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Judgments - Imperial Chemical Industries v. Colmer (Her Majesty's Inspector of Taxes)

HOUSE OF LORDS

Lord Nicholls of Birkenhead Lord Keith of Kinkel Lord Mustill Lord Nolan

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

IMPERIAL CHEMICAL INDUSTRIES

(RESPONDENTS)

v.

COLMER (HER MAJESTY'S INSPECTOR OF TAXES)

(APPELLANT)

ON 18 NOVEMBER 1999

LORD NICHOLLS OF BIRKENHEAD

My Lords,

    I have had the advantage of reading in draft the speech of my noble and learned friend Lord Nolan. For the reasons he gives I too would allow this appeal.

LORD KEITH OF KINKEL

My Lords,

    For the reasons contained in the speech to be delivered by my noble and learned friend Lord Nolan, which I have read in draft and with which I agree, I too would allow this appeal.

LORD MUSTILL

My Lords,

    I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Nolan. For the reasons he gives I too would allow this appeal.

LORD NOLAN

My Lords,

    The facts of this matter are fully set out in the speech which I made in your Lordships' House on 14 March 1996, when the case was first considered. It concerns a claim by the respondents for consortium tax relief. The crucial question was (and is) whether Coopers Animal Health (Holdings) Ltd. ("Holdings"), a company in which the respondent taxpayer holds 49 per cent of the shares, was during the relevant period a holding company as defined by section 258(5)(b) of the Income and Corporation Taxes Act 1970. The definition, so far as material, reads as follows: (now section 413(3)(b) of the Income and Corporation Taxes Act 1998).

    "' . . holding company' means a company the business of which consists wholly or mainly in the holding of shares or securities of companies which are its 90 per cent. subsidiaries, and which are trading companies,"

    and the opening words of section 258(7) provide that (see now section 413(5) of the Act of 1998)

    "References in this and the following sections of this Chapter to a company apply only to bodies corporate resident in the United Kingdom . . ."

Your Lordships held that the opening words of section 258(7) applied to the words "company" and "companies" in section 258(5)(b) with the result that Holdings could only qualify as a "holding company" if its business consisted wholly or mainly in the holding of shares or securities of companies which were not only trading companies but also resident in the United Kingdom. This had been the view of the Special Commissioner, Mr. D. C. Potter Q.C., but the contrary view had been taken by Millett J. (as he then was) and by the Court of Appeal. The significance of the point lay in the fact that Holdings has 23 wholly owned trading subsidiaries of which 19 are resident outside the United Kingdom.

    It was accepted by the parties and by your Lordships that for the purposes of the present case - though not as a universal proposition - the "wholly or mainly" requirement should be judged on the basis of a simple head count of the subsidiaries, so that if all or a majority of the subsidiaries satisfied the United Kingdom residence condition Holdings would qualify, but otherwise not. On this basis, of course, Holdings clearly failed to qualify.

    In your Lordships` House the respondents raised for the first time the further argument that the construction of section 258 adopted by your Lordships was in conflict with European Community law, since in so far as it discriminated against companies holding shares in subsidiaries resident in other member states it militated against the rights of establishment conferred by articles 52 and 58 of the European Community Treaty (now articles 43 and 48 of the Treaty as amended by the Treaty of Amsterdam). In consequence, argued the respondents, your Lordships were obliged by article 5 (now article 10) to construe section 258 in a manner which avoided the conflict, or, in other words, to uphold the construction adopted by Millett J. and the Court of Appeal. In fact only six of the subsidiaries of Holdings are resident in other member states, which leaves a majority resident not merely outside the United Kingdom but outside the European Union and therefore unaffected by the Treaty: but the respondents contended that the Treaty point must nonetheless be addressed in order to determine the scope and validity of section 258(5)(b).

    Accepting this last contention, and unable to regard the matter as acte clair, your Lordships referred the questions raised by the respondents' arguments to the Court of Justice on 24 July 1996. By its decision given on 16 July 1998 the Court of Justice upheld the first argument of the respondents. In paragraph 30 of its judgment the Court of Justice declared that:

    "article 52 of the Treaty precludes legislation of a member state which, in the case of companies established in that state belonging to a consortium through which they control a holding company, by means of which they exercise their right to freedom of establishment in order to set up subsidiaries in other member states, makes a particular form of tax relief subject to the requirement that the holding company's business consist wholly or mainly in the holding of shares in subsidiaries that are established in the member state concerned."

    It did not follow, however, that the United Kingdom legislation, as interpreted by your Lordships, conflicted with Community law in the circumstances of the present case. As to that, the Court of Justice ruled as follows:

    "32. It must be emphasised that the difference of treatment applied according to whether or not the business of the holding company belonging to the consortium consists wholly or mainly in holding shares in subsidiaries having their seat in non-member countries lies outside the scope of Community law.

    33. Consequently, articles 52 and 58 of the Treaty do not preclude domestic legislation under which tax relief is not granted to a resident consortium member where the business of the holding company owned by that consortium consists wholly or mainly in holding shares in subsidiaries which have their seat in non-member countries. Nor does article 5 of the Treaty apply.

    34. Accordingly, when deciding an issue concerning a situation which lies outside the scope of Community law, the national court is not required, under Community law, either to interpret its legislation in a way conforming with Community law or to disapply that legislation. Where a particular provision must be disapplied in a situation covered by Community law, but that same provision could remain applicable to a situation not so covered, it is for the competent body of the state concerned to remove that legal uncertainty in so far as it might affect rights deriving from Community rules.

    35. Consequently, in circumstances such as those in point in the main proceedings, article 5 of the Treaty does not require the national court to interpret its legislation in conformity with Community law or to disapply the legislation in a situation falling outside the scope of Community law."

It is thus clear that, in the circumstances of the present case, Community law presents no obstacle to the application of section 258 in accordance with the construction placed upon the section by your Lordships on the last occasion.

    The respondents have sought, however, to persuade your Lordships that the decision of the Court of Justice upon the first point makes that construction unsustainable as a matter of domestic law. The effect of that decision is undeniably that if a majority of the subsidiaries of Holdings had been resident in countries within the European Community then the consortium tax relief which is claimed by the respondents could not have been denied. Therefore, submitted Mr. Whiteman Q.C. for the respondents, it was no longer permissible to draw the line around companies resident in the United Kingdom as your Lordships had done on the last occasion.

    He submitted that there were two alternative solutions to the problem. The first, which was to be preferred, was to return to the construction adopted by Millett J. and the Court of Appeal and abandon United Kingdom residence as the criterion for the subsidiaries. The second was, in effect, to admit defeat and disapply that criterion in cases which were within the scope of the decision of the Court of Justice on the first point, a course which would create obvious anomalies between groups of companies with different and possibly changing numbers of subsidiaries established inside or outside the Community.

    In support of the former alternative Mr. Whiteman argued that section 258 was ambiguous, that the ambiguity should be resolved in a manner which conformed with Community law, and that this result would be achieved by accepting the construction adopted in the courts below.

    My Lords, there appear to me to be two objections to this argument. The first is that the section is not to my mind properly described as ambiguous. It is difficult to construe, but that is another matter. An ambiguity is a word or phrase fairly open to diverse meanings, the classic example being "twelve o'clock" which, save for users of the twenty four hour clock, could equally mean midday or midnight. The crucial words in the present case might arguably bear the meaning attached to them by the courts below or that attached to them by your Lordships. They cannot on any view of the matter bear both.

    The second and more fundamental objection is that, while the construction adopted by the courts below would certainly avoid the difficulty raised by article 52, it can scarcely be described as conforming with the article, because it draws no distinction between companies resident within and those resident outside the Community. There is no way in which such a distinction can be read into the words used. It is impossible to construe section 258 as permitting a company such as Holdings to include in the head count non-United Kingdom resident subsidiaries which are established in other Community countries in conformity with article 52, but not to include those established outside the Community which are unprotected by Community law. For substantially the same reasons Mr. Whiteman`s argument that the doctrine of severance could be invoked to separate the permissible from the impermissible elements of section 258 cannot in my judgment succeed. The language of the crucial provisions is indivisible.

    It remains to consider the question of disapplication in accordance with the provisions of section 2(1) and (4) of the European Communities Act 1972. Explaining the effect of the section in Reg. v. Secretary of State for Transport, Ex parte Factortame Ltd. [1990] 2 A.C. 85, Lord Bridge of Harwich said, at p. 140B-D:

    "By virtue of section 2(4) of the Act of 1972 Part II of the Act of 1988 [the Merchant Shipping Act] is to be construed and take effect subject to directly enforceable Community rights, and those rights are, by section 2(1) of the Act of 1972, to be recognised and available in law, and . . .enforced, allowed and followed accordingly. . . . This has precisely the same effect as if a section were incorporated in Part II of the Act of 1988 which in terms enacted that the provisions with respect to the registration of British fishing vessels were to be without prejudice to the directly enforceable Community rights of nationals of any member state of the E.E.C."

So, in the present case, the effect of section 2 of the Act of 1972 is the same as if a subsection were incorporated in section 258 of the Act of 1970 which in terms enacted that the definition of "holding company" was to be without prejudice to the directly enforceable Community rights of companies established in the Community. As the concluding paragraphs of the judgment of the Court of Justice make plain, this in no way affects the application of the definition to companies established outside the Community; cf. in this connection the comments of Lord Keith of Kinkel on the effect of the Factortame decision in Reg. v. Secretary of State for Employment, Ex parte Equal Opportunities Commission [1995] 1 A.C. 1 at 27D-E.

    Mr. Whiteman pointed out with justification that, with or without disapplication, the decision of the Court of Justice on the first point undermined the dichotomy between companies resident and those non-resident in the United Kingdom upon which I had relied in my earlier speech as suggesting a legislative purpose which supported the construction adopted by your Lordships. The possibility remains, however, that Parliament based section 258 of the Act of 1970 upon that dichotomy but simply and understandably failed to anticipate the effects upon it of the Act of 1972. It is not altogether surprising that the latter Act should prevent the criterion of United Kingdom residence from prevailing over the Community rights conferred by article 52. It is true that the result is to increase the number of oddities and anomalies which the definition of "holding company" creates, and which are referred to in my earlier speech. That, however, is a matter for the consideration of the legislature rather than your Lordships.

    To return to the facts of the present case, I am satisfied for the reasons given that the decision of the Court of Justice does not assist the respondents. Holdings does not in my judgment qualify as a "holding company," and so the claim of the respondents for consortium tax relief must fail. Accordingly I would allow the appeal. The Crown must nonetheless pay the costs in accordance with the order of Your Lordships' House granting leave to appeal.

 

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