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

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    63.  It is impossible to foresee all eventualities, and I agree with Lord Nicholls that the proceedings in the High Court in respect of claims which should have been brought before the commissioners should be stayed and not struck out. This would have two advantages. It should encourage the revenue to co-operate in waiving or extending time limits and removing procedural and other obstacles to the commissioners' jurisdiction; and it would enable the High Court claims to be revived in the event of unforeseen difficulties arising before the commissioners which cannot be overcome.

LORD WALKER OF GESTINGTHORPE

My Lords,

Introduction

    64.  This appeal could be described as being concerned with a purely procedural question: whether numerous sets of proceedings which have been commenced by numerous companies in the Chancery Division of the High Court, and which have been made subject to a Group Litigation Order ("GLO") should continue on their course in the High Court; or whether some of the claims made in the proceedings (that is, those in respect of overpaid corporation tax) should be struck out on the ground that they can be heard and decided only by the Special Commissioners. Even if it right to describe this as a purely procedural question, it is one which raises important issues of principle; the sums at stake are very large indeed; and the lower courts have taken sharply different views on the question.

    65.  All the companies concerned in the litigation are members of groups of companies, and all the groups have the common feature (although presented in various structural permutations) that at least one company in the group is resident in the United Kingdom, and at least one is resident in another member state of the European Union ("EU"). The United Kingdom tax code makes available to groups of companies various types of group relief, as a sort of practical mitigation of the strict theory of the separate juristic personality of each company in the group. One of the most important of these reliefs is group loss relief. But that relief is, on the face of the legislation, restricted to companies resident in the United Kingdom (or non-resident but trading in the United Kingdom through a branch or agency).

    66.  For many years this restriction was accepted at its face value by groups of companies which were predominantly resident in the United Kingdom, but had one or more subsidiaries trading in EU countries. But about ten years ago corporate tax advisers started to consider whether the restrictions infringed a basic principle of EU law, embodied in article 43 of the Treaty, which prohibits restrictions on freedom of establishment. The ground was broken (although the taxpayer company was ultimately unsuccessful) in Imperial Chemical Industries Plc v Colmer (Inspector of Taxes) (Case C-264/96), a case concerned with consortium relief. This House's reference of the matter to the Court of Justice of the European Communities ("the ECJ") is reported at [1996] STC 352; the judgment of the ECJ at [1999] 1 WLR 108; and this House's disposal of the matter at [1999] 1 WLR 2035.

    67.  More closely in point, and still unresolved, is Marks & Spencer Plc v Halsey (Inspector of Taxes) [2003] STC (SCD) 70, in which group loss relief claims for years ending 31 March 1998, 1999, 2000 and 2001 were made in respect of that company's French, Belgian and German subsidiaries. The claims came before the special commissioners at the end of 2002, and were rejected (see [2003] STC (SCD) 70). The special commissioners held that the United Kingdom rule restricting group relief by reference to residents did not constitute either a discriminatory or a non-discriminatory restriction on freedom of establishment, and they regarded the matter as acte clair. On appeal Park J made a reference to the ECJ. Advocate-General Maduro delivered his opinion on 7 April 2005, and it has since been subjected to a great deal of detailed and anxious scrutiny. Since your Lordships are not concerned with the substance of the matter, and since the ECJ has yet to give judgment, it is sufficient to say that the opinion of the Advocate-General gives some comfort to each side, and clear victory to neither.

    68.  That is the background to the present flood of High Court litigation concerned with the lawfulness, under EU law, of various territorial restrictions on different types of group relief. The GLO to which this appeal relates is by no means the only GLO which has been made in order to stem and channel the flood. But the claims raised in the proceedings subject to this GLO are the first in which the revenue has raised any significant procedural objection. Park J (who has the heavy responsibility of managing almost all these GLOs) acceded to the revenue's objection. But the Court of Appeal took a different view. The revenue now appeals to your Lordships' House.

    69.  That is a brief sketch of what this appeal is about. It is now necessary to go into the different strands of the problem more systematically and in more detail.

Domestic tax law: group relief

    70.  Group relief of various types has been a feature of United Kingdom corporation tax law since 1973. The most important provisions are in Part X Chapter IV of the Income and Corporation Taxes Act 1988 ("ICTA 1988"). Section 402 (as amended by the Finance Act 2000 and as explained by the interpretation provisions in section 413) lays down the framework of the reliefs:

    "402(2) Group relief shall be available in a case where the surrendering company and the claimant company are both members of the same group.

    413(3) For the purposes of this Chapter—

    (a)  two companies shall be deemed to be members of a group of companies if one is the 75% subsidiary of the other or both are 75% subsidiaries of a third company;. . .

    413(5) References in this Chapter to a company apply only to bodies corporate resident in the United Kingdom; and in determining for the purposes of this Chapter whether one company is a 75% subsidiary of another, the other company shall be treated as not being the owner— …

    (c)  of any share capital which it owns directly or indirectly in a body corporate not resident in the United Kingdom.

    402(3A) [taking effect for accounting periods ending after 31 March 2000] Group relief is not available unless the following condition is satisfied in the case of both the surrendering company and the claimant company.

    (3B) The condition is 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 branch or agency."

    71.  Park J (who has exceptional knowledge and experience in this field) summarised the effect of these provisions as follows ([2004] STC 594, 598, para 8):

    "The points which matter for the purposes of this judgment are the requirements in section 413 (5) that the companies must be resident in the United Kingdom, and, from 2000 onwards, the similar residence requirements of s 402 (3B). They mean that, if they take effect according to their terms, group relief is only available if the surrendering and claimant companies are resident in the United Kingdom and are both members of a group which has a United Kingdom parent (which can, however, itself be a subsidiary of a non-United Kingdom parent). An exceptional case, introduced in 2000, is that group relief is available to or from the United Kingdom branch of a non-resident company."

    72.  The judge then gave three examples of the restrictive effect of the residence requirement: a United Kingdom parent company with one United Kingdom subsidiary (both profitable) and one loss-making French subsidiary; a loss-making French parent company with a profitable United Kingdom subsidiary; and a non-resident parent company with two United Kingdom subsidiaries, one profitable and one loss-making. He added that these were very simple examples (para 9):

    "In the practical reality of many large multi-national groups more complicated structures are likely to arise, particularly so if one introduces the possibility of consortium companies. The Revenue and the professional advisers of the participants in the GLO have identified many variants on the basic patterns, and most of them are exemplified in one way or another by the six groups which have been identified as potential test cases for this GLO."

    73.  The different categories of group structure have been designated (in the GLO relevant to this appeal) as classes 1, 1A, 1B, 1C, 2, 3, 3A, 4, 4A and 5. The House was told that more categories may be identified as more companies come in under the GLO. But to avoid confusion it should be noted that the six lead groups have been selected, not by reference to the different categories of group structure, but by reference to their participation or non-participation (and for the participants, by their state of progress) in what might be called conventional tax proceedings (that is, proceedings starting with an appeal heard by the special commissioners). That is the next strand of the matter which I must address.

Domestic tax law: jurisdiction and procedure

    74.  In Barraclough v Brown [1897] AC 615 this House stated and applied a general principle which has important consequences in many different fields of law, including tax law. Section 47 of the Aire and Calder Navigation Act 1889 gave statutory undertakers who had incurred expenditure in removing a sunken vessel a right "to recover such expenses from the owner of such vessel in a court of summary jurisdiction." This House affirmed the decisions of the lower courts that the expenses were not recoverable in an action the High Court. Lord Watson said at p 622:

    "By these words the Legislature has, in my opinion, committed to the summary court exclusive jurisdiction, not merely to assess the amount of expenses to be repaid to the undertaker, but to determine by whom the amount is payable; and has therefore, by plain implication, enacted that no other court has any authority to entertain or decide these matters."

    75.  Lord Watson added, in relation to the suggestion that the High Court could at least have made a declaration of liability (also at p 622):

    "It is possible that your Lordships might accede to such a suggestion, if it were necessary, in order to do justice. But apart from the circumstance that such a declaration would not be in accordance with law, the substance of it is one of those matters exclusively committed to the jurisdiction of the summary court."

    The rest of the House either agreed, or expressed similar views.

    76.  This principle has often been applied when taxpayers who are in dispute (or anticipate being in dispute) with the revenue seek to ventilate the matter by initiating proceedings in the High Court, rather than by pursuing the conventional path of an appeal (against an assessment or the refusal of a claim) to the general or special commissioners. For example in Argosam Finance Company Ltd v Oxby (Inspector of Taxes) [1965] Ch 390, a share-dealing company issued an originating summons in the Chancery Division seeking a declaration as to the correct method of computing its income for the purposes of loss relief. The revenue challenged the proceedings as an abuse of process. The Court of Appeal, affirming Plowman J, struck out the proceedings as an abuse of process. Lord Denning MR said at p 423,

    "If the summons had been limited to question (a)—that is, to determine whether the company was entitled to relief under section 341 [of the Income Tax Act 1952]—I would agree that the courts would have no jurisdiction to determine it. The question is one which is entrusted by the legislature to the exclusive province of the commissioners, and the courts cannot entertain it. It falls within the decision of the House of Lords in Barraclough v Brown."

    The position was made no better by the inclusion in the originating summons of question (b), which was a hypothetical "will-o-the-wisp" (see Harman LJ at pp424-425) except so far as it followed on from the objectionable question (a).

    77.  Barraclough v Brown was also cited and referred to in this House in In re Vandervell's Trusts [1971] AC 912. That was the second occasion on which this House had to consider different aspects of the complicated, expensive and regrettable litigation set in train by Mr Vandervell's flawed attempt to make a tax-efficient gift to the Royal College of Surgeons. I need not go into the facts beyond noting that it was (as Lord Wilberforce accepted at pp 936-937) an exceptional case, in which the real issue was (as Lord Reed observed at p 928) not jurisdiction but res judicata. Although the decision was unanimous, the House showed some divergence in reasoning. But subject to those caveats I find it helpful to see what Lord Wilberforce said about Barraclough v Brown. At p 939 he quoted from the speech of Lord Herschell:

    "I do not think the appellant can claim to recover by virtue of the statute, and at the same time insist upon doing so by means other than those prescribed by the statute which alone confers the right."

    Lord Wilberforce commented on this:

    "The limits of this decision are obvious from these words. In order to compare (in fact to contrast) the situation under the Income Tax Acts, it is necessary to see precisely what it is that under that legislation has been made the subject of the statutory procedure. This is the validity and quantum of the assessment to tax which has been made upon the subject. It is this which, when made, is the subject of appeal to the Special Commissioners under section 52 (5) of the Income Tax Act 1952 and section 12 (5) of the Income Tax Management Act 1964; it is the assessment which cannot be altered except in accordance with the Income Tax Acts (Income Tax Management Act 1964, section 12) and which ultimately becomes final and conclusive. All this is undoubted and, if necessary, the authority of Barraclough v Brown could be invoked to show that the High Court cannot interfere with assessments.

    Lord Wilberforce went on to express doubt whether the principle was wider than that.

    78.  At this point it is appropriate to say something about the status and functions of the general commissioners and the special commissioners (the familiar abbreviations of their full titles, the commissioners for the General Purposes of the Income Tax and the Commissioners for the Special Purposes of the Income Tax Acts). They are venerable institutions whose history has been well documented (see for instance H H Monroe's 1981 Hamlyn Lectures, "Intolerable Inquisition? Reflections on the Law of Tax" and two recent articles by Dr John Avery Jones [2005] BTR 40 and 80). The general commissioners have been described as the lay magistracy of the tax world (and as with lay magistrates their future is uncertain). They sit in regional divisions throughout the United Kingdom. The special commissioners, by contrast, are the equivalent of an elite cadre of legally qualified and highly experienced stipendiary magistrates, dealing with particularly demanding tax matters. The status and functions of the general commissioners and the special commissioners are now provided for in Part I of the Taxes Management Act 1970 ("TMA 1970"). Section 4 (5) provides,

    "By virtue of their appointment the Special Commissioners shall have authority to execute such powers, and to perform such duties, as are assigned to them by any enactment."

    Their powers are therefore wholly statutory. A list of their principal functions can be found in Simon's Direct Tax Service, Volume 2, para A 2.516. The special commissioners are not a court of record, or indeed a court of any sort, but a statutory tribunal subject to the oversight of the Council on Tribunals.

    79.  The Special Commissioners (Jurisdiction and Procedure) Regulations 1994 (SI 1994/1811) (made under powers conferred by TMA 1970), provide for procedure before the special commissioners. Their express case-management powers are limited. They have power (regulation 7) to order proceedings raising a common issue to be heard either together or consecutively, but their only express power to designate lead cases (regulation 7A) applies only to certain social security matters. They have only a very limited power (regulation 25) to make orders for costs. In arguing that the High Court is the appropriate forum for their claims the respondents rely on the special commissioners' very limited powers of case-management, their very limited powers to make orders as to costs, and the absence of any power for them to award interest (repayment supplement, which the respondents regard as inadequate compensation, being a matter of statutory machinery and not something ordered by the special commissioners).

    80.  In arguments about the exclusive jurisdiction of the special commissioners under the principle in Barraclough v Brown much emphasis is often placed on the almost ritual significance, in the history of tax law, of the assessment made by a revenue official, originally called a surveyor, and later an Inspector of Taxes. This is reflected, for instance, in the passage from the speech of Lord Wilberforce in Vandervell [1971] AC 912, 939 which I have already quoted. Similarly, Lord Diplock said at p 940,

    "Section 5(6) of the Income Tax Management Act 1964 provides that after notice of assessment has been served 'the assessment shall not be altered except in accordance with the express provisions of the Income Tax Acts.' The only way in which an assessment can be altered under the provisions of the Income Tax Acts is by the special commissioners on an appeal to them by the party assessed."

    81.  It is not easy to see how far this hallowed principle still has the same force in the current tax system, which differs in very many respects from the system in force before 1965 (the period with which Vandervell was concerned). 1965 was a watershed year as under the Finance Act 1965, companies became subject to an entirely new tax, corporation tax, instead of being subject to income tax in much the same way as individuals. Since 1965 corporation tax has become much more complicated and has diverged further and further away from income tax, both in its substantive provisions and in the provisions for assessment and collection. Moreover, the assessment of both income tax and corporation tax has been put on a new basis, that is self-assessment, which is provided for (in relation to corporation tax) principally in Parts I to IV of Schedule 18 to the Finance Act 1998 ("FA 1998"). It replaced the "pay and file" system which had operated from 1993. Schedule 18 operates for accounting periods ending on or after 30 June 1999 and has effect as if contained in TMA 1970 (FA 1998 section 117 (2)). Part VIII of Schedule 18 contains new procedural provisions about group loss relief, and Part XI contains supplemental provisions.

    82.  Part II of Schedule 18 provides for companies to make company tax returns for an accounting period which must include (para 7(1)):

    "an assessment (a 'self-assessment') of the amount of tax which is payable by the company for that period—

    (a)  on the basis of the information contained in the return, and

    (b)  taking into account any relief or allowance for which a claim is included in the return or which is required to be   given in relation to that accounting period."

    Para 8 prescribes how the tax payable is to be calculated. Most claims (including claims for group relief) can be made only by inclusion in a company tax return (para 10). Part III imposes statutory duties to keep and preserve records. Part IV (enquiry into company tax return) is the closest equivalent to the old system of assessment by an inspector of taxes. The revenue may by notice to a company amend its self-assessment in order to make good a perceived deficiency in the amount of tax shown as due under a self-assessment (para 30). The company has a right of appeal (para 30 (3) to (5)). Such an appeal lies to the general or special commissioners (para 93 and 94 in Part XI).

    83.  The provisions of Part VIII of Schedule 18 (claims for group relief) are detailed and, in some respects, inflexible. A claim for group relief must quantify the amount of relief claimed (para 68). If the amount claimed proves to be excessive the claim is wholly ineffective (para 69 (2)). The first prescribed step in the computation of the relief assumes that the surrendering company makes a company tax return showing its income computed in accordance with United Kingdom tax law (para 69 (3)). Overseas companies which do not trade in the United Kingdom would not prepare their accounts in this way, but your Lordships were shown copies of recent correspondence indicating that the revenue have been insisting on these requirements. The respondents say that for a non-resident surrendering company to comply with these procedural requirements would create difficulties which are not imaginary, hypothetical or trivial.

    84.  It is a curiosity that the only corporation tax provision closely corresponding to section 5 (6) of the Income Tax Management Act 1964 (to which Lord Diplock attached importance) appears to be para 47 (2) in Part V of Schedule 18. Part V contains default provisions which apply if a company does not comply with the statutory self-assessment procedure. But other provisions in Parts I to IV and XI of Schedule 18, briefly summarised above, seem to produce much the same practical effect. I can discern no parliamentary intention to alter the general principle embodied in tax law before self-assessment, that any dispute with the revenue about an individual's liability to income tax or a company's liability to corporation tax is to be determined in the first instance by the general commissioners or the special commissioners.

    85.  There is another very significant change which has occurred since 1965: that is the extraordinary growth of judicial review. Tax lawyers were not in the forefront of this expansion but they have been catching up during the last two decades. Judicial review is available not only for procedural errors or unfairness on the part of the general or special commissioners but also to challenge the validity of secondary tax legislation, as in the case of Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70. But judicial review in the High Court is not an appropriate remedy in cases where Parliament has provided a special appeal procedure for determining substantive questions as to tax liability.

GLO's

    86.  GLO's were introduced with effect from 2000 in implementation of one of Lord Woolf's proposals for procedural reform. They are provided for in Part III, rules 19.10 to 19.15 of the Civil Procedure Rules 1998, as supplemented by the practice direction on group litigation. The key features and normal effect of any GLO are that it identifies the common issues which are a pre-condition for participation in a GLO; it provides for the establishment and maintenance of a register of GLO claims; it gives the managing court wide powers of case management, including the selection of test claims and the appointment of a lead solicitor for the claimants or the defendants, as appropriate; it provides for judgments on test claims to be binding on the other parties on the group register; and it makes special provision for costs orders.

    87.  The GLO relevant to this appeal exhibits all these features. It was made on 23 May 2003 by the Chief Chancery Master. It has been amended several times. There are now a large and growing number of corporate groups on the group register (the Revenue's printed case puts the total at 89 groups and the respondents' printed case puts the total number of companies involved at over 1,000).

    88.  Five of the six selected test claims were commenced (as Part 8 proceedings) on 23 or 24 December 2002. The revenue moved swiftly and issued striking-out applications on 30 January 2003. The timing and procedure in the BNP Paribas claim (and in other claims which have not been selected as test cases) was different but the details are unimportant. What is noteworthy is that the GLO was made under the shadow of strike-out applications which had already been made. The revenue cannot be accused of having been dilatory in launching its jurisdictional challenge to claims covered by the GLO. There was a reference to the challenge in para 24 of the GLO:

    "This Order disapplies the terms of Civil Procedure Rules 1998, Part II, so that the defendants need not file or serve a Part 23 application with witness evidence in support where they indicate in an acknowledgment of service that they dispute the jurisdiction of the High Court to try the claim or where they contend that the High Court should decline jurisdiction to try the claim and the question of jurisdiction shall be dealt with as one of the issues in the litigation."

Community law: articles 43 and 56 and direct effect

    89.  Article 43 of the Treaty (formerly article 52) is in the following terms:

    "Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a member state in the territory of another member state shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any member state established in the territory of any member state.

    Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of article 48, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital."

    This article has direct effect (Reyners v Belgium (Case 2/74) [1974] ECR 631) and it is therefore to be enforced by courts in the United Kingdom as an "enforceable Community right" within the meaning of section 2 (1) of the European Communities Act 1972.

    90.  Article 56 of the Treaty (formerly article 73 (b)) is in the following terms:

    "(1)  Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between member states and between member states and third countries shall be prohibited.

    (2)  Within the framework of the provisions set out in this Chapter, all restrictions on payments between member states and between member states and third countries shall be prohibited."

 
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