House of Lords portcullis
House of Lords
Session 2005 - 06
Publications on the Internet
PDF Print Version pdf icon

Judgments - Autologic Holdings plc and others (Respondents) etc. v. Her Majesty's Commissioners of Inland Revenue (Appellants)




Autologic Holdings plc and others (Respondents) v. Her Majesty's Commissioners of Inland Revenue (Appellants)

BNP Paribas UK Holdings Limited and others (Respondents) v. Her Majesty's Commissioners of Inland Revenue (Appellants)

The Future Network plc and others (Respondents) v. Her Majesty's Commissioners of Inland Revenue (Appellants)

Perkins Engines Company Limited and others (Respondents) v. Her Majesty's Commissioners of Inland Revenue (Appellants)

HJ Heinz Company Inc and others (Respondents) v. Her Majesty's Commissioners of Inland Revenue (Appellants)

British Telecommunications plc and others (Respondents) v. Her Majesty's Commissioners of Inland Revenue (Appellants)

(Conjoined Appeals)

[2005] UKHL 54


My Lords,

    1.  On these appeals the question before the House is procedural: should the principal substantive issues raised by the six claimant groups of companies be heard and decided by the High Court or by the Special Commissioners? Resolution of this question is difficult partly because of the variety of claims being advanced and partly because not all the claimants are in the same position. The huge number of companies involved adds a further practical complication.

The background

    2.  Simplified as far as possible, the background is this. On the procedural question now under consideration six groups of companies have been selected as test cases. They represent a large number of claimant companies in proceedings started in the Chancery Division against the Commissioners of Inland Revenue. This litigation is currently being managed under a group litigation order made by the Chief Chancery Master in May 2003. The claims within this order are known as the 'loss relief group litigation'. The principal substantive issues raised by these claims are issues of Community law. These issues of law are also the subject of a large number of appeals pending before the special commissioners. In many instances claimants have both appealed to the special commissioners and started proceedings in the High Court.

    3.  The origin of this mass of litigation lies in two decisions of the European Court of Justice: Imperial Chemical Industries Plc v Colmer (Inspector of Taxes) (Case C-264/96) [1999] 1 WLR 108, and the combined cases of Metallgesellschaft Ltd v Inland Revenue Commissioners; Hoechst AG v Inland Revenue Commissioners (Joined Cases C-397 and 410/98) [2001] Ch 620, usually known as the Hoechst case. Stated shortly, these decisions made plain that United Kingdom legislation restricting fiscal reliefs or advantages to cases where the relevant companies are resident in the United Kingdom may be inconsistent with the E C Treaty. The I C I case concerned consortium relief. The European Court ruled that article 52, now article 43, of the E C Treaty precludes legislation of a member state which makes tax relief subject to the requirement that the subsidiaries of the holding company are established in the member state concerned. The Hoechst case concerned advance corporation tax. The European Court ruled it is contrary to article 43 for the tax legislation of a member state to afford companies resident in that state the opportunity to benefit by paying dividends without paying advance corporation tax where their parent company is also resident in that state but to deny that opportunity where their parent company has its seat in another member state.

    4.  Multi-national groups of companies were quick to seize on the possibility of applying the reasoning underlying these two decisions to other tax provisions. Hundreds of claims have now been made against the Commissioners of Inland Revenue amounting to many billions of pounds. One of the fiscal provisions thought to be vulnerable concerns group relief from corporation tax. Corporation tax is charged on the profits of companies. Group relief is a relief from corporation tax available when one company in a group surrenders its losses to another company in the same group, thereby enabling the latter to claim the benefit of those losses as a set off against its profits. Thus, in essence, group relief is a transfer of tax relief from one company to another. It was introduced into United Kingdom tax law in 1973. Chapter IV of Part X of the Income and Corporation Taxes Act 1988 (ICTA) now regulates this relief. Until 2000 one of the prescribed conditions was that both the company surrendering its losses and the claimant company must be resident in the United Kingdom: section 413(5). The equivalent condition from 2000 is that both the surrendering company and the claimant company must be either resident in the United Kingdom or a non-resident company carrying on a trade in the United Kingdom through a branch or agency: section 402(3A) and (3B). The tax legislation also includes provision for the surrender of losses between companies having a consortium relationship. For present purposes it is sufficient to confine attention to group relief claims. For the purpose of these appeals there is no material distinction between group relief claims and consortium relief claims.

    5.  In 2002 Marks and Spencer Plc appealed against the refusal of group relief, on the ground that these statutory limitations on the territorial scope of group relief were incompatible with, and overridden by, Community law. The Special Commissioners dismissed the taxpayer's appeal: Marks and Spencer Plc v Halsey (Inspector of Taxes) [2003] STC (SCD) 70. On appeal to the High Court Park J referred questions to the European Court of Justice. Advocate General Maduro delivered his opinion on 7 April 2005. The decision of the European Court of Justice is awaited.

    6.  As was to be expected, other international groups of companies showed interest in following Marks and Spencer's lead. A mass of proceedings followed in the High Court. The loss relief group litigation order was made in order to manage these claims. The House was told that currently there are 95 claimants subject to this order, involving 70 corporate groups and more than 1,000 individual companies. These claims raise some difficult questions of Community law. For present purposes it suffices to note that the primary contention of substantive law is that the provisions in ICTA restricting group relief to companies resident or carrying on an economic activity in the United Kingdom are incompatible with article 43 of the EC Treaty (freedom of establishment) and article 56 (abolition of restrictions on movements of capital and payments).

    7.  The procedural dispute now before the House arises out of a contention by the Inland Revenue that the principal claims for relief covered by the loss relief group litigation order are not properly justiciable in the High Court. Claims for group relief should be made to an inspector of taxes. If he wrongly refuses a claim the taxpayer should appeal to the General or Special Commissioners. These appeal commissioners, as I shall describe them, will give effect to directly applicable provisions of Community law, just as much as the High Court. Over 300 groups of companies have followed this route in challenging the group relief provisions. They include 65 of the High Court claimants. That, say the Inland Revenue, is the correct way to proceed. Six test claimants were selected as the vehicle for resolving this jurisdictional dispute.

    8.  The first major complicating factor on this appeal can now be noted. Four different types of loss are said to have been suffered by reason of the alleged breaches of Community law. The test claimants assert they have suffered loss under at least two, and in some instances, all four headings:

    (1)  A claim for group relief. This comprises loss of profits of the UK profit-making company which should have been relieved by the losses of a non-UK resident company.

    (2)  A claim in respect of utilised reliefs. Profit-making companies used other reliefs (eg capital allowances or surplus ACT) they would not have used had basic group relief been available.

    (3)  A claim for recovery of surrendered reliefs. Other UK members of the group surrendered their own reliefs to the UK profit-making company.

    (4)  A claim for payments. Companies which would have surrendered losses, possibly for payment, had the group relief rules not been confined to UK resident companies seek compensation for the loss of those payments.

    9.  Park J struck out claims in category (1): [2004] STC 594. These are matters for the appeal commissioners. The Inland Revenue accept that the so-called 'satellite' claims in categories (2) to (4) are outside the jurisdiction of the appeal commissioners. In a characteristically lucid judgment Park J said it does not greatly matter whether the High Court lacks jurisdiction to decide the category (1) claims or has a discretion to accept or decline jurisdiction since, if the latter is the position, he would decline to exercise whatever jurisdiction he had: page 596, para 4. He said the most important factor is that 'whether it would be more convenient to commence the entire case in the High Court or not, that is not the system our law provides for the resolution of tax disputes between taxpayers and the Revenue': page 607, para 35. Further, he considered it was not 'a major inconvenience' to have two sets of proceedings when they would proceed sequentially and not simultaneously, with the High Court proceedings claiming consequential relief going ahead only if the taxpayers were successful in the proceedings before the special commissioners: page 607, para 36.

    10.  The Court of Appeal, comprising Peter Gibson and Longmore LJJ, allowed the taxpayers' appeals: [2005] 1 WLR 52. Peter Gibson LJ said the judge's attitude was one which would perhaps appeal to most lawyers experienced in tax matters if Community law considerations could be left out of account: page 57, para 12. The court held that Community law obliges the High Court to entertain the claims: page 63, para 28. On these appeals the Inland Revenue seek to restore the order of Park J.

The statutory code

    11.  In resolving this question of jurisdiction the starting point is to note two basic principles. The first concerns the exclusive nature of the appeal commissioners' jurisdiction to decide certain types of disputes arising in the administration of this country's tax system. The present disputes concern claims for group relief. The way a taxpayer claims group relief depends on whether the claim relates to an accounting period before or after 1 July 1999. Before that date the corporation tax (pay and file) system was in force. This has now been replaced by the corporation tax (self-assessment) system. For present purposes this difference is immaterial. What matters is that, whichever system is applicable, an assessment which disallows a group relief claim cannot be altered except in accordance with the express provisions of the tax legislation. Statute so provides: see, in respect of the pay and file system, section 30A of the Taxes Management Act 1970 and, in respect of the self-assessment system, paragraphs 47(2) and 97 of Schedule 18 to the Finance Act 1998. Further, the statutory code makes its own provision for appeals. Under both the 'pay and file' system and the self-assessment system a taxpayer has a right of appeal to the appeal commissioners against assessments of tax, including amendments made by the revenue to a taxpayer's tax return. The appeal commissioners' findings of fact are final. In appropriate cases a further appeal lies to the High Court by way of case stated on a point of law. Where the appeal commissioners reduce the amount of an assessment, any overpaid tax must be repaid to the taxpayer, with a repayment supplement by way of interest as provided in section 825 of the ICTA.

    12.  Clearly the purpose intended to be achieved by this elaborate, long established statutory scheme would be defeated if it were open to a taxpayer to leave undisturbed an assessment with which he is dissatisfied and adopt the expedient of applying to the High Court for a declaration of how much tax he owes and, if he has already paid the tax, an order for repayment of the amount he claims was wrongly assessed. In substance, although not in form, that would be an appeal against an assessment. In such a case the effect of the relief sought in the High Court, if granted, would be to negative an assessment otherwise than in accordance with the statutory code. Thus in such a case the High Court proceedings will be struck out as an abuse of the court's process. The proceedings would be an abuse because the dispute presented to the court for decision would be a dispute Parliament has assigned for resolution exclusively to a specialist tribunal. The dissatisfied taxpayer should have recourse to the appeal procedure provided by Parliament. He should follow the statutory route.

    13.  I question whether in this straightforward type of case the court has any real discretion to exercise. Rather, the conclusion that the proceedings are an abuse follows automatically once the court is satisfied the taxpayer's court claim is an indirect way of seeking to achieve the same result as it would be open to the taxpayer to achieve directly by appealing to the appeal commissioners. The taxpayer must use the remedies provided by the tax legislation. This approach accords with the views expressed in authorities such as Argosam Finance Co Ltd v Oxby (Inspector of Taxes) [1965] Ch 390, In re Vandervell's Trusts [1971] AC 912 and, more widely, Barraclough v Brown [1897] AC 615.

    14.  In Vandervell's case [1971] AC 912, 939-940, Lord Wilberforce sought to clarify the limits of this 'exclusivity' principle. This principle, he said, is not to be taken to exclude the jurisdiction of the courts to decide a question of fact or law which is a basis for an income tax assessment where the taxpayer and the revenue so agree, provided the assessment to which the question relates has not become final and provided also the question, 'in form suitable for decision by the court', is not 'so close to the question of the assessment itself' that the court should decline to entertain it. But Lord Wilberforce was at pains to add that either the taxpayer or the revenue have the right to insist the statutory procedure should be followed.

    15.  Lord Wilberforce's formulation indicates that, apart from cases of straightforward abuse, there is an area where the court has a discretion. In Glaxo Group Ltd v Inland Revenue Commissioners [1995] STC 1075, 1083-1084, Robert Walker J put the matter this way:

    'It is not easy to discern any clear dividing-line between High Court proceedings which are, and those which are not, objectionable as attempts to circumvent the exclusive jurisdiction principle. Possibly the correct view is that there is an absolute exclusion of the High Court's jurisdiction only when the proceedings seek relief which is more or less co-extensive with adjudicating on an existing open assessment: but that the more closely the High Court proceedings approximate to that in their substantial effect, the more ready the High Court will be, as a matter of discretion, to decline jurisdiction.'

    I respectfully agree with this approach, subject to noting that, at least as a general principle, the taxpayer and the revenue are each entitled to insist that the statutory procedure for dealing with disputed assessments should be followed.

    Community law

    16.  The second basic principle concerns the interpretation and application of a provision of United Kingdom legislation which is inconsistent with a directly applicable provision of Community law. Where such an inconsistency exists the statutory provision is to be read and take effect as though the statute had enacted that the offending provision was to be without prejudice to the directly enforceable Community rights of persons having the benefit of such rights. That is the effect of section 2 of the European Communities Act 1972, as explained by your Lordships' House in R v Secretary of State for Transport, Ex p Factortame Ltd [1990] 2 AC 85, 140, and Imperial Chemical Industries Plc v Colmer (Inspector of Taxes) (No 2) [1999] 1 WLR 2035, 2041.

    17.  Thus, when deciding an appeal from a refusal by an inspector to allow group relief the appeal commissioners are obliged to give effect to all directly enforceable Community rights notwithstanding the terms of sections 402(3A) and (3B) and 413(5) of ICTA. In this regard the commissioners' position is analogous to that of the Pretore di Susa in Amministrazione delle Finanze dello Stato v Simmenthal SpA (Case 106/77) [1978] ECR 629. Accordingly, if an inconsistency with directly enforceable Community law exists, formal statutory requirements must where necessary be disapplied or moulded to the extent needed to enable those requirements to be applied in a manner consistent with Community law. Paragraph 70 of Schedule 18 to the Finance Act 1998 is an instance of such a requirement. Paragraph 70 provides that a claim for group relief requires the consent of the surrendering company, which must be given by notice in writing to its own inspector of taxes when or before the claim is made. This provision cannot be applied literally in the case, say, of a German subsidiary which makes no tax returns in this country. So if the residence restriction is found to be inconsistent with Community law this provision will need adapting so as to give effect to the overriding Community rights. In this regard the appeal commissioners have the same powers and duties as the High Court.

    Claimant companies which can still obtain group relief

    18.  Against that background I turn to the other complicating feature of these appeals: the different positions of the claimants. The six test claimants exemplify different claims histories. They were chosen for that purpose. In referring to these six cases I shall adhere to the position as it existed when the proceedings were before Park J in March 2004 even though in some instances the actual claims positions of the claimants, agreed between the parties for the purpose of these appeals, have changed since then.

    19.  As I see it, these claimants fall into two broad classes. One class comprises cases where, if the claimant company's contentions on Community law are well-founded, it is still open to the company to obtain in full the group relief to which, on that footing, the company is entitled. The other class comprises cases where this course is not open to the claimant company. The difference between these two classes corresponds to the distinction between (a) giving effect to the group relief provisions as read and applied in accordance with Community law and (b) awarding damages for breach of a Community law right.

    20.  In my view in the former of these two classes the category (1) claims in the High Court are misconceived. Where a claimant company can obtain through the statutory procedures the very tax relief of whose non-availability it is complaining, I see no justification for the company by-passing the statutory route and, instead, going to the High Court and claiming damages or a restitutionary remedy based on the proposition that the company has been wrongly refused the tax relief to which it is entitled under Community law.

    21.  Take a case where an inspector disallowed a claim for group relief and an appeal to the Special Commissioners is pending. If that appeal proceeds the Special Commissioners will give effect to all relevant directly applicable provisions of Community law. The Special Commissioners can refer any necessary questions to the European Court just as readily as the High Court. They can resolve any questions of fact which may arise on issues such as the amount of the losses claimed. They can enquire into the group structure to see if it meets the statutory requirements. Indeed, detailed questions of this character are more suited for determination by the Special Commissioners than the High Court, especially where large numbers of companies are involved. In short, in this example the claimant is still able to obtain the tax relief it seeks despite its claim having been refused by an inspector.

    22.  The Autologic group exemplifies this factual situation. The material facts are that one of the companies in the group submitted corporation tax returns for the years ending 31 December 1999 and 31 December 2000 making group relief claims in respect of losses surrendered by two French subsidiaries. Having conducted inquiries into these returns, the inspector refused the claims and amended the returns accordingly. The claimant company appealed to the Special Commissioners against the revenue amendments. Corporation tax was paid on the basis of the amended assessments. These appeals are still pending. An enquiry into the tax return for the year ended 31 December 2001 is still in progress. In the High Court Autologic claims that, in refusing to grant group relief in respect of the losses of the French subsidiaries, the revenue unlawfully failed to give effect to the E C Treaty. They claim as damages, and by way of restitution, the amounts of corporation tax overpaid. These are the category (1) claims.

    23.  In my view these claims in the High Court are prima facie a misuse of the court's process. These claims cover the same ground in all respects as the appeals pending before the appeal commissioners. The remedy sought is co-extensive with adjudicating upon existing, open assessments. The essence of the High Court claims is that these assessments were wrong, that the court should so hold, and that the court should itself calculate the amounts which ought to have been assessed and order repayment of the overpaid excess. There could hardly be a more obvious example of seeking to sidestep the statutory procedure.

    24.  The taxpayers say that recourse to the appeal commissioners is a poor alternative to the High Court proceedings. If their appeals succeed their position regarding interest and costs before the special commissioners will compare unfavourably with their position in the High Court. The appeal commissioners do not have power to award interest as such. The statutory repayment supplement is restricted to simple interest at a specified rate, usually about 1% below base rate, starting 12 months after the date the corporation tax was paid. The special commissioners' power to award costs is confined to cases where a party has acted wholly unreasonably in connection with the hearing: Special Commissioners (Jurisdiction and Procedure) Regulations 1994 S I 1994/1811, regulation 21. These limitations on the special commissioners' powers, it is said, offend the Community law principle which requires that relief for breach of Community rights must be effective.

    25.  I am not attracted by this submission. Appeals to the special commissioners when novel points of law arise are part of the ordinary statutory procedure. Usually the points of law concern United Kingdom tax legislation. But a dispute on the interpretation and application of Community law, and the need to refer questions to Luxembourg, do not make a case fundamentally different. Once the interpretation and application of Community law have been clarified by the European Court, the principal difficulty surrounding these appeals will be gone. Confining claimants to the statutory route, with the interest and costs consequences just mentioned, can hardly be regarded as rendering this route to reimbursement 'excessively onerous', to adopt the phrase of Advocate-General Colomer in D v Rijksbelanstingdienst (Case C-376/03, 26 October 2004).

    26.  The Autologic group exemplifies cases where the statutory claims procedures have reached an advanced stage. In other cases the claims for group relief are less advanced. In some cases the claimant company is in time to make a group relief claim to the revenue but has not yet done so. The H J Heinz group is an instance of this. In other cases claims for group relief have been made and are still being considered by the revenue, as with the British Telecommunications group. In further cases claims have been made and refused and the claimants are in time to appeal to the appeal commissioners but have not yet done so. The Future Network group is an example of this.

    27.  In my view in each of these types of case the category (1) claims in the High Court are prima facie misconceived, for the reason set out above. The claimants are able to obtain the group relief to which they are entitled by following the statutorily-prescribed route. That is the route they should follow.

    28.  The taxpayers contend that to oblige all claimants to follow this route, especially those who have not yet made group relief claims to the revenue, would be inconsistent with the approach indicated by the European Court of Justice in the Hoechst case. As matters stand the revenue are bound to refuse claims for group relief where the surrendering company is not resident in this country. The European Court, it is said, has ruled that claimants should not be required to take futile steps of this nature when seeking to enforce their rights under Community law. In the Hoechst case [2001] Ch 620, 667, para 107, the European Court said:

    '... it is contrary to Community law for a national court to refuse or reduce a claim brought before it by a resident subsidiary and its non-resident parent company for reimbursement or reparation of the financial loss which they have suffered as a consequence of the advance payment of corporation tax by the subsidiary, on the sole ground that they did not apply to the tax authorities in order to benefit for the taxation regime which would have exempted the subsidiary from making payments in advance and that they therefore did not make use of the legal remedies available to them to challenge the refusals of the tax authorities, by invoking the primacy and direct effect of the provisions of Community law, where upon any view national law denied resident subsidiaries and their non-resident parent companies the benefit of that taxation regime.'

    The Court of Appeal regarded this ruling as determinative of these test cases.