Whampoa companies (“the Applicants”) in respect of losses made by one member of
the group, Hutchison 3G UK Limited (“the Surrendering Company”).
3. At
the relevant time the Surrendering Company was owned by a consortium of
companies through an intermediate holding company. Relief has been claimed
pursuant to the provisions of s 406 of the Income and Corporation Taxes Act
1988 (“ICTA”). In order for such relief to be available there must exist a
“link company” which is both a member of the consortium and a member of a group
of companies. In the present case the Applicants say that Hutchison 3G UK
Investments Sarl (“Investments”), a company resident in Luxembourg, was such a
company on the basis that it was a member of the consortium owning, through an
intermediate UK resident holding company (Hutchison 3G UK Holdings Limited),
the Surrendering Company, and was in addition a member of a group of companies
which included the Applicants.
4. It
is a requirement of s 406(2) ICTA that the obtaining of relief by a group
member is dependent on the link company itself being able to make a consortium
relief claim. In the present case it was not possible for Investments to make
such a claim on the face of the relevant legislation. Entitlement of a company
to group relief is given by s 402(3) ICTA. Subsection (3A) provides that such
relief is not available unless the claimant company satisfies the condition in
subsection (3B), namely
“that the company is resident in the United Kingdom or is a non-resident company carrying on a trade in the United Kingdom through a
permanent establishment.”
5. It
is common ground that this condition is not satisfied in respect of
Investments. The Applicants say that such a requirement is ineffective as
regards the Applicants in that:
(a)
it is a requirement that is inconsistent with European Union law; and/or
(b)
it is a requirement that cannot be applied as against the Applicants in
order to give effect to Article 26(4) of the double taxation convention between
the United Kingdom and Luxembourg (“the DTC”)
6. In
addition to these issues on the fundamental right to claim consortium relief in
these circumstances, a question also arises in the circumstances of this case
on the application of the anti-avoidance provisions in s 410 ICTA. This arises
as a result of certain share sale agreements entered into at the relevant time.
7. At
the May 2011 hearing we heard oral argument from Mr Baker and Miss Shaw for the
Applicants and from Mr Goy (assisted by Mr Facenna) for HMRC. Because the
appeal of the decision of the First-tier Tribunal in FCE Bank plc v Revenue
and Customs Commissioners [2010] SFTD 718 had only recently been heard in
the Upper Tribunal (Tax and Chancery), and the decision had not been released,
we adjourned for written submissions following the release of the Upper
Tribunal decision. That decision (see [2011] UKUT 420 (TCC)) was released on
13 October 2011. We are grateful for the written submissions we have received
in that respect, which we have considered in reaching our decision.
The referral questions
8. The
questions referred to the Tribunal for determination are:
(1)
In relation to the claims for group relief, does the requirement in
section 406(2) ICTA for the link company to be resident in the United Kingdom
or carrying on a trade in the United Kingdom through a permanent establishment
infringe the EU law rights of any company in the Hutchison Whampoa Group and,
if it does, can the Applicants rely on that infringement in support of their
claims for group relief? (“the EU Law question”)
(2)
To what extent does Article 26 of the UK/Luxembourg double taxation
convention (the non-discrimination article) impact upon the Applicants’ claims
for group relief? (“the DTC question”)
(3)
What is the impact, if any, of section 410 ICTA [on] the claims made for
group relief in the periods up to 22 June 2005? (“the section 410 question”)
The facts
9. There
was no dispute on the facts. We reproduce below the statement of agreed facts
produced by the parties:
1. The
Applicants are all companies incorporated and resident in the United Kingdom
and were members of the group comprising Hutchison Whampoa Ltd and its
subsidiaries (the “Hutchison Whampoa Group”) during all, or part of, the
period from 26 April 2002 to 23 June 2005 (the “Total Period”) (as specified in
Appendices 2 & 3 to this Agreed Statement of Facts). They have made claims
for consortium relief under sections 402 and 406 of the Income and Corporation
Taxes Act 1988 (ICTA) in respect of the trading losses of Hutchison 3G UK
Limited (“the Surrendering Company”), a company incorporated and resident in
the United Kingdom. A list of the relevant Applicant claims appears at
Appendix 1 to this Agreed Statement of Facts.
2. The
Surrendering Company, a company incorporated and resident in the United Kingdom, commenced trading on 26 April 2002 and had an accounting period for all
relevant years ending 31 December. The accounting periods of the Surrendering
Company that fall within the Total Period are referred to here as the “Relevant
Accounting Periods”. On 23 June 2005 the consortium relationship ceased to
exist and the Surrendering Company became a member of the same group as the
Applicants.
3. The ultimate parent company of the Hutchison Whampoa
Group is, and was throughout the Total Period, Hutchison Whampoa Limited
(“HWL”), a company incorporated and resident in Hong Kong. The diagram at
Appendix 2
illustrates the Group position of the Applicants and the Surrendering Company
as at 7 November 2003 (the relevance of that date is explained below). The diagram
at Appendix 3
of this Agreed Statement of Facts illustrates the Group position of the
Applicants and the Surrendering Company as at 23 June 2005.
4. The
Surrendering Company is, and was throughout the Total Period, a 100% subsidiary
of Hutchison 3G UK Holdings Limited (“Holdings”), a company incorporated and
resident in the United Kingdom. On 7 November 2003 Holdings was owned:
(i) as to 50.1% by
Hutchison 3G UK Investments SARL (“Investments”), a company incorporated and
resident in Luxembourg;
(ii) as to 14.9% by
three indirect subsidiaries of HWL, Brave First Limited (as to 1.5%), Clear
Choice Limited (as to 5%) and Bright Thought Limited (as to 8.4%), all three
being companies, incorporated and resident in the British Virgin Islands;
(iii) as to 20%, by
Brilliant Design Limited (“Brilliant Design”) a company incorporated in the
British Virgin Islands, whose indirect 100% shareholder was NTT DoCoMo, Inc.
(“DoCoMo”), a company incorporated in Japan; and
(iv) as to 15%, by
Waerdah Limited (“Waerdah”) a company incorporated in the British Virgin
Islands, whose 100% shareholder was KPN Mobile N.V. (“KPNM”), a company
incorporated in the Netherlands.
5. Throughout
the Total Period, Investments was 100% owned by Hutchison Europe
Telecommunications SARL, a company incorporated and resident in Luxembourg,
which was throughout the Total Period 100% owned by Hutchison Whampoa Europe
Investments SARL, also incorporated and resident in Luxembourg, which was
throughout the Total Period 98.98% owned by Auditorium Investments 1 SARL, a
company incorporated and resident in Luxembourg. The balance of the shares in
Hutchison Whampoa Europe Investments SARL were, throughout the Total Period,
owned by Auditorium Investments 2 SARL (0.51%) and Auditorium Investments 3 SARL
(0.51%), which two companies were incorporated and resident in Luxembourg.
6. Throughout
the Total Period, Auditorium Investments 1 SARL, Auditorium Investments 2 SARL
and Auditorium Investments 3 SARL were each 100% owned by New Millennium Corp,
a company incorporated and resident in the Cayman Islands, which was 100% owned
by Ommaney Limited, a company incorporated and resident in the British Virgin
Islands, which was owned 100% by Hutchison Whampoa International (00/03)
Limited, a company incorporated and resident in the British Virgin Islands,
which was owned 100% by Hutchison Telecommunications Limited, a company
incorporated and resident in Hong Kong, which was owned 100% by Hutchison
International Limited, a company incorporated and resident in Hong Kong, which
was owned 100% by HWL.
7. During
each Relevant Accounting Period (or part thereof) in respect of which
consortium claims have been made, the Applicants were not less than indirect
75% owned subsidiaries of HWL. During each Relevant Accounting Period, the
Applicants were neither directly nor indirectly owned by Investments.
8. The
principal activity of the Surrendering Company is owning network infrastructure
and providing mobile telecoms services in the United Kingdom. In May 2000, the
Surrendering Company acquired a UK 3G telecoms licence (“the Licence”) and
began incurring substantial expenditure in establishing a network, acquiring
content and other services to be provided to customers, promotional work and
agreeing contracts with suppliers and customers.
9. On 12 July
2000, HWL, KPNM, New Millennium Corp and Koninklijke KPN NV entered into an
agreement under which KPNM agreed to subscribe for shares representing 15% of
Holdings’ issued share capital, and this transaction completed on 21 September
2000. Also on 12 July 2000, HWL, DoCoMo, and New Millennium Corp entered into
an agreement under which DoCoMo purchased all of the shares in the issued share
capital of Brilliant Design, and this transaction also completed on 21
September 2000.
10. On 7
November 2003 and on 27 May 2004, HWL entered into share purchase agreements
(the “SPAs”) with KPNM and DoCoMo respectively under which (a) HWL agreed to
purchase from KPNM all of the issued shares in Waerdah, and (b) HWL agreed to
purchase from DoCoMo all of the issued shares in Brilliant Design.
11. On 23 June
2005, HWL exercised its rights under the SPAs by procuring that New Millennium
Corp, an indirect 100% owned subsidiary of HWL, acquired from KPNM all of the
issued shares of Waerdah and acquired from DoCoMo all of the issued shares of
Brilliant Design. Since 23 June 2005, Holdings has been 100% owned by HWL
indirectly and directly owned by Waerdah Ltd (as to 15%), Brilliant Design Ltd
(as to 20%), Brave First Ltd (as to 1.5%), Clear Choice Ltd (as to 5%), Bright
Thought Ltd (as to 8.4%) and Investments (as to 50.1%).
12. During the
Total Period the Surrendering Company incurred substantial losses. For each of
the Relevant Accounting Periods to which the claims for consortium relief
relate all of the Applicants made trading profits of at least the amount of
relief claimed by them.
13. Pursuant to an
arrangement within the Hutchison Whampoa Group, the Surrendering Company was
entitled to receive 30 pence for every £1 of losses surrendered. Appendix 4
details the quantum of the claims made, the amounts invoiced and amounts paid
to date.
The EU law question
10. Having heard
argument on the EU law question, we decided that we could not with complete
confidence reach a conclusion on that question without a reference to the Court
of Justice of the European Union (“CJEU”). Accordingly, we invited the parties
to submit a draft form of reference for us to settle. We have made directions,
incorporating the form of the reference to the CJEU, and have released those
directions to the parties at the same time as this decision.
The DTC question
11. Investments is a
company resident in Luxembourg for the purposes of the UK/Luxembourg double tax
convention of 24 May 1967 (“the DTC”).
12. Article 26 of
the DTC is a non-discrimination provision. Article 26(4) provides as follows:
“(4) Enterprises of a Contracting State, the capital
of which is wholly or partly owned or controlled, directly or indirectly, by
one or more residents of the other Contracting State, shall not be subjected in
the first-mentioned Contracting State to any taxation or any requirement
connected therewith which is other or more burdensome than the taxation and
connected requirements to which other similar enterprises of that
first-mentioned State are or may be subjected.”
13. The Surrendering
Company is an enterprise of the UK, and its capital is partly owned indirectly
by Investments. That much is not in dispute. But Mr Baker submitted that the
link company residence requirements in s 406(2), (3A) and (3B) contravened
Article 26(4) in two particular respects:
(1)
First, that by reason of its inability to surrender its losses to the Applicants
the Surrendering Company was subjected to taxation or a requirement connected
therewith that is other or more burdensome that the requirements attaching to
similar enterprises of the UK.
(2)
Secondly, that the inability to surrender losses arises solely on the
ground that the Surrendering Company is indirectly owned by a Luxembourg (and not a UK) company.
14. Mr Baker submitted
that the effect of Article 26(4), taken with s 788(3) ICTA, is that the Applicants
can obtain relief from corporation tax by means of the group relief claims
notwithstanding the link company residence requirement.
15. Mr Goy, on the
other hand, argued that the Applicants’ claims could not be made out, for three
reasons:
(1)
The inability of the Surrendering Company to surrender losses is not “any
taxation or any requirement connected therewith” to which that company is
subject.
(2)
Relief is not precluded solely because Investments is resident
outside the UK.
(3)
Section 788 ICTA does not have the effect of enabling the Applicants to
obtain relief for losses surrendered by the Surrendering Company, which is the
company entitled to the benefit of the DTC.
Taxation or any requirement connected therewith
16. In any group
relief claim there are two elements: the surrender of a tax loss by the
surrendering company and the claim for relief from tax by use of the
surrendered loss by the claimant company. In the latter case it is easy to
conclude that, if the claim for relief is denied to a company in foreign
ownership in circumstances where it would have been available to reduce the
claimant company’s liability to tax if the claimant company had been owned by a
UK resident, the claimant company would have suffered more burdensome
taxation. That was the accepted position in FCE Bank plc v Revenue and
Customs Commissioners [2010] SFTD 718 before the First-tier Tribunal and in
the Upper Tribunal [2011] UKUT 420 (TCC). We shall discuss FCE Bank in
more detail later, but we do not agree with the written submission of Mr Baker
and Miss Shaw that the Upper Tribunal decision in FCE Bank can in any
way be authority that the inability to surrender losses is “taxation” which is
“other or more burdensome”. The point was not argued in FCE Bank, but
was merely accepted in the context of group relief, where the company alleging
discrimination on the ground that it was owned by a non-UK resident company was
the claimant company. The position is less straightforward in the case of the Surrendering
Company, which does not itself make a claim to relieve its own taxation.
17. There is no
dispute on the appropriate comparison that needs to be made in construing
Article 26(4). Noting that the First-tier Tribunal in FCE Bank left the
position open regarding discrimination on account of third state-ownership (p
729, fn 5), in this case the relevant comparison is between the case where the
capital of the Surrendering Company, as here, is partly owned or controlled,
indirectly, by a Luxembourg-resident company (Investments) that is a link
company within s 406(1) ICTA, and the same structure where the link company is
a UK-resident company. Applying this comparison, there is clearly a difference
of treatment; in the latter case the Surrendering Company would have been able
to surrender its losses, whereas in the former it would not. The question is
whether this is a difference in treatment which has the result that the Surrendering
Company in the former case has been subjected to any taxation or any
requirement connected therewith which is other or more burdensome than the
taxation and connected requirements to which the Surrendering Company in the latter
case would be subjected.
18. This then is a
matter of treaty interpretation. We were referred to the helpful summary of
the approach to treaty interpretation by the special commissioners in Re the
Trevor Smallwood Trust, Smallwood v Revenue and Customs Commissioners
[2008] STC (SCD) 629 (at [94], [95] and [98] – [99]), which was repeated by the
First-tier Tribunal in FCE Bank (at [3]). We need not set that out in
full. We must look for a clear meaning of the words used, having regard to the
purpose of the particular article or of the treaty as a whole. The interpretation
of an international treaty should take account of the general principle of
international law, embodied in article 31(1) of the Vienna Convention on the
Law of Treaties, 23 May 1969, 1155 UNTS 33 that “a treaty should be interpreted
in good faith and in accordance with the ordinary meaning to be given to the
terms of the treaty in their context and in the light of its object or
purpose.”
19. The DTC is based
on the OECD (Organisation for Economic Co-operation and Development) model tax
convention of 1963. As the special commissioners described the position in Smallwood
(in that case in relation to the corresponding OECD model of 1977), the model
has a commentary explaining its terms and this is accordingly an important
means of interpretation of the model and of the treaties that follow it. If
particular treaty wording to which meaning has been attached by the commentary
is used by the treaty negotiators or drafters, it may be readily assumed that those
words should bear such a meaning even if, on their ordinary meaning, they
arguably might not do so.
20. In the
commentary on the non-discrimination article (Article 24) of the 1963 model
treaty, the OECD refer to the phrase “… shall not be subjected … to any
taxation or any requirement connected therewith which is other or more
burdensome”. Although this is in the context, not of Article 24(5) (which is
the equivalent provision in the 1963 model to that with which we are concerned
in Article 26(4) of the DTC), but of Article 24(1), which provides that
nationals of a contracting state may not be less favourably treated in the
other contracting state than nationals of the latter state in the same
circumstances, the relevant wording is identical. The commentary states (at
para 9) that those words:
“mean that when a tax is imposed on nationals and
foreigners in the same circumstances, it must be in the same form for both, its
basis of charge and method of assessment must be the same, and, finally, the
formalities connected with the taxation (returns, payment, prescribed times,
etc.) must not be more onerous for foreigners than for nationals.”
21. In relation to
Article 24(5), the commentary makes the point that the provision relates only
to the taxation of enterprises, and not of the persons owning or controlling
the capital. But in that context it states that Article 24(5):
“forbids a State to give different treatment to two
enterprises residing in its territory, the capital of one of which is wholly or
partly owned or controlle[d], directly or indirectly, by one or more residents
of the other Contracting State.”
22. We were referred
also to the 2010 version of the OECD commentary, which contains an expanded
commentary on Article 24(5) of the model treaty. This is relevant as it
represents the current views of the member states of the OECD, although, as the
First-tier Tribunal in FCE Bank pointed out (at [30]), some caution must
be exercised in relying on commentaries added later than the treaty because it
cannot be said that the parties made the treaty in reliance on them. Our
attention was drawn to paras 76 and 77 of the 2010 version in particular.
Paragraph 76 repeats the principle that Article 24(5), and the discrimination
which it puts an end to, relates only to the taxation of enterprises and not of
the persons owning or controlling their capital. Its object is to ensure equal
treatment for taxpayers residing in the same state, and not to subject foreign
capital, in the hands of the partners or shareholders, to identical treatment
to that applied to domestic capital. Paragraph 77 then continues:
“77. Since the paragraph relates only to the
taxation of resident enterprises and not to that of the persons owning or
controlling their capital, it follows that it cannot be interpreted to extend
the benefits of rules that take account of the relationship between a resident
enterprise and other resident enterprises (e.g. rules that allow consolidation,
transfer of losses or tax-free transfer of property between companies under
common ownership). For example, if the domestic tax law of one State allows a
resident company to consolidate its income with that of a resident parent
company, paragraph 5 cannot have the effect to force the State to allow such
consolidation between a resident company and a non-resident parent company. This
would require comparing the combined treatment of a resident enterprise and the
non-resident that owns its capital with that of a resident enterprise of the
same State and the resident that owns its capital, something that clearly goes
beyond the taxation of the resident enterprise alone.”
23. We do not find
this further commentary in para 77 to be of any assistance in determining the
issue before us. The most it tells us is that questions of treaty
non-discrimination can fall to be considered in the context of domestic
legislation concerning transactions within, or tax treatment of, groups of
companies with an element of foreign ownership. Mr Goy did not seek to argue
that para 77 had the effect of precluding non-discrimination from applying in
the case of group relief generally. In any event, we would share the view
expressed by the First-tier Tribunal in FCE Bank that para 77 does no
more than say that grouping of losses etc might not be claimed where one group
company is resident and the other non-resident, which is a very different case
from that with which we are concerned, where both the Surrendering Company and
the claimant companies are UK resident, and so the focus is clearly on the
taxation of resident enterprises and not on that of the non-resident parent
company.
24. Mr Baker
submitted that the refusal to allow the Surrendering Company to surrender its
trading losses to the Applicants constituted both “taxation” that was other or
more burdensome than in the case of the equivalent UK-owned surrendering
company, and also “any requirement connected therewith” that was similarly
other or more burdensome. He referred to the need to interpret the treaty
provision purposively; the purpose, ascertained from the OECD commentary, is to
prevent differences in tax treatment based solely on foreign ownership. That
purpose would not be achieved by taking a narrow view of the meaning of
“taxation” in this context. On the ordinary meaning of the words in Article
26(4) of the DTC, the Surrendering Company is subjected to taxation other than
or more burdensome than in the equivalent case. The Surrendering Company
cannot, in contrast to its UK-owned counterpart, transfer its losses. It is
restricted to carrying those losses forward, and may, or may not, be able to
use them against its own trading profits.
25. Mr Baker
accepted that the inability of the Surrendering Company to surrender its losses
did not have the result that it would be liable to a greater amount of tax.
Indeed, of course, its liability to tax for the accounting period of surrender
would be the same, irrespective of any ability or inability to surrender,
namely zero. Furthermore, if it were to be able to surrender its losses, it
could, if it subsequently made profits, pay more tax, as it would not have the
benefit of the carried forward losses at that time. However, the effect is
that the Surrendering Company is deprived of the opportunity, available to its
UK-owned equivalent, to use its losses at an earlier date. This, submitted Mr
Baker, means that the Surrendering Company is subject to a treatment for tax
purposes that is other than that which would apply if it were owned indirectly
by a UK company. Furthermore, although he submitted that it was not a
necessary ingredient of a claim under article 26(4), Mr Baker argued that the
Surrendering Company is disadvantaged because it cannot receive compensation
for the surrender of its losses.
26. Mr Goy submitted
that the inability of the Surrendering Company to surrender losses is not
taxation, nor is it another requirement connected therewith. The “other
requirement” must be connected with taxation to which the company in question
is subject. The relief in this case is not taxation to which the
Surrendering Company is subject and hence the requirement complained of cannot
be a requirement connected with such taxation. Mr Goy argued that the question
is not whether the Surrendering Company is subject to different treatment but
whether it is subjected to different taxation, or other requirement connected
therewith. An inability to part with a relief cannot mean that the
Surrendering Company is subjected to taxation. In respect of requirements
connected with taxation, those, submitted Mr Goy, can relate only to
obligations and not, in the case of a surrender, to opportunities.
27. In this respect,
Mr Goy referred us to two cases, R v Inland Revenue Commissioners, ex parte
Commerzbank AG [1991] STC 271, and UBS AG v Revenue and Customs
Commissioners [2005] STC (SCD) 589, as illustrative of the application of
non-discrimination articles in cases that were concerned with burdens faced by
the taxpayer. In Commerzbank the question concerned a repayment
supplement sought by the bank in respect of certain tax overpaid. The claim
was refused on the basis that eligibility for repayment supplement depended on
the bank being resident in the UK. On the issue of the non-discrimination
article in the applicable treaty in that case, the Divisional Court (Nolan LJ
and Henry J), whilst finding that the repayment supplement did not fall within
s 788(3) ICTA, so that the non-discrimination provision did not have effect to
that extent in UK law, nevertheless decided that the bank had been subjected to
a more burdensome requirement than its UK counterpart, by not being entitled to
the possibility of compensation on the overpayment. That was a more burdensome
requirement as regards the payment of tax, which was paid without the prospect
of obtaining compensation.
28. In UBS, a
claim was made, under s 243 ICTA, for payment of tax credits by the setting of
losses against franked investment income. The special commissioners took the
view that payment of the tax credit was part of the levying of taxation and
that the taxation of the appellant in that case was less favourably levied. Mr
Goy submitted that the non-availability of the tax credit to the appellant
meant that the tax burden on the appellant would be heavier. However, on the
facts of that case, the appellant (or its predecessor) had accumulated trading
losses. Its claim was an attempt to monetise those losses by making a s 243
claim so that its surplus franked investment income for the relevant accounting
period was treated as trading income of that period and that accordingly the
carried forward losses could be set against that income and payment of the tax
credit could be received. UBS is not therefore, in our view, a case
where the difference in treatment resulted in an increased liability to tax.
It is closer to the facts of this case, where an inability to surrender does
not lead to any change in the liability to tax of the Surrendering Company for
the relevant period.
29. In our view,
construing Article 25(6) so as to relate only to discrimination that results in
a liability to tax or a burden in respect of tax would be to take too narrow an
approach to the interpretation of that article. The article does not refer to
tax liability as such, and we regard the more natural reading of “subjected to
taxation” as referring to the taxation regime of the relevant contracting
state, and not to any particular liability or burden. The reference in the
OECD commentary to “different treatment” suggests a broad meaning, and it is
one that in our view accords with the ordinary meaning of the words in the
article.
30. We agree
therefore with Mr Baker that the inability of the Surrendering Company to make
use of its losses by surrender, in circumstances where its UK-owned counterpart
could do so, and the inability therefore to obtain a payment for group relief,
does have the result that the Surrendering Company has been subjected in the UK
to taxation that is other or more burdensome than the taxation to which
corresponding enterprises are subjected. Although the inability to surrender
losses can have no impact on the immediate tax liability of the Surrendering
Company, and the fact that it carries forward the losses and may therefore
suffer lower taxation in future accounting periods than if the losses had been
surrendered, this inability, both to surrender and to obtain payment from the
claimant companies for the losses, is a difference in treatment that in our
view falls within Article 26(4).
Is the difference in treatment solely on the ground of non-UK ownership?
31. Mr Goy argued
that, even if it were found that the inability of the Surrendering Company to
surrender losses was a taxation or requirement connected therewith, that
inability to surrender was not the sole ground on which the relief was
precluded. Accordingly, argued Mr Goy, relying on Boake Allen Limited v
Revenue and Customs Commissioners [2007] UKHL 25; sub nom NEC
Semi-Conductors Ltd v IRC [2007] STC 1265, the difference in treatment did
not fall within the ambit of article 26(4) of the DTC.
32. In Boake
Allen the dispute concerned the application of the group income provisions
of s 247 ICTA under which UK resident group companies could, subject to certain
conditions, elect to pay and receive dividends without the paying company being
liable to account for the then advance corporation tax (“ACT”) and without the
recipient company receiving a corresponding tax credit. On a claim that the
refusal to apply the same treatment to payment of a dividend by a UK company to
its non-UK parent, the House of Lords held that this did not amount to
discrimination contrary to the relevant double taxation convention. The
equality ensured by a double taxation convention was only that any enterprise
which a company or individual resident in one country owned in the other
country would not be subject to taxation which discriminated on the ground of
its foreign control, but the denial of the right of election for group income
treatment was not on the ground of the company’s foreign control but on the
ground that s 247 could not be applied in a case in which the parent company
was not liable to ACT.
33. Arguments based on
Boake Allen were raised by HMRC in FCE Bank. In that case, which
concerned the UK’s group relief rules as they operated prior to the Finance Act
2000, group relief as between two UK subsidiaries of a common US parent was
denied in circumstances where it would have been available had the US parent
company been resident in the UK. The Upper Tribunal, upholding the decision of
the First-tier Tribunal, held that denial of group relief in those
circumstances was in contravention of the non-discrimination article of the
relevant treaty.
34. In finding as it
did, the Upper Tribunal examined HMRC’s reliance, in particular, on the speech
of Lord Hoffman in Boake Allen. Having set out a passage from that
speech (para [14] to [22]), the tribunal concluded (at [18]):
“In our view it is clear from this passage, read as
a whole, that the reason why there was no breach of the non-discrimination
article in Boake Allen is that section 247 was incapable of application
to a case in which the parent company, being non-UK resident, was not liable to
ACT. Lord Hoffmann explained why this was
so in the latter part of paragraph 17 and in paragraphs 18 to 19. He then
repeated his conclusion, in unambiguous language, in paragraph 22. Since the
concept of a joint election was incapable of meaningful application in a
cross-border context, there could be no discrimination against a US-parented
group because it was denied the right to make
an election which only made sense in a purely domestic context. In other words,
the reason for the difference in treatment (which prohibited the non-UK
tax-resident company from being a party to a group income election) was not the
foreign ownership of the UK tax-resident subsidiary’s share capital but rather
the absence of any charge to ACT on the non-UK tax resident parent.”
35. Accordingly,
whilst there could be no doubt that the actual statutory prohibition was that s
247 could not apply to a non-resident parent company, this was unrelated to the
question of control or ownership, and simply related to the fact that a company
that was not liable to ACT could not be a party to a group income election.
36. Boake Allen
concerned a case where the non-resident company was itself a party to the
transaction in question, in that case the payment of a dividend between group
companies. That was not the case in FCE Bank, where the group relief
was claimed as between two UK-resident companies, and the only connection the
non-resident company had with the transaction was as the common parent of both UK companies. Accordingly, the reasoning of Lord Hoffman in relation to the group income
election in Boake Allen had no application to the group relief claim in FCE
Bank. As the Upper Tribunal observed (at [19]):
“We observe at this point that this crucial part of
Lord Hoffmann’s reasoning has no relevance to the present case, because the
claim for group relief was a claim that only affected the UK tax position of the two UK subsidiaries. The claim had no effect at all on the tax position of
the US parent, and the only relevance of the parent company was to establish
(or not, as the case may be) the necessary group relationship between the two
UK companies which surrendered and accepted the trading losses. It is
conceptually quite irrelevant whether the US common parent is within the charge
to UK corporation tax or not, in relation to the question of whether two UK tax resident companies are sufficiently connected to each other so as to form a group
which permits the surrender of losses from one to another.”
37. As the Upper
Tribunal went on to say, whilst Lord Hoffman’s conclusion needed no further
reasoning to support it, he nevertheless gave certain examples designed to
illustrate that control by the non-resident company could not have been the
sole ground for denial of the right to make a group income election. HMRC
argued in FCE Bank that, having regard to an example given by Lord
Hoffman, there was no discrimination as regards group relief on the ground that
the capital of the UK companies was owned or controlled by the non-UK resident
parent company, because it would have been perfectly possible for group relief
to be obtained if a UK resident intermediate company had been interposed. This
argument was rejected by the tribunal as it was just another way of saying that
the reason why group relief was not available is because the actual (not
hypothetical) parent of the two UK companies was in fact not resident in the UK.
38. Lord Hoffman was
not saying in Boake Allen that the mere ability to interpose a UK company and obtain the relevant relief will in all cases mean there is no
discrimination. The real reason why s 247 could not be applied in that case
was not because a non-UK resident had control. It was because a group income
election is a concept that cannot be applied to a case where one of the
entities is not within the scope of ACT. In drawing attention to the fact that
a s 247 election could be made if a UK intermediate parent company were
interposed, Lord Hoffman was not suggesting that the non-discrimination article
cannot apply if a different structure (albeit with the same ultimate non-UK
ownership) can be adopted to achieve the relief; he was merely illustrating
that the reason for the UK rule on group income elections was related to the
quality of one of the parties to the election as a UK-company within the charge
to corporation tax, and not solely to the fact of non-UK control.
39. As the Upper
Tribunal found in FCE Bank, the same analysis could not apply in the
case of group relief. In that case there is no need for the parent of two
UK-resident subsidiaries itself to be UK resident in order for a group relief
claim to be made between the UK–resident subsidiaries. Where the UK law requires the parent company to be UK resident to establish the necessary group relationship, the
only reason for the difference in treatment is the non-UK resident status of
the parent company.
40. In their written
submissions on FCE Bank HMRC make the point, which we acknowledge, that
they do not accept that the decision of the Upper Tribunal is correct. Whilst
accepting of course that this tribunal is bound by the Upper Tribunal, HMRC
reserve the right, if appropriate, to raise at a higher level the correctness
of that decision.
41. Essentially the
written submissions of Mr Goy and Mr Facenna sought to distinguish FCE Bank
from this case on the basis of the various separate arguments we refer to in
this decision. We shall not repeat those arguments here. But Mr Goy also
argued before us, and this was repeated in the written submissions, that in
relation to the “sole reason” issue the position in this case is different from
that in FCE Bank for two reasons. The first is that the real reason why
the Surrendering Company cannot surrender its losses is that the Applicant
companies cannot claim. The second is that the relevant requirement would have
been satisfied, and the consortium relief would have been available (subject to
the section 410 question) if either the Luxembourg parent was resident
in the UK or if it carried on a trade in the UK through a permanent
establishment.
42. As to the first
of these submissions, we discuss later the question whether s 788 ICTA applies
to provide the Surrendering Company with the relief claimed. In that context
we have concluded that the position of the Surrendering Company cannot be
considered in isolation from that of the claimant companies. There are two
sides to any group relief equation: the surrendering company and the claimant
company. If the Applicant companies cannot claim losses surrendered by the
Surrendering Company, it is because the relevant consortium relationship does
not exist. The reason why that relationship does not exist is that the
Surrendering Company is indirectly owned by a Luxembourg company. The
inability of the Applicants to claim group relief is not a separate, unrelated,
reason why the surrender cannot be achieved; it is inextricably bound up with
the underlying reason, namely the indirect ownership of the Surrendering
Company by the Luxembourg company.
43. The second
submission has echoes of HMRC’s failed argument in FCE Bank. But
instead of relying on the argument that the position would have been rectified
if an intermediate company had been interposed, it is argued that the relevant
requirement for consortium relief would also have been satisfied if the
Luxembourg company, whilst remaining non-UK resident, had carried on a trade in
the UK through a permanent establishment (see s 402(3B)). Mr Goy argued in
this respect that it could not in those circumstances be said that the real and
sole reason for the refusal of the claim is that the Luxembourg company was not
resident in the UK.
44. In our view this
argument fails for the same reason that HMRC’s arguments in FCE Bank
failed. In distinguishing Boake Allen from the group relief position in
FCE Bank, the Upper Tribunal noted, as we have quoted at [19] of their
decision, that it is conceptually quite irrelevant whether the parent company
is within the charge to UK corporation tax or not in relation to whether or not
two UK tax-resident companies are sufficiently connected to each other so as to
form a group which permits the surrender of losses from one to another. In our
view the reasoning of the Upper Tribunal in FCE Bank is equally
applicable to a case of consortium relief. Unlike the position in Boake
Allen, where the status of the parent company receiving the dividends as
within the charge to corporation tax was the material factor, there is in this
case no conceptual need for a link company, that is simply part of the
ownership structure and is not itself seeking either to surrender or claim
group relief, to be within the scope of that charge to tax.
45. The essential
question is whether in this case s 402 discriminates against the Surrendering
Company on the ground that its capital is in part indirectly owned or
controlled by the Luxembourg company. In this case we consider that it plainly
does. In our view, following the reasoning in FCE Bank, the fact that a
different structure may be put in place whilst preserving the ultimate non-UK
ownership is not sufficient to displace a finding that the sole reason for a
difference in treatment is that non-UK ownership. If a non-UK resident company
does not carry on a trade in the UK through a permanent establishment, the only
reason group relief for the consortium that would otherwise be available if it
had instead been resident in the UK is that it is non-UK resident.
46. In our judgment
Mr Goy’s argument also fails because it necessarily involves the ownership
structure for the Surrendering Company being subject to other or more
burdensome requirements than those for a corresponding company owned by a
UK-resident link company. In the latter case there is no requirement for the UK company to carry on a trade; it may be a pure holding company. By contrast, a non-UK
resident company must, if it is to be a link company, carry on a trade in the UK through a permanent establishment. This is itself a difference of treatment that is
solely based on the non-resident status of the non-UK company. The alternative
structure suggested by HMRC does no more therefore than to confirm that the
sole ground for the discrimination is that the Surrendering Company’s capital
is indirectly partly owned or controlled by the Luxembourg company.
Section 788 ICTA
47. The provisions
of the DTC have effect by virtue of s 788 ICTA. So far as material, that
section provides:
“(1) If Her Majesty by Order in Council declares
that arrangements specified in the Order have been made in relation to any
territory outside the United Kingdom with a view to affording relief from
double taxation in relation to—
(a) income tax,
(b) corporation tax in
respect of income or chargeable gains, and
(c) any taxes of a similar
character to those taxes imposed by the laws of that territory,
and that it is expedient that those arrangements
should have effect, then those arrangements shall have effect in accordance
with subsection (3) below.
…
(3) Subject to the provisions of this Part, the
arrangements shall, notwithstanding anything in any enactment, have effect in
relation to income tax and corporation tax in so far as they provide—
(a) for relief from income
tax, or from corporation tax in respect of income or chargeable gains;
…”
48. We start
therefore with the interpretation of section 788. This was considered by Park
J in the High Court in NEC Semi-Conductors [2004] STC 489, which, as we
have described, was a case concerning the application of non-discrimination
provisions in certain double tax conventions to the same effect as Article 26(4)
of the DTC. We have described the factual background to that case earlier.
For this purpose it suffices to say that the issue was the inability of UK subsidiaries of foreign parent companies to make a group income election pursuant to s
247 ICTA, so that they could pay dividends to those parent companies without
accounting for ACT. Mr Justice Park held that the words in s 788(3) “in so far
as they provide for” are limiting words: if the infringement of the double tax
convention is not within the matters listed, then that aspect of the convention
is not part of our domestic law. Furthermore, there was no requirement to give
a wide interpretation to the various matters listed; what was required was a
natural interpretation, neither too wide nor too narrow.
49. This approach
was approved on appeal to the Court of Appeal [2006] STC 606. There it was
argued on behalf of the appellant that if reliefs from ACT were not covered by
the natural meaning of s 788(3)(a), that paragraph should nevertheless be
construed so as to extend to ACT since otherwise the UK would be in breach of
its treaty obligations. The court rejected that argument, and distinguished Salomon
v Customs and Excise Commissioners [1967] 2 QB 116, as s 788 is a general
provision whereby a number of treaties may be given effect as part of domestic
law, whereas the provision in question in Salomon was intended to enact
a particular treaty. The court agreed with Park J that the only proper
approach is to consider what is the natural meaning of the words used in s
788(3). In the House of Lords [2007] STC 1265, the claim in question was held
not to fall within the non-discrimination provision, so the question of the
effect of s 788 did not fall to be determined. Nevertheless, Lord Neuberger
considered it, and, whilst recognising that the principle in Salomon
would have less weight where the legislative provision had not been enacted to
give effect to a specific treaty obligation, expressed the view (at [51]) that
the point would have some force, but not sufficient to require the section to
be construed other than on a fair reading of it.
50. Mr Goy argued
that s 788(3)(a), in this context, gives effect to the provisions of the DTC
only so far as they confer a right to a relief from tax. To the extent that a
claim for relief from tax may be made under the relevant treaty article, it has
effect by virtue of s 788. But s 788 does not refer to the ability of one
company to surrender losses to another company. Such a surrender may provide
relief from tax for a company claiming losses, such as the Applicants, but it
is not a relief from tax for the company surrendering losses. The position is
rather the reverse. The company surrendering losses is giving up a relief
rather than claiming it.
51. Mr Goy argued
further that the application and effect of the non-discrimination provision can
only be considered from the point of view of the Surrendering Company, as the
company whose capital is indirectly owned by a Luxembourg resident. A relief
from tax that can be obtained under the provisions of a treaty must necessarily
be a relief from tax for someone capable of benefitting from an article in the
treaty. Here, he argued, the Surrendering Company is not claiming any relief
from tax but is rather claiming the right to surrender a relief. On this basis,
Mr Goy submitted, s 788 does not enable Article 26(4) to confer on the
Surrendering Company the right claimed.
52. Mr Goy submitted
that the true analysis in this case is that the requirement complained of is
taxation or another requirement to which the Applicants, and not the
Surrendering Company, are subject. On its terms Article 26(4) is only
concerned with the taxation treatment of a UK company owned or controlled by
residents of Luxembourg. It cannot operate to provide a relief from tax for
other companies such as the Applicants. Whilst it was accepted that an
inability to claim group relief could be a difference in treatment falling
within the scope of a non-discrimination article, subject to that difference in
treatment being solely on the ground of ownership or control in the other
contracting state, there was nothing in the terms of Article 26(4) to suggest
that it could affect the claims of other companies not so owned or controlled.
Furthermore, the OECD commentary on the 1963 model treaty, in its reference to
Article 24(5) of the model, could only refer to enterprises owned or controlled
by residents of the contracting state in question. A claimant company that was
not in this category could not make a claim on the basis of the consequential
effect of discrimination affecting a surrendering company.
53. We were referred
to a number of cases where treaty non-discrimination claims had been made by a
company controlled by residents of the other contracting state, but in each
case the claim had been denied on the ground that s 788 had only a limited
effect. We have referred above to NEC Semi-Conductors. In that case it
was held in the High Court and in the Court of Appeal that a claim in respect
of ACT failed because, although it was corporation tax, it was not corporation
tax in respect of income or chargeable gains. In Commerzbank the
repayment supplement was held neither to be a charging nor relieving provision,
and so fell outside s 788(3), and in UBS the right to payment of the
amount of the tax credit on set-off of franked investment income against the
losses was not itself a relief from corporation tax. These cases illustrate
the application of the principle, clearly expressed, as we have described, in NEC
Semi-Conductors, that s 788 does not import all the provisions and effects
of a double tax convention into UK law. But they provide no answer to cases
involving different facts; each such provision and effect must be examined on
its own merits.
54. Mr Baker argued
that, ex hypothesi, there are two parties to a claim for group relief:
the surrendering company and the claimant company. A restriction on the
ability of the surrendering company to surrender its losses impacts on both
companies, and the only way to ensure that the Surrendering Company in this
case is not subject to taxation or any connected requirement which is other or
more burdensome is to allow the Applicants to utilise those losses.
55. Mr Baker further
submitted that the terms of s 788(3)(a) were not limited to the grant of relief
to a resident of the other contracting state, or, in this case, to a company
controlled by residents of that state. On a plain reading of the legislation
it is not limited to relief granted only to the Surrendering Company. There is
no reason to give s 788(3)(a) a narrow interpretation so that it applies only
to a claim for relief by the company owned by a resident of the other
contracting state. To grant relief from corporation tax by allowing the
Applicants to claim group relief is the only way to give effect to the
non-discrimination commitment in Article 26(4). Mr Baker submitted that an
analogy could be drawn with FCE Bank where the grant of group treatment
to the claimant company necessarily had an impact on the surrendering company.
56. Mr Baker
referred us to a number of cases where, he argued, it had been accepted that a
claim for relief from income tax or corporation tax could be made by a person
other than the person who is a resident of the contracting state for the purposes
of the relevant tax treaty. In Lord Strathalmond v IRC (1972) 48 TC 537
relief was claimed by the husband of the person entitled to the benefit of the
treaty. In Avery Jones v IRC (1976) 51 TC 443 relief was claimed by the
executor of the deceased person entitled to the benefit of the treaty. In Padmore
v IRC (1989) 62 TC 352 relief was claimed by a partner in the partnership
entitled to the benefit of the treaty. Finally, in Smallwood relief was
claimed – although rejected on other grounds – by the settlor of a trust
claiming entitlement to the benefit of the treaty.
57. We do not
consider that any of these cases are of assistance in resolving the question
before us in this appeal. As Mr Goy submitted, all those cases involved
situations where the treaty provided protection or relief from the taxation of
particular income or gains, and the protection was available to the person
sought to be taxed. Nor do we accept that FCE Bank is analogous to the
position in this case; that case was concerned with a claim for relief by a
company owned by a resident of the contracting state in question.
58. Nonetheless,
although it is the case that, unlike other provisions of a double taxation
convention, such as those dealing with dividends, interest and capital gains, a
non-discrimination provision does not itself provide for a specific relief from
tax, that itself, as a matter of principle, does not, as FCE Bank
illustrates, prevent s 788 from giving effect to the non-discrimination
provision.
59. In their written
submissions, Mr Baker and Miss Shaw argued that, although the s 788 issue was
not addressed explicitly by the Upper Tribunal in FCE Bank, the tribunal
must be taken to have accepted that s 788 would apply to the ability of one
company to surrender losses to another company. We do not regard FCE Bank
as authority for such an application of s 788. That issue was not argued in
that case, and FCE Bank is accordingly of no assistance in that
respect. We agree with the written submission of Mr Goy and Mr Facenna that
the effect of s 788 was not an issue in FCE Bank because the companies
concerned in that case were claiming a relief from tax. The issue in this
case, where the Surrendering Company is the company whose shares are indirectly
owned by the Luxembourg company, was not present in FCE Bank.
60. In our view the
correct approach to the question we have to address in this case is to look
first at the nature of the difference in treatment that the non-discrimination
article seeks to prohibit. In this case it is that the Surrendering Company is
not permitted to surrender its losses in the way an equivalent UK-owned
subsidiary could, nor, consequently, can it receive a tax-free payment for
group relief. The treaty obligation therefore, is to remove those differences
in treatment. It would not be sufficient, in our view, despite Mr Goy
accepting that this was the effect of his submissions, for the UK simply to enable the Surrendering Company to surrender its losses into a void. That
would not in practice enable it to obtain a payment for group relief and that
result would once more leave the Surrendering Company in the position of having
been treated differently from its UK-owned counterpart.
61. For the
difference in treatment to be effectively eliminated, the group relief system
must operate as regards the Surrendering Company in the same way that it does
in the equivalent UK-owned case. That means that the Surrendering Company’s
position cannot be considered in isolation. The difference in treatment can
only effectively be remedied by resolving both sides of the group relief
equation. For the Surrendering Company to be treated in the same way as its
UK-owned counterpart, the claim for group relief must also be enabled. If it
is not, then the Surrendering Company remains at a tax disadvantage. No
payment for group relief could be made unless there is a recipient of that
group relief in the form of the claimant company or companies, represented in
this case by the Applicants. To remedy the difference in treatment of the Surrendering
Company, it therefore follows that, in order for the discrimination against the
Surrendering Company to be eliminated, Article 26(4) must require that the
concomitant group relief must be capable of being made. The effect of Article
26(4) therefore is that the Applicants must be enabled to claim group relief in
relation to losses surrendered by the Surrendering Company.
62. On that basis
the effect of the treaty obligation is not only to require that the
Surrendering Company be entitled to surrender its losses notwithstanding the
fact that its capital is partly, and indirectly, owned by Investments, but also
to require that the Applicants be enabled to claim group relief on the
surrenders of those losses. That requirement accordingly provides for relief
from corporation tax, and so falls within
s 788(3)(a) ICTA.
Conclusions on the DTC question
63. We therefore
conclude on the DTC question as follows:
(1)
By reason of its inability to surrender its losses to the Applicants,
the Surrendering Company was subjected to “any taxation or other requirement
connected therewith” within the meaning of Article 26(4) of the DTC.
(2)
That inability to surrender losses arose solely on the ground that the
Surrendering Company was indirectly owned by a company (Investments) which was
resident in Luxembourg, and not resident in the UK.
(3)
Section 788 ICTA has the effect of enabling the Applicants to obtain
relief for losses surrendered by the Surrendering Company (subject to s 410).
The section 410 question
64. Section 410 ICTA
has the effect of precluding group relief in certain circumstances if specified
“arrangements” exist. HMRC say that, as a result of the sale and purchase
agreement entered into by Hutchison Whampoa Limited (“HWL”) with KPN Mobile NV
(“KPNM”) on 7 November 2003 (and subsequently the agreement, on 27 May 2004,
with NTT DoCoMo, Inc) to acquire indirectly their respective 15% and 20%
interests in Hutchison 3G Holdings Limited (“Holdings”), such arrangements
existed from 7 November 2003 to 23 June 2005, when HWL exercised its rights
under the SPAs and completed the purchase indirectly of the 15% and 20%
shareholdings in Holdings.
65. So far as
material s 410 provides as follows:
“Arrangements for transfer of company to another
group or consortium
(1) …
(2) If a trading company is owned by a consortium or
is a 90 per cent subsidiary of a holding company which is owned by a consortium
and—
(a) in any
accounting period the trading company or a member of the consortium has trading
losses or other amounts eligible for relief from corporation tax which it
would, apart from this section, be entitled to surrender by way of group
relief; and
(b)
arrangements are in existence by virtue of which—
(i)
the trading company or any successor of it could, at some time during or after
the expiry of that accounting period, become a 75 per cent subsidiary of a
third company; or
(ii)
…
(iii)
any person, other than a holding company of which the trading company is a 90
per cent subsidiary, either alone or together with connected persons, holds or
could obtain, or controls or could control the exercise of not less than 75 per
cent of the votes which may be cast on a poll taken at a general meeting of
that trading company in that accounting period or in any subsequent accounting
period; or
(iv) …
then, for the purposes of this Chapter, the trading
company shall be treated as though it did not (as the surrendering company or
the claimant company) fall within section 402(3).
(3) …
(4) In this section “third company” means a company
which, apart from any provision made by or under any such arrangements as are
specified in paragraph (b) of either subsection (1) or subsection (2)
above, is not a member of the same group of companies as the first company or,
as the case may be, the trading company or the holding company to which
subsection (2) above applies.
(5) In subsections (1) and (2) above—
“arrangements”
means arrangements of any kind whether in writing or not;
“connected persons”
shall be construed in accordance with section 839 [but as if subsection (7) of
that section (persons acting together to control a company are connected) were
omitted]1; and
“control” has the meaning
assigned by section 840.”
66. There is no
dispute on the facts. Nor is it disputed that the SPAs had the effect that the
Surrendering Company could become a 75% subsidiary of a company that was not a
member of the same group as the Surrendering Company or Holdings. However, the
Applicants say that the SPAs are not “arrangements” falling within
s 410. They make this submission on the basis that the arrangements in
question in
s 410 are those which transfer the benefit of losses of a company within a
group or owned by a consortium to another group or consortium, and that the
scheme of the provisions is to target the manipulation of group relief so as to
allow a non-associated, third company, which is not a member of the group or
consortium to take the benefit of the tax advantage.
67. The Applicants
point to the fact that the effect of the SPAs, and the transfers of the
interests in the shares of Holdings, was not to take the benefit of the losses
of the Surrendering Company outside of a relevant association (group or
consortium in existence at the time the losses were incurred). They contend
that s 410(2) is not targeted at commercial arrangements which allow the
holding in a company to be increased from one where a consortium claim can be
made to one where a primary group relief claim can be made. The Applicants say
that if HMRC are right on the impact of s 410, the result would be that prior
to 7 November 2003 the Applicants could (subject to the EU law and DTC
questions) make valid consortium claims, and from 23 June 2005 they could make
a valid group relief claim. However, between those two dates they could make
neither a consortium claim nor a group claim because of the existence of the
SPAs. The Applicants say that such a result is absurd and cannot be consistent
with the will of Parliament.
68. We were taken by
Miss Shaw to a number of authorities on statutory construction. Little of this
was controversial, and we set out below a summary of the principles she
referred to:
(1)
The object of statutory interpretation is to identify the intention of
Parliament (R v Secretary of State for the Environment ex p Spath Holme
[2001] 2 AC 349 at p 396).
(2)
Parliament is presumed to intend that its legislation will be
interpreted in a meaningful and purposeful way so as to give effect to its
basic objectives (A-G’s Reference (no 5 of 2002) [2004] UKHL 40; IRC
v McGuckian [1997] STC 908 at pp 915-6).
(3)
Regard must be had to the whole of the statute and it should be
construed so that the various parts make sense together (Colquhoun v Brooks
(1889) 14 App Cas 493; Canada Sugar v R [1898] AC 735 at p 741).
(4)
Regard may be had to the heading of the section. For this proposition
Miss Shaw relied upon Dixon v British Broadcasting Corporation [1979] QB 546, citing in particular the judgment of Shaw LJ at p 552, where in the
context of construing the meaning of the phrase “fixed term” in the Trade Union
and Labour Relations Act 1974, he found it requisite to look at the applicable
heading, which referred to “unfair dismissal”. This does not seem to us to
indicate that interpretation of the words of a statutory provision should in
any way be constrained by reference to a heading; the Dixon case is
merely an illustration of the need to look at the statutory words in their
context.
In this connection, Mr Goy
referred us to Page v Lowther [1983] STC 799. There, in relation to an
assessment to tax under s 488 ICTA 1970, the court had to consider whether the
phrase “arrangement or scheme” construed in light of a preamble in s 488(1),
which stated the anti-avoidance purpose of the section, and a sidenote reading
“Artificial transactions in land”, denoted only a scheme or arrangement of an
artificial nature, designed to avoid tax. It was held that the operation of
the section was not limited to transactions specifically designed to avoid
tax. The sidenote could not be relied upon as a guide to the construction of
the section. In his judgment, Slade LJ said (at p805g):
“… I myself feel no doubt that, even having full
regard to the sidenote and s 488(1), the lease of 1971 was an 'arrangement'
within the meaning of sub-s (2), entered into between the trustees and
Trafalgar. The trustees' task on this appeal in this context would have been
much easier if s 488 had specifically provided that a condition for the
application of sub-s (2)(ii) should be that the main object, or one of the main
objects, of the scheme or arrangement in question was for the avoidance or
reduction of liability to tax.”
(5)
Parliament is presumed not to have intended a statute to have absurd or
anomalous results (R (oao Edison First Power Ltd) v CVO [2003] UKHL 20
at [116], [117]; Hirsch v Crowthers Cloth Ltd [1990] STC 174 at p 181).
69. There was no
dispute that s 410 is an anti-avoidance provision. But Mr Baker argued that
the mischief at which the provision is aimed is arrangements to transfer the
benefit of losses of a company within a group or owned by a consortium to another
group or consortium, having regard to the heading to s 410. He submitted that
the scheme of the provisions is to target the manipulation of group relief and
that, accordingly, the “arrangements” referred to are “avoidance arrangements”.
70. Mr Baker
submitted that, having identified its basic objective as being concerned with
avoidance arrangements, this in turn informs the proper interpretation of each
of the sub-provisions of s 410.
71. Mr Baker took us
first to s 410(1)(b), which applies in the case of group companies. The focus
of that provision is on arrangements by virtue of which a group company could
cease to be a member of the group (specifically, by becoming a member of an
associated “third company” group, or by another person obtaining control, or by
a “third company” group carrying on its trade). Plainly, as Mr Baker put it,
these are all avoidance arrangements.
72. Section
410(2)(b) contains the comparable provisions that apply in the case of a
consortium. We accept that these were intended to be parallel provisions to
those applying to groups. Mr Baker submitted that the focus of s 410(2)(b) is
on arrangements by virtue of which a company could cease to be owned by the
consortium members.
73. Turning to s
410(2)(b)(i), this applies where the surrendering company becomes a 75%
subsidiary of a “third company”. The expression “third company” is a defined
term, and its meaning is set out in s 410(4). In the context of consortium
relief, it means a company that is not, apart from any relevant arrangement, a
member of the same group of companies as the trading company in question or the
holding company of the trading company. On the plain wording of this
definition, HWL was not a member of the same group as either the Surrendering Company
or Holdings. However, Mr Baker argued that s 410(4) should be interpreted in a
way consistent with its meaning for the purposes of s 410(1); that is, that the
third company should also be a company that is not itself a member of the
consortium.
74. As regards s
410(2)(b)(iii), Mr Baker submitted that, having regard to the purpose of the
provisions and in the light of the other situations posited by the section,
this sub-section is concerned only with avoidance arrangements involving manipulations
to the voting rights attached to shares. He argued that if s 410(2)(b)(iii)
applied to arrangements relating to the mere acquisition of shares, it would
overlap with sub-paragraph (i), but without the limitation contained in that
sub-paragraph relating to “third companies” This might lead to a result which
conflicted with sub-paragraph (i). On a proper interpretation of s
410(2)(b)(iii), Mr Baker submitted that it does not apply to the SPAs in this
case, as those are agreements for the acquisitions of shares and not
arrangements to alter the voting rights attached to shares.
75. Mr Baker
submitted that, as a general matter, s 410(2) is not targeted at commercial
arrangements which allow the holding in a company to be increased from one
where a consortium claim can be made to one where the primary claim to group
relief can be made. He argues that denial of relief in the circumstances of
this case, where, assuming a valid claim for consortium relief could, absent s
410, be made in the relevant periods, the Applicants could make consortium
claims prior to 7 November 2003, and group relief claims after 23 June 2005,
but not (because of s 410) in the intervening period, was an absurd result and
could not be consistent with the intention of Parliament. If the remaining 355
of the shares in Holdings had been acquired immediately upon entering into the
SPAs there would be no objection to the relief for the losses. There is no
rational basis, according to Mr Baker’s submission, for distinguishing between that
and the facts of the present case.
76. We turn first to
the question whether s 410 is to be construed as limited to arrangements that
have an avoidance purpose. It is clear that the section is designed to counter
avoidance of tax through losses being used outside the relevant group or
consortium. One example of avoidance is the temporary introduction of a
loss-making company in one group to another group. In the context of
consortium relief, we accept, as Mr Goy submitted, that s 410(2)(b) appears to
have as its purpose the prevention of companies being introduced as members of
a consortium for a limited period.
77. Mr Goy referred
us to Shepherd v Law Land plc [1990] STC 795, which concerned the period
during which s 29 FA 1973 (a precursor to s 410) operated. That case concerned
denial of a group relief claim on account of the existence of a series of
options that were acknowledged to have been commercial and not designed to
abuse the group relief system. It was common ground that the options were
“arrangements” of the kind referred to in the section (see Ferris J at p 803c).
However, we do not regard this as material to our own decision, as the issue of
whether arrangements must have an avoidance purpose was not raised.
78. Mr Goy also
referred us to the special commissioners’ decision in Scottish and Universal
Newspapers Ltd v Fisher [1996] STC (SCD), where again the arrangements in
question concerned the grant of an option to acquire a company. The appeal was
allowed on the basis that the arrangements were conditional on the consent of
the Office of Fair Trading having been obtained, and that until that time the
arrangements had no effect. But significantly the special commissioners
referred (at [16]) to what Lord Bridge said in Pilkington Bros Ltd v IRC
[1982] STC 103 (at p 113) about the expression “by virtue of” in the
introductory part of s 410(2): “This directs attention to the effect of the
arrangements not to their purpose.” This shows clearly that there is no
purpose test in s 410, and there is no reason for one to be implied.
79. Parliament
could have legislated against devices for the manipulation of group relief by
introducing a purpose-based anti-avoidance provision. It did not do so.
Instead it set out objective tests designed to achieve its own purpose of
preventing losses being used in cases where arrangements it perceived as
objectionable were put in place. This inevitably catches all such
arrangements, whether or not those arrangements themselves have an avoidance
purpose, and whether or not they are commercial. That objective measure was
intended by Parliament to be the yardstick by which its anti-avoidance purpose
was achieved. Accordingly, adopting a purposive approach to s 410, we can see
no foundation for a construction outside of its clear words. The arrangements
in question do not have to be shown to have an avoidance purpose.
80. The next
question is whether, as the Applicants submit, the definition of “third
company” in the material part of s 410(4) should be read so as to exclude a company
that is a member of the consortium, or, it would follow, a member of the same
group as a member of the consortium. On this we agree with Mr Goy that such an
approach could not be supported by the wording of s 410. Nor can any of the
principles of statutory construction compel or permit us to make changes to
what is clear and unambiguous legislation.
81. In any event, we
do not consider that such an intervention could be justified by regard to the
purpose of the provisions. It is quite clear that to import the exclusion from
the definition of “third company” (as the Applicant proposes) would open up the
very opportunities for avoidance that Parliament was seeking to forestall. A
loss-making company could be transferred out of a group and placed in the temporary
ownership of a consortium including a member of the original group, with
arrangements for it to be re-acquired by the original group. Mr Goy provided
us with an example of this:
A company (Company A) has a loss-making subsidiary
(Company B). Company A can make use of some of Company B’s losses, but not all
of them. Company A parts with 35% of the Company B shares to one or two other
companies that can benefit from consortium relief. Company A retains the right
to re-acquire Company B through options, an agreement or other arrangements.
82. Mr Goy
submitted, and we agree, that this is clearly an example of the sort of
arrangement which s 410 is designed to counter. Section 410 cannot possibly,
therefore, be construed in the way the Applicants submit it should.
83. Mr Baker referred
in his submissions to the difficulty in discerning why s 410(4) excludes from
the definition of “third company”, in relation to consortium relief, companies
that are members of the same group as the trading company or the holding company.
Mr Baker pointed out that, under s 402(3) a trading company owned by a
consortium could not be a 75% subsidiary of any company other than its holding
company. Mr Goy acknowledged that the reason for this exclusion was obscure,
but submitted that this was not relevant to the question whether members of the
consortium should be outside the definition of “third company”. We agree with
that submission. In any event, it seems to us plain that, in a holding company
case (such as the present case), the trading company and the holding company
are members of a group together. If the holding company had another 75%
subsidiary, the exclusion in s 410(4) would not preclude consortium relief if
there were arrangements to transfer the trading company to that other
subsidiary. The provision is understandable in that context, and not of no
effect.
84. In relation to s
410(2)(b)(iii), we do not accept Mr Baker’s submission that this must be
construed only so as to affect arrangements for the manipulation of voting
rights. There may well, in some cases, be an overlap with s 410(2)(b)(i), but
that will not universally be the case, and it cannot justify an interpretation
of s 410(2)(b)(iii) that is narrower than its ordinary meaning. The definition
of 75% subsidiary, which is the focus of the condition in sub-paragraph (i), is
not concerned with voting rights. It focuses on the beneficial ownership of
ordinary share capital and the economic rights of the shares. In cases where
such ownership does not correspond to voting rights, it is clear that
Parliament intended that arrangements for the acquisition of 75% of the votes,
by whatever means, should be covered by the section. This is confirmed, in our
view, by the wide meaning afforded in s 410(5) to “arrangements” as meaning
arrangements “of any kind”. It is true that in some cases the protection of
the “third company” definition would not be available where both of
sub-paragraphs (i) and (iii) would apply to a particular arrangement, but that
is a defect that cannot be addressed by construction without itself producing
further anomalies. That therefore is a question for Parliament and not for
this tribunal.
85. As Mr Goy submitted,
the real complaint that might be made by companies in the position of the
Surrendering Company, and the Applicants, is not in relation to the conditions
for the application of s 410, but in the effect of that application. Section
410 does not operate in a subtle way; it is all or nothing. If the section
does not apply, group or consortium relief is unrestricted, according to its
terms. If it does, relief is wholly denied. There is no middle course that
arguably might provide a more logical result in cases of this nature, where a
claimant company is at one time a member of a consortium, and at another a
member of a group. In such a case, if Parliament had decided to adopt a more
nuanced approach, it could have provided that the effect of
s 410 would be to deny relief only in respect of claims by consortium members
outside the group to which the trading company was to be transferred under the
arrangements in question. But Parliament made no such provision, and no amount
of statutory construction can fill that gap. If Parliament considers that a
different approach should be introduced, that will be a matter for it to enact.
Conclusion on the section 410 question
86. In conclusion,
therefore, we find that the effect of s 410 is to treat the Surrendering
Company as not falling within s 402(3) for the period from 7 November 2003 to
22 June 2005 inclusive.
Summary of our determination
87. We have
determined the questions referred to us as follows. In each case this is a
very brief summary only and must be read in conjunction with our decision as a
whole.
(1)
The EU law question. We have decided to refer certain questions
to the CJEU. Our directions in this respect, and the form of reference, are released
at the same time as this decision.
(2)
The DTC question. We determine that the effect of Article 26(4)
of the DTC, as applied by s 788(3) ICTA, is that the Appellants are (subject to
s 410) entitled to obtain relief from corporation tax by means of the group
relief claims notwithstanding the requirements of s 402(3B) ICTA.
(3)
The section 410 question. We determine that the effect of s 410
ICTA is to treat the Surrendering Company as not falling within s 402(3) for
the period from 7 November 2003 to 22 June 2005 inclusive.
Application for permission to appeal
This document contains full findings of fact and reasons
for the decision. Any party dissatisfied with this decision has a right to
apply for permission to appeal against it pursuant to Rule 39 of the Tribunal
Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application
must be received by this Tribunal not later than 56 days after this decision is
sent to that party. The parties are referred to “Guidance to accompany a
Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and
forms part of this decision notice.
ROGER BERNER
SIR STEPHEN OLIVER
TRIBUNAL JUDGES
RELEASE DATE: 19 December 2011
