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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Vodafone 2 v Revenue and Customs  EWHC 1569 (Ch) (04 July 2008)
Cite as:  2 WLR 210,  3 CMLR 21,  STI 1675,  Bus LR 96,  STC 2391,  3 CMLR 30,  Ch 123,  BTC 526, 10 ITL Rep 1052,  EWHC 1569 (Ch)
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Strand, London, WC2A 2LL
B e f o r e :
| Vodafone 2
|- and -
|The Commissioners of Her Majesty's Revenue and Customs
David Ewart QC & Sarah Ford (instructed by HMRC Solicitors) for the Respondent
Hearing dates: 20/5/08 – 22/5/08
Crown Copyright ©
Mr Justice Evans-Lombe :
The relevant legislation
"Subject to Section 748, where the provisions of this Chapter apply in relation to an accounting period of a controlled foreign company, the chargeable profits of that company for that period and its creditable tax (if any) for that period shall each be apportioned in accordance with Section 752 among the persons (whether resident in the United Kingdom or not) who had an interest in the company at any time during that accounting period."
"748 (1) No apportionment under Section 747(3) falls to be made as regards an accounting period of a controlled foreign company if
(a) in respect of that period the company pursues within the meaning of Part I of Schedule 25 an acceptable distribution policy; or
(b) throughout that period the company is, within the meaning of Part II of that schedule, engaged in exempt activities;
(c) the public quotation conditions set out in Part III of that schedule is fulfilled with respect to that period; or
(d) the chargeable profits of the accounting period do not exceed £50,000 or, if the accounting period is less than 12 months, a proportionately reduced amount; or
(e) as respects the accounting period, the company is, within the meaning of regulations made by the board for the purposes of this paragraph, resident in a territory specified in the regulations and satisfies
(1) such conditions with respect to its income or gains as may be so specified
(2) such other conditions, if any, as may be so specified."
Vodafone accepts that VIL did not fall within any of these exceptions during the Accounting Period. It will be seen that the tests prescribed in the subsections to Section 748(1) are objective tests.
"Notwithstanding that none of paragraphs (a) to (e) of subsection (1) above applies to an accounting period of a controlled foreign company, no apportionment under Section 747(3) falls to be made as regards that accounting period if it is the case that:-
(a) in so far as any of the transactions the results of which are reflected in the profits arising in that accounting period, or any two or more transactions taken together, results of at least one of which are so reflected, achieved a reduction in United Kingdom tax, either the reduction so achieved was minimal or it was not the main purpose or one of the main purposes of that transaction or, as the case may be, of those transactions taken together to achieve that reduction, and
(b) it was not the main reason or, as the case may be, one of the main reasons for the company's existence in that accounting period to achieve a reduction in United Kingdom tax by a diversion of profits from the United Kingdom,
and Part IV of Schedule 25 shall have effect with respect to the preceding provisions of this subsection."
Chronology of events and proceedings
(a) the imposition of UK tax on Vodafone in respect of VIL's profits under the CFC legislation would amount to an unlawful restriction on the freedom of establishment pursuant to Article 43 EC, and/or the free movement of capital pursuant to Article 56 EC.
(b) In any event, the notice itself imposed a considerable administrative burden on Vodafone and would have resulted in substantial costs being incurred. That in itself amounted to a breach of Article 43 and/or Article 56 EC as Vodafone would not have incurred such burdens and costs in respect of the establishment of a UK subsidiary in an enquiry into Vodafone's own tax return.
"(a) allow its appeal of 13th December 2002 against the letter of 15th November 2002 and/or
(b) direct the Revenue pursuant to paragraph 33 of Schedule 18 of the Finance Act to issue an immediate closure notice in respect of its enquiry, on the grounds that both the notice of 15th November 2002 and the enquiry itself were unreasonable."
"69. Mr Walters considers that it would be consistent with the scheme and the "grain" of the motive test, which ought to be considered, not in isolation but in its proper context as part of the CFC legislation, to interpret s.748(3) ICTA, pursuant to our obligation under s.2(4) ECA 1972, as if it provided, in addition, a second, alternative, condition (paragraphs (a) and (b) of section 748(3) ICTA providing the first condition) for there to be no apportionment under s.747(3) ICTA. (Section 748(3) ICTA contains the motive test as defined by the CFC legislation and is therefore the subject of the conforming interpretation.) This second condition would be that there will be no such apportionment (despite the presence of an intention to obtain a tax advantage) if there are also objective circumstances showing that the objective pursued by freedom of establishment in Community law has been achieved and the establishment of the CFC reflects economic reality…. This second, alternative, condition would specifically relate to wholly artificial arrangements (or to the absence of them) and would, in effect, ensure that the motive test, as defined by the CFC legislation, would be applied without prejudice to the directly enforceable Community rights of companies established in the Community….
70. Mr Walters therefore, concludes that we are able to, and should, interpret the motive test so that it can apply in the case of a CFC established in another Member State only where such application relates only to wholly artificial arrangements intended to escape the United Kingdom tax normally payable, in the sense that that expression is used by the European Court in the dispositif in Cadbury Schweppes. Accordingly the CFC legislation cannot be applied, in such a case, where it is proven by the UK-resident controlling person(s), on the basis of objective factors which are ascertainable by third parties, that despite the existence of tax motives the CFC concerned is actually established in the host Member State (in this case, Luxembourg) and carries on genuine activities there."
"80. …He has no difficulty in accepting that the limitation of the CFC legislation to wholly artificial transactions goes with the grain of the legislation. However he notes that Mr. Plender was not able to put forward any way in which the motive test as defined by the CFC legislation could be interpreted as restricted to wholly artificial arrangements. He does not see how the approach of Arden LJ in IDT at  can be adopted so as to avoid the need to address the question on the interpretation of the motive test posed in paragraph 72 of Cadbury Schweppes. He concludes that the motive test is not amenable to a conforming interpretation such as would confine its application to wholly artificial arrangements. This is because the criteria on which the motive test is based mean that, where none of the exceptions laid down by the CFC legislation applies and the intention to obtain a reduction in United Kingdom tax is central to the reasons for incorporating the CFC, the resident parent company comes within the scope of application of that legislation, even where there is no objective evidence such as to indicate the existence of a wholly artificial arrangement (cf. paragraph 72 of the European Court's judgment in Cadbury Schweppes). A specific restriction would accord with the principle of certainty."
"82. Mr Walters considers that a restriction in the application of the motive test as defined in the CFC legislation to its application only to wholly artificial arrangements can be "read down" into s.748(3) ICTA as a matter of conforming interpretation, and the result would not be inconsistent with the scheme or "grain" of the motive test as defined by the CFC legislation. In particular, he regards the scheme or "grain" of the motive test as so defined to be to serve as part of the legislative mechanism in place to ensure that the CFC legislation is not applicable in situations which are not abusive (or, put positively, to ensure that the CFC legislation is only applicable in abusive situations).
83. Mr Wallace, on the other hand, takes the view that, although a provision restricting the CFC legislation to wholly artificial arrangements would not be inconsistent with the basic purpose of the CFC legislation, the European Court in Cadbury Schweppes did not envisage reading into the motive test a restriction which is wholly absent from that test as defined in the legislation."
The Cadbury Case
"101. From that reasoning two considerations may be derived which are relevant to the present case.
102. The first of those is connected with the fact that the freedoms introduced by the Treaty are not designed to enable companies to transfer their profits or losses from one Member State to another to suit their convenience. In other words, the Court confirmed that those rules are not designed to call into question the allocation by the Member States of their power to impose taxes, nor the right of each State to tax economic activities carried out in its territory. The Member States may thus prevent such transfers, which are aimed at benefiting from disparities in the rates applicable for the taxation of profits which have already arisen.
103. The second consideration which can be inferred from the Marks and Spencer judgment is that the first consideration must not call into question the scope of Articles 43 EC and 48 EC, which has been set out in the first part of my analysis. In paragraph 44 of that judgment, the Court confirmed its own settled case-law, according to which a reduction in tax revenue cannot constitute an overriding reason in the public interest which may justify a restriction on the exercise of the freedoms guaranteed by the Treaty. The Member State in which the parent company is established cannot therefore prevent the establishment by the latter of a subsidiary in another Member State using the pretext, for example, that the activities carried on by it there could be carried on in its own territory and fall within its tax sovereignty.
104. The question whether, and to what extent, transactions between a CFC and its parent company which result in the reduction of the latter's taxable profits constitute tax avoidance involves seeking the right balance between those two principles."
"51 …A national measure restricting freedom of establishment may be justified where it specifically relates to wholly artificial arrangements aimed at circumventing the application of the legislation of the Member State concerned. …
54 Having regard to that objective of integration in the host Member State, the concept of establishment within the meaning of the Treaty provisions on freedom of establishment involves the actual pursuit of an economic activity through a fixed establishment in that State for an indefinite period (see Case C-221/89 Factortame and Others  ECR 1-3905, paragraph 20, and Case C-246/89 Commission v United Kingdom  ECR 1-4585, paragraph 21). Consequently, it presupposes actual establishment of the company concerned in the host Member State and the pursuit of genuine economic activity there.
55 It follows that, in order for a restriction on the freedom of establishment to be justified on the ground of prevention of abusive practices, the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory.
57 In the light of those considerations, it must be determined whether the restriction on freedom of establishment arising from the legislation on CFCs may be justified on the ground of prevention of wholly artificial arrangements and, if so, whether it is proportionate in relation to that objective. …
59 By providing for the inclusion of the profits of a CFC subject to a very favourable tax regime in the tax base of the resident company, the legislation on CFCs makes it possible to thwart practices which have no purpose other than to escape the tax normally due on the profits generated by activities carried on in national territory. As the French, Finnish and Swedish Governments stated, such legislation is therefore suitable to achieve the objective for which it was adopted.
60 It must further be determined whether that legislation goes beyond what is necessary to achieve that purpose. …
63 As stated by the applicants in the main proceedings and by the Belgian Government and the Commission, the fact that none of the exceptions provided for by the legislation on CFCs applies and that the intention to obtain tax relief prompted the incorporation of the CFC and the conclusion of the transactions between the latter and the resident company does not suffice to conclude that there is a wholly artificial arrangement intended solely to escape that tax.
64 In order to find that there is such an arrangement there must be, in addition to a subjective element consisting in the intention to obtain a tax advantage, objective circumstances showing that, despite formal observance of the conditions laid down by Community law, the objective pursued by freedom of establishment, as set out in paragraphs 54 and 55 of this judgment, has not been achieved (see, to that effect, Case C-110/99 Emsland-Stärke  ECR I-11569, paragraphs 52 and 53, and Case C-255/02 Halifax and Others  ECR I-0000, paragraphs 74 and 75).
65 In those circumstances in order for the legislation on CFCs to comply with Community law, the taxation provided for by that legislation must be excluded where, despite the existence of tax motives, the incorporation of a CFC reflects economic reality."
"72 In this case, it is for the national court to determine whether, as maintained by the United Kingdom Government, the motive test, as defined by the legislation on CFCs, lends itself to an interpretation which enables the taxation provided for by that legislation to be restricted to wholly artificial arrangements or whether, on the contrary, the criteria on which that test is based mean that, where none of the exceptions laid down by that legislation applies and the intention to obtain a reduction in United Kingdom tax is central to the reasons for incorporating the CFC, the resident parent company comes within the scope of application of that legislation, despite the absence of objective evidence such as to indicate the existence of an arrangement of that nature.
73 In the first case, the legislation on CFCs should be regarded as being compatible with Articles 43 EC and 48 EC.
74 In the second case, on the other hand, the view should be taken, as submitted by the applicants in the main proceedings, the Commission and, at the hearing, the Cypriot Government, that that legislation is contrary to Articles 43 EC and 48 EC.
75 In the light of the preceding considerations, the answer to the question referred must be that Articles 43 EC and 48 EC must be interpreted as precluding the inclusion in the tax base of a resident company established in a Member State of profits made by a CFC in another Member State, where those profits are subject in that State to a lower level of taxation than that applicable in the first State, unless such inclusion relates only to wholly artificial arrangements intended to escape the national tax normally payable. Accordingly, such a tax measure must not be applied where it is proven, on the basis of objective factors which are ascertainable by third parties, that despite the existence of tax motives that CFC is actually established in the host Member State and carries on genuine economic activities there. "
"147. The Commission, supported by the Belgian and Cypriot Governments on that point, maintains that the test is not altogether satisfactory because, first there is no indication that the United Kingdom tax authorities perform any analysis of the actual activities of the subsidiary and, secondly, that test would result in retaining, within the scope of the legislation on CFCs, companies which wished to benefit from the lower tax rate in the host State. The Commission notes that such a choice does not constitute a wholly artificial arrangement.
148. If the Commission's interpretation of the motive test were well founded, I would also take the view that the United Kingdom legislation on CFCs goes beyond what is necessary to counteract tax avoidance. As we have seen, the fact that a company has decided to centralise the performance of services in a Member State with very favourable taxation for the purpose of reducing its tax burden does not prove the existence of a wholly artificial arrangement.
149. However, in the light of the national court's description of the legal framework, it is not certain that the motive test should be given such an interpretation. Thus we do not know for sure if the first limb of that test, regarding the services which have resulted in a significant reduction in the tax due in the United Kingdom, enables the taxpayer to exempt itself by providing proof of the reality of those services. Likewise, it is not clear whether the second limb relates to the subjective motives of those concerned or whether it can be satisfied where the taxpayer proves that the subsidiary is genuinely established in the host State.
150. At this stage I am of the opinion that it is for the national court, which has the task of determining the compatibility with Community law of its national law on CFCs, to assess whether the motive test may be given an interpretation which makes it possible to limit the application of that law to artificial arrangements intended to circumvent national tax law."
"33 From this review it appears to us that the guidance given by the European Court in Cadbury Schweppes is that the CFC legislation itself introduces a restriction on freedom of establishment which can be justified on the basis that it enables the United Kingdom to "thwart practices which have no purpose other than to escape tax normally due on the profits generated by activities carried on in national territory" (the United Kingdom). The restriction must however be proportionate to the achievement of that objective. The CFC legislation is proportionate in relation to that objective if and to the extent that it confines the restriction to wholly artificial arrangements intended to escape the United Kingdom tax normally payable – such wholly artificial arrangements being arrangements in relation to which, in addition to there being a subjective element consisting in the intention to obtain a tax advantage, the resident company has not proved, on the basis of objective factors which are ascertainable by third parties, that the CFC is actually established in the host Member State and carries on genuine economic activities there."
"(4) The Commissioners may grant the application only if they are satisfied that the specified amount does not exceed the amount (if any) equal to so much of those chargeable profits as can reasonably be regarded as representing the net economic value which –
(a) arises to the appropriate body of persons (taken as a whole) and
(b) is created directly by qualifying work."
Construction of Section 748(3)
"(3) … No apportionment under Section 747(3) falls to be made as regards that accounting period if it is the case that –
(a) in so far as any of the transactions … achieved a reduction in United Kingdom tax, either the reduction so achieved was minimal or it was not the main purpose or one of the main purposes of that transaction…and
(b) it was not the main reason or, as the case may be, one of the main reasons for the company's existence in that accounting period to achieve a reduction in United Kingdom tax …."
(i) results in an entirely subjective test (save as to whether the resulting tax saving was minimal or not) of the state of mind of the parent in setting up the arrangement with the CFC which produces a tax advantage, namely, a main intention to achieve such advantage.
(ii) The existence or otherwise of such a main intention, in the case of dispute, would have to be established by proving objective facts from which it could be inferred.
(iii) The test is applicable to any CFC of the parent, including those resident outside the EC, which would not fall within the ambit or purpose of Article 43.
(iv) There are no words in the subsection which either expressly or by inference point to a restriction on the ambit of the applicability of the subsection to CFCs resident outside the UK in other Member States whose residence is of an artificial character in the sense that they are not "established" within that Member State.
(v) At paragraph 148 of the opinion of the Advocate General in the Cadbury case, he expressed the view that if the Commission's interpretation of the motive test (described in paragraph 147) is met then the CFC legislation "goes beyond what is necessary to counteract tax avoidance" by which he clearly meant necessary to counteract the abuse of the rights conferred by Article 43 by artificial arrangements intended to avoid tax.
The effect of Section 2 of the European Communities Act 1972 on construction
"2(1) All such rights, powers, liabilities, obligations and restrictions from time to time created or arising by or under the Treaties, and all such remedies and procedures from time to time provided for by or under the Treaties, as in accordance with the Treaties are without further enactment to be given legal effect or used in the United Kingdom and shall be recognised and available in law, and be in force, allowed and followed accordingly; and the expression "enforceable Community right" and similar expressions shall be read as referring to one to which this subsection applies. …
(4) …Any enactment passed or to be passed, other than one contained in this Part of this Act, shall be construed and have effect subject to the foregoing provisions of this section."
"111. It is the responsibility of the national courts in particular to provide the legal protection which individuals derive from the rules of Community law and to ensure that those rules are fully effective."
"The approach to the construction of primary and subordinate legislation enacted to give effect to the United Kingdom's obligations under the EEC Treaty have been the subject matter of recent authority in this House (see Pickstone v Freemans plc  AC 66) and is not in doubt. If the legislation can reasonably be construed so as to conform with those obligations which are to be ascertained not only from the wording of the relevant directive but from the interpretation placed upon it by the European Court of Justice at Luxembourg – such a purposive construction will be applied even though, perhaps, it may involve some departure from the strict and literal application of the words which the legislature has elected to use."
"The remedies provided by the Act of 1978 in the case of an insolvent transferor are largely illusory unless they can be exerted against the transferee as the Directive contemplates and I do not find it conceivable that, in framing regulations intending to give effect to the Directive, the Secretary of State could have envisaged that its purpose should be capable of being avoided by the transparent device to which resort was had in the instant case. Pickstone v Freemans plc …has established that the greater flexibility available to the court in applying a purposive construction to legislation designed to give effect to the United Kingdom's Treaty obligations to the Community enables the court, where necessary, to supply by implication words appropriate to comply with those obligations: see particularly the speech of Lord Templeman at pages 120-121. Having regard to the manifest purpose of the regulations, I do not, for my part, feel inhibited from making such an implication in the instant case. The provision in Regulation 8(1) that a dismissal by reason of a transfer is to be treated as an unfair dismissal is merely a different way of saying that the transfer is not to "constitute a ground for dismissal" as contemplated by Article 4 of the Directive and there is no good reason for denying to it the same effect as that attributed to that article. In effect this involves reading Regulation 5(3) as if there were inserted after the words "immediately before the transfer" the words "or would have been so employed if he had not been unfairly dismissed in the circumstances described in Regulation 8(1)". For my part I would make such an implication which is entirely consistent with the general scheme of the regulations and which is necessary if they are effectively to fulfil the purpose for which they were made of giving effect to the provisions of the directive."
"111. It is the responsibility of the national courts in particular to provide the legal protection which individuals derive from the rules of Community law and to ensure that those rules are fully effective.
112. That is a fortiori the case when the national court is seized of a dispute concerning the application of domestic provisions which, as here, have been specifically enacted for the purpose of transposing a directive intended to confer rights on individuals. The national court must, in the light of the third paragraph of Article 249 E.C., presume that the Member State, following its exercise of the discretion afforded it under that provision, had the intention of fulfilling entirely the obligations arising from the directive concerned (see Wagner Miret v Fondo de Guaranatia Salarial (Case C. – 334/92  ECR 1-6911 para. 20)
115. Although the principle that national law must be interpreted in conformity with Community law concerns chiefly domestic provisions enacted in order to implement the directive in question, it does not entail an interpretation merely of those provisions but requires the national court to consider national law as a whole in order to assess to what extent it may be applied so as not to produce a result contrary to that sought by the directive…
116. In that context if the application of interpretive methods recognized by national law enables, in certain circumstances, a provision of domestic law to be construed in such a way as to avoid conflict with another rule of domestic law or the scope of that provision to be restricted to that end by applying it only in so far as it is compatible with the rule concerned, national law is bound to use those methods in order to achieve the result sought by the directive.
117. In such circumstances, the national court, when hearing cases which, like the present proceedings, fall within the scope of Directive 93/104 and derive from facts postdating expiry of the period for implementing the directive, must, when applying the provision of national law specifically intended to implement the directive interpret those provisions so far as possible in such a way that they are applied in conformity with the objectives of the directive…
118. In this instance the principle of interpretation in conformity with Community law thus requires the referring court to do whatever lies within its jurisdiction having regard to the whole body of rules of national law to ensure that Directive 93/104 is fully effective…."
"81. …The question how far it [the national court] can go under the guise of interpretation, and whether it can, for instance, adopt what would otherwise be regarded as a strained construction, is a matter for domestic law.
82. Normally when construing domestic legislation, the English courts must find the meaning of the words which Parliament has used. In the context, however, of legislation which requires to be construed in a way which is compatible with European Union law or with the rights conferred by the European Convention on Human Rights, the English courts can adopt a construction which is not the natural one. The process, however, remains one of interpretation: the obligation imposed by the Court of Justice is only to interpret national law in conformity with a directive "so far as possible". That raises the question when a process ceases to be that of legitimate interpretation and trespasses into the field of law-making that is the task of Parliament not the courts. …
84. Mr Lasok has referred the court to the decision of the House of Lords in Imperial Chemical Industries plc v Colmer (Inspector of Taxes)  STC 1089…. In that case the House of Lords had to consider tax legislation giving consortium relief to companies following a reference to the Court of Justice. The Court of Justice held that the legislation would infringe the right of freedom of establishment conferred by the EC Treaties if relief were denied to companies holding shares wholly or mainly in other companies established in the European Community but not if it were denied to companies holding shares wholly or mainly in other companies established outside the European Community. In fact the appellant did not fall in the protected category but it argued that the legislation had to be interpreted in its case on the basis that it could be interpreted in conformity with Community law. The House of Lords held that it was impossible for the legislation in question to be interpreted so as to distinguish between the two categories of holding company. This case illustrates that there will be cases where the court cannot interpret domestic legislation so as to conform to European Union law."
"He held that the effect of Section 3 was that the court might be required to depart from the unambiguous meaning of a statute. The question of difficulty was how far the courts should go. He held that the answer to this question did not depend on the actual wording used by Parliament."
" …the first point to be considered is how far, when enacting s 3, Parliament intended that the actual language of a statute, as distinct from the concept expressed in that language, should be determinative. Since s 3 relates to the "interpretation" of legislation, it is natural to focus attention initially on the language used in the legislative provision being considered. But once it is accepted that s 3 may require legislation to bear a meaning which departs from the unambiguous meaning the legislation would otherwise bear, it becomes impossible to suppose Parliament intended that the operation of s 3 should depend critically upon the particular form of words adopted by the parliamentary draftsman in the statutory provision under consideration. That would make the application of s 3 something of a semantic lottery. If the draftsman chose to express the concept being enacted in one form of words, s 3 would be available to achieve convention-compliance. If he chose a different form of words, s 3 would be impotent.
 From this the conclusion which seems inescapable is that the mere fact the language under consideration is inconsistent with a convention-compliant meaning does not of itself make a convention compliant interpretation under s 3 impossible. Section 3 enables language to be interpreted restrictively or expansively. But s 3 goes further than this. It is also apt to require a court to read in words which change the meaning of the enacted legislation, so as to make it convention compliant. In other words, the intention of Parliament in enacting s 3 was that, to an extent bounded only by what is "possible", a court can modify the meaning, and hence the effect, of primary and secondary legislation.
 Parliament, however, cannot have intended that in the discharge of this extended interpretative function the courts should adopt a meaning inconsistent with a fundamental feature of legislation. That would be to cross the constitutional boundary s 3 seeks to demarcate and preserve. Parliament has retained the right to enact legislation in terms which are not convention-compliant. The meaning imported by application of s 3 must be compatible with the underlying thrust of the legislation being construed. Words implied must, in the phrase of my noble and learned friend, Lord Rodger of Earlsferry, "go with the grain of the legislation". Nor can parliament have intended that s 3 should require courts to make decisions for which they are not equipped. There may be several ways of making a provision convention-compliant, and the choice may involve issues calling for legislative deliberation."
" Lord Rodger also considered the boundaries of s 3 and gave helpful guidance. He held that in deciding how to interpret the legislation the courts should not produce a meaning which departed substantially from a fundamental feature or cardinal principle of the legislation. Likewise the courts should be less ready to interpret legislation as to be compatible with Convention rights where there would be important practical repercussions which the courts are not equipped to evaluate.
 The decision in the Ghaidan case is a powerful statement of the court's preparedness to interpret legislation so that it is compatible with human rights. … The House of Lords has recognised the force of the mandatory obligation in s 3. However, s 3 permits only interpretation, not the rewriting of legislation which goes beyond mere interpretation. …
 The critical point made by the House of Lords in the Ghaidan case can be found in the passage from the speech of Lord Nicholls which I have set out above. Lord Nicholls accepts that the effect of interpretation in accordance with s 3 of the 1998 Act may be to change the meaning of the legislation but, as he explains, the meaning adopted by the court must not conflict with a fundamental feature of the legislation. He adopts the words of Lord Rodger that the interpretation chosen by the court must "go with the grain of the legislation". Lord Nicholls, Lord Steyn and Lord Rodger all accepted that there would be occasions when the courts could not adopt an interpretation that would make the legislation compatible with Convention rights because that would involve making policy choices which the court was not equipped to make…. It is also clear from the Ghaidan case that the interpretation of legislation under s 3 or the Marleasing principle may involve a substantial departure from the language used though it will not involve a departure from the fundamental or cardinal features of the legislation. It is possible to read the legislation up (expansively) or down (restrictively) or to read words into the legislation. The question of whether s 3 can be applied does not depend on whether it is possible to solve the problem by a single linguistic device.
 Lord Nicholls also makes it clear that there is no need to find that the statutory language should be ambiguous before interpreting legislation so as to be compatible with Convention rights. …In determining whether the solution is one of interpretation or impermissible law-making the relevant test remains whether the interpretation that would be required to make the statute in question … EU law compliant, would involve a departure from a fundamental feature of the legislation. As I see it, the latter cannot be the case where the effect of the interpretation would be to bring the statute into conformity with the objectives of the Sixth Directive in the absence of clear statutory language to the effect that Parliament intended that there should not be such conformity."
"109. Once it is determined that the court has a wide power to interpret legislation in the light of the wording and purpose of the Sixth Directive, there can be seen to be no objection in principle to interpreting Schedule 10A to conform to the principles of the Sixth Directive. The principal remaining objection to the application of the Marleasing principle in this case is the principle of legal certainty. This is an important issue.
110. I accept that under the principle of legal certainty the person affected by legislation must be able to foresee the manner in which it is to be applied and I would also accept that this must particularly be so where the legislation has financial consequences for him such as flow from the imposition of the requirement to account for VAT. A taxpayer has a legitimate expectation that this principle will be observed. Moreover, a taxpayer is entitled to structure his business so as to limit his liability to tax and take advantage of any loopholes he can find. …However in the present case, it is well known that the provisions of VATA 1994 have to be interpreted in conformity with the Sixth Directive and that the supply of telecommunications services constitutes a taxable supply for the purposes of the Sixth Directive. I therefore agree with the judge that the principle of legal certainty is not infringed in this case."
"It concerns a claim by the respondent taxpayer ("ICI") for consortium tax relief. The crucial question was (and is) whether…"Holdings", a company in which ICI holds 49% 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:
"Holding company means a company the business of which consists wholly or mainly in the holding of shares or securities companies which are its 90% subsidiaries, and which are trading companies"
and the opening words of Section 258(7)… provide that "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."
"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 [i.e. which the House of Lords had rejected]."
"My Lords, there appear to me to be two objections to this argument. The first [the relevant section was not ambiguous] … 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."
"I can see (though I confess with difficulty) that it is possible to read this judgment [in the Grundig case] as laying down a rule that, if there is a transitional period provided by the national legislation, and if it happens to be inadequate, it will nonetheless still be permissible to apply the new time bar after the expiration of what the court decides is in fact an adequate transitional period. Assuming that favourable interpretation of the case in the Commissioners' favour, it still gives no assistance to the Commissioners where the legislation fails to allow any transitional time at all.
80 Indeed it would come as a surprise to me to imply a reasonable transitional period in legislation which provides none. Whilst a benign purposive construction of an inadequate transitional time may possibly lead to the implication of a period of grace which is judged to be reasonable, I simply cannot see how one can construe something out of nothing."
Commenting on this passage in Lord Justice Ward's judgment in the House of Lords, Lord Walker said that he could not discern any difference in principle between there being no provision for a transitional period and an inadequate period.
"44 It is necessary to state what Section 3(1,) and in particular the word "possible", does not mean. First, Section 3(1) applies even if there is no ambiguity in the language in the sense of it being capable of bearing two possible meanings. The word "possible" in Section 3(1) is used in a different and much stronger sense. Secondly, Section 3(1) imposes a stronger and more radical obligation than to adopt a purposive interpretation in the light of the ECHR. Thirdly, the draftsman of the Act had before him the model of the New Zealand Bill of Rights Act which imposes a requirement that the interpretation to be adopted must be reasonable. Parliament specifically rejected the legislative model of requiring a reasonable interpretation.
45 Instead the draftsman had resort to the analogy of the obligation under the EEC Treaty on national courts, as far as possible, to interpret national legislation in the light of the wording and purposes of Directives. In Marleasing … the European Court of Justice defined this obligation as follows:"it follows that, in applying national law, whether the provisions in question were adopted before or after the Directive, the national court called upon to interpret it is required to do so, as far as possible, in light of the wording and the purpose of the Directive in order to achieve the result pursued by the latter and thereby comply with the third paragraph of Article 189 of the Treaty". Given the undoubted strength of this interpretive obligation under EEC law, this is a significant signpost in the meaning of Section 3(1) in the 1998 Act."
"48…In both cases the House eschewed linguistic arguments in favour of a broad approach. Pickstone and Litster involve national legislation which implemented EC Directives. Marleasing extended the scope of the interpretive obligation to unimplemented Directives …
49 A study of the case law listed in the Appendix to this judgment reveals that there has sometimes been a tendency to approach the interpretive task under Section 3(1) in too literal and technical a way. In practice there has been too much emphasis on linguistic features. If the core remedial purpose of Section 3(1) is not to be undermined a broader approach is required. That is, of course, not to gainsay the obvious proposition that inherent in the use of the word "possible" in Section 3(1) is the idea that there is a Rubicon which courts may not cross. If it is not possible, within the meaning of Section 3, to read or give effect to legislation in a way which is compatible with Convention rights, the only alternative is to exercise, where appropriate, the power to make a declaration of incompatibility. Usually, such cases should not be too difficult to identify…
50 Having had the opportunity to reconsider the matter in some depth, I am not disposed to try to formulate precise rules about where Section 3 may not be used. Like the proverbial elephant such a case ought generally to be easily identifiable…"
"65 I derive from Ghaidan the principle that however strong and radical the obligation on a court to interpret legislation, there is a line the courts may not cross."
"To read Section 29 as precluding participation by the Home Secretary if it were possible to do so, would not be judicial interpretation but judicial vandalism: it would give the section an effect quite different from that which Parliament intended and would go well beyond any interpretative process sanctioned by Section 3 of the 1998 Act …"
"The "judicial vandalism" would lie not in any linguistic changes, whether great or small, which the court might make in interpreting Section 29 but in the fact that any reading of Section 29 which negatived the explicit power of the Secretary of State to decide on the release date for murderers would be as drastic as changing black into white. …
112 In reaching this conclusion Lord Bingham had regard to the well-known words of Lord Nicholls of Birkenhead in Re S (minors) Care Order… 2 AC 291 para. 39 where the relevant distinction is drawn:
"The Human Rights Act reserved the amendment of primary legislation to Parliament. By this means the Act seeks to preserve parliamentary sovereignty. The Act maintains the constitutional boundary. Interpretation of statutes is a matter for the courts; the enactment of statutes, and the amendment of statutes, are matters for Parliament."
Whatever can be done by way of interpretation must be done by the courts and anyone else who is affected by the legislation in question. The rest is left to Parliament and amounts to amendment of the legislation. As Lord Nicholls pointed out, it is by no means easy to decide in the abstract where the boundary lies between robust interpretation and amendment, but, he added at page 313 para. 40:
"For present purposes it is sufficient to say that a meaning which departs substantially from a fundamental feature of an act of Parliament is likely to have crossed the boundary between interpretation and amendment. This is especially so where the departure has important practical repercussions which the court is not equipped to evaluate. In such a case the overall contextual setting may leave no scope for rendering the statutory provision Convention-compliant by legitimate use of the process of interpretation. The boundary line may be crossed even though a limitation on Convention rights is not stated in express terms"."
"113 …There was no provision in the Children Act 1989 that lent itself to the interpretation that Parliament was conferring this supervisory function on the court. On the contrary conferring such a function was inconsistent in an important respect with the scheme of the Act. "It would constitute amendment of the Children Act not its interpretation". In that situation it was not possible to "read in" to the Act or any of its provisions a power to set up such a system."
"115 In the second passage from his speech in Re S which I have quoted in paragraph 112 above, Lord Nicholls made the further point that a departure from a fundamental feature of an act of Parliament may be more readily treated as crossing the boundary into the realm of amendment where it has important practical repercussions which the court is not equipped to evaluate. It appears to me that difficult questions may also arise where, even if the proposed interpretation does not run counter to any underlying principle of the legislation, it would involve reading into the statute powers or duties with far-reaching practical repercussions of that kind. In effect these powers or duties, if sufficiently far-reaching would be beyond the scope of the legislation enacted by Parliament. If that is right the answer to such questions cannot be clear-cut and will involve matters of degree which cannot be determined in the abstract but only by considering the particular legislation in issue. In any given case, however there may come a point where standing back, the only proper conclusion is that the scale of what is proposed would go beyond any implication that could possibly be derived from reading the existing legislation in a way that was compatible with the Convention right in question. In that event the boundary line will have been crossed and only Parliament can effect the necessary change."
"It is argued, alternatively, that the court can and should fix the duration of an extra period, a transitional period, that must be allowed to claimants whose pre-1st May 1997 claims would otherwise be barred by paragraph (1a) [of the regulation in question]. It is, to me, a surprising proposition that the court can, by judicial legislation, add a transitional period in order to cure the invalidity of a statutory provision that would not otherwise comply with European law and be enforceable against certain claimants. There are, to my mind, several objections to the proposition. First, it is not the function of judges to legislate. Second, the principle that people must be expected to know the law and conduct their affairs in accordance with the law can hardly apply to a judicial amendment to primary or secondary legislation that, until it is made known in the judge's pronounced judgment, is held in pectore. The objection to retrospective legislation would apply here too. Third, the important principle of certainty can hardly be satisfied. The terms of the judicial amendment might change as the case travelled up the appellate chain. And the ability of this House to depart from previous decisions would need to be kept in mind.
22 The notion that a court can add a transitional provision to Regulation 29 (1a), and thereby avoid the need to disapply the paragraph in relation to Regulation 29 claims based on some pre-1st May 1997 input tax payments, appears to derive from language used by the ECJ [in the Grundig case]. …
My Lords, the ECJ in this passage was dealing with the principle of effectiveness. But that is not the only principle in play. The principle of certainty too must be taken into account. Taxpayers are entitled to know from the statutory scheme what input tax repayment claims they can bring under Regulation 29 … It is no answer to the requirement of certainty to be told that the claims can be brought within "an adequate transitional period"."
Then having reviewed the Ghaidan case, Lord Scott concludes by saying, "It is not the function of judges sitting in UK courts to amend UK legislation that is inconsistent with Community law."
"26 However, the Member States' obligation arising from a directive to achieve the result envisaged by the directive and their duty under Article 5 of the Treaty to take all appropriate measures, whether general or particular, to ensure the fulfilment of that obligation, is binding on all the authorities of Member States including, for matters within their jurisdiction, the courts. It follows that in applying the national law and in particular the provisions of a national law specifically introduced in order to implement Directive 76/207, national courts are required to interpret their national law in the light of the wording and the purpose of the Directive in order to achieve the result referred to in the third paragraph of Article 189. …
28 …It is for the national court to interpret and apply the legislation adopted for the implementation of the Directive in conformity with the requirements of Community law, in so far as it is given discretion to do so under national law."
"47 The obligation on the national court to refer to the content of a framework decision when interpreting the relevant rules of its national law ceases when the latter cannot receive an application which would lead to a result compatible with that envisaged by that framework decision. In other words the principle of conforming interpretation cannot serve as the basis for an interpretation of national law contra legem. That principle does, however, require that, where necessary the national court consider the whole national law in order to assess how far it can be applied in such a way as not to produce a result contrary to that envisaged by the framework decision."
"39 In that respect, the Italian and French Governments object that in the present case the result sought by the referring court is unachievable because of contrary provisions of Italian law. With regard to that objection, it must be conceded that interpretation in conformity with the Framework Directive is possible only so far as national law provides for the possibility of such an interpretation. That is expressed in the qualification "as far as possible" used by the Court. Although the objectives pursued by provisions of Union law demand precedence over all other methods of interpretation, they cannot lead to a result which could not be achieved under national law by way of interpretation. Only national courts can determine the extent to which, in the final analysis, their national law allows scope for that."
i) "Conforming construction" of UK legislation, under the Marleasing principle in an appropriate case, can extend as far as implying words or provisions into UK legislation even where the relevant provisions of that legislation are unambiguous.
ii) In implying words or provisions it is not necessary for the court to produce precise wording as if redrafting the legislation but the words, or the sense of them, must not run counter to the overall purpose and pattern of the provisions being construed ("the grain" of that legislation).
iii) The duty of UK courts to interpret UK legislation in conformity with EC law "where possible" does not permit those courts, in the process, to amend UK legislation. The furthest limit of what it is permissible for UK courts to do is drawn at the point where interpretation becomes legislation.
iv) UK courts should not imply words into UK legislation under the principle of conforming construction as in i) above where to do so involves the court in taking policy decisions which a court is unfitted to take. Typically this situation will arise where there are two or more choices as to the form of words to be implied, each of which may render the legislation Community law compliant but which produce differing effects on the parties or on the public generally.
v) The duty to construe UK legislation, in accordance with the principle of conforming construction, applies, with particular strength, where the legislation in question was enacted to implement provisions of Community law, usually a Directive. This is a logical conclusion because the UK court in such cases will have guidance as to the purpose which that legislation was designed to achieve from the Directive itself. In those cases lacunae in the UK legislation can properly be filled by implying words into legislative provisions of which the meaning is otherwise plain, where such implication is necessary to give effect to the plain intention of the Community law in question. It is easier to see what "goes with the grain" of the UK legislation where the court has a Directive for guidance (see Litster at para. 43 and 44 above, Pfeiffer at para. 45 above (s 112, 115 & 117), Ghaidan at para. 59 above (s 48), Colson at para. 66.
vi) When implying words or provisions into taxing legislation, particular regard must be had to the Community law principle of certainty. Taxpayers are entitled to know what their liability to pay tax is or may be and to organise their affairs accordingly from taxing statutes the meaning of whose provisions is plain from their words.
Application of the principle of conforming construction to the facts of the present case
i) It is not in issue that Vodafone enjoys the directly enforceable right under Article 43 freely to establish a CFC (VIL) in a Member State (Luxembourg) and that the Cadbury case shows that the apportionment of the profits of VIL to Vodafone, there to be taxed, constitutes, prima facie, an unlawful interference with that freedom under Community law. See Lord Scott in Pirelli Cable Holding NV v IRC. 2006 1WLR 400 at para. 77.
ii) The provisions of subsection (3) are unambiguous and its purpose is plain, namely, to defeat tax avoidance by parent companies resident for tax purposes in the UK, by channelling profits to CFCs resident in foreign countries where those profits are taxed at a significantly lower level and where one of the main reasons of a UK parent company for doing so was to achieve such tax advantage. The Cadbury case demonstrates that the establishment of a CFC in a Member State with such an objective is protected by Article 43 and, accordingly, legislation seeking to penalise the parent, in those circumstances alone, is contrary to Community law. Community law only permits anti-tax avoidance legislation of this kind where the CFC in question is part of an artificial arrangement whose sole object is the avoidance of tax and is not "established" in the host country conducting bona fide commercial operations there. There are no words in subsection (3) which, using conventional rules of construction, are capable of being construed as limiting the operation of the subsection so as to comply with Article 43 as explained in the Cadbury case.
iii) It follows from ii) that the only way in which such a limitation can be read into subsection (3) is by the implication of words or provisions, as proposed by the Special Commissioners and HMRC, creating a further and objective test before profits can be appropriated under Section 747(3). In the course of submissions I suggested that this further condition would, perhaps, be more felicitously imported into subsection (3) as a proviso to subsections (a) and (b) of subsection (3). Either way, it seems to me incontrovertible that to do so is amending subsection (3) and, in no sense, interpreting any part of it. To adapt Lord Scott in the Fleming case, it is to me a surprising proposition that the court can, by judicial legislation, add a further condition for the application of Section 748(3) in order to cure the invalidity of a statutory provision that would not otherwise comply with European law and be enforceable against certain taxpayers.
But if my conclusion in iii) above is wrong,
iv) By contrast with the Pickstone, Litster, IDT and EB. Central Services cases, there is no indication that the CFC legislation was enacted with Article 43 in mind. It seems likely that, in enacting the CFC legislation in 1984, Parliament "simply and understandably failed to anticipate the effects upon it of the Act of 1972"; see per Lord Nolan in the ICI case at page 2041 H. This is not a case where the court is confronted with the necessity to imply a provision to fill a lacuna in legislation which is demonstrably necessary so that the intentions of the Community provision, which that legislation was enacted to import into UK law, will be given effect to.
v) The further condition which it is proposed to incorporate into Section 748(3), to limit its application to artificial arrangements by means of CFCs which are not "established" in a host Member State, renders the whole of that subsection redundant, so far as its application to such CFCs is concerned and substitutes an objective test for exemption from tax for what was previously an almost entirely subjective test. It renders virtually redundant all the exceptions in subsection 748(1) save that in subsection (d), the de minimis exception excluding the profits of a CFC less than £50,000 in any 12-month period of accounting, reducing proportionately where the accounting period is less than 12 months. This is hardly "going with the grain" of Sections 747 and 748. The point is not evaded by saying one must look at the whole of the CFC legislation to determine what the "grain" is. Section 748 defines which taxpayers will be exempt from the charge imposed by Section 747(3) and forms a fundamental part, if not the fundamental part (with Section 747) of the CFC legislation. It is no answer, without more, to say that the purpose or "grain" of the CFC legislation is the defeat of tax avoidance, for the purpose of which it is sought to imply the new condition, without going on to examine the method chosen by the legislature to bring about that defeat. The Cadbury case establishes that an intention to avoid tax does not, by itself, render a transaction involving a CFC resident in a Member State, an artificial arrangement and so abusive.
vi) Because the duty on UK courts to apply the doctrine of conforming interpretation, and with it the power to imply words into that legislation, even where its relevant terms are unambiguous, arises under Section 2 of the European Communities Act 1972, which does not apply to non-Member States, it would seem that the same geographical difficulty stands in the way of implying a further condition into Section 748(3) as was present in the ICI v Colmer case.
vii) The fact that the CFC legislation applies to CFCs resident in both Member States and non-Member States imposes on international groups of companies, if HMRC's construction of subsection (3) is accepted, different treatment by the Revenue of the profits of subsidiaries depending on whether or not they are resident in a Member State. HMRC appear content with this, subject to being able to apportion the profits of CFCs which are resident in Member States derived from operations outside the EU as defined in the new Section 751A. (With Mr Glick I entertain some doubt that the new section is not also an infringement of Article 43 rights). An alternative solution, open to the legislature but not the courts, would have been to amend Section 748(3) by expressly introducing the "artificial arrangements test" into Section 748. As I have already pointed out, it would effectively replace subsection (3) because any evidence of intention to avoid tax in a parent company would go to prove the objective fact that the arrangements were artificial. This would have the merit of meeting criticism based on the "principle of certainty", to which I will shortly come, but it also shows that the provisions proposed to be implied into subsection (3) have economic and political implications which the authorities show ought to discourage the court from implying its own solution. The new section 751A underlines this point. In order to be effective it requires that Section 748(3) be construed so as to include the "artificial arrangements" condition, but seeks to deal with the potential loophole where profits earned outside the EU are channelled through a CFC resident in a Member State which is "established" there within the criteria of the Cadbury case. There is a further loophole not yet apparently addressed. What happens if a UK-resident parent, wishing to avoid tax, purchases an "established" company resident in another Member State, but uses it as "letter box" for investment transactions, unassociated with its existing business, using no additional staff or premises, but which contributes substantially to that company's profits? HMRC contends correctly that the CFC legislation was enacted as an anti-avoidance measure. There are a number of ways of doing this.
viii) In both the speech of Lord Scott in the Fleming case and the judgment of Lady Justice Arden in the IDT case are passages, which I have quoted, showing that the Community law "principle of Certainty" is important when the courts come to consider the application of the principle of conforming construction to UK legislation. Particularly is this so where the legislation in question is a taxing statute. It has long been a principle of our law that taxation is not to be imposed on the subject, save by statutory provisions of which the meaning is plain. This is not a case, like the IDT case, where it is possible to take the view Lady Justice Arden took in that case that the provision of services to the users of mobile phones being assessable to VAT is so well known that the court's "widening" of the ambit of that tax by implying words or provisions, would not take the average taxpayer by surprise. In the present case Section 748(3) is capable of having application in a wide sphere of commercial life involving businesses large and small. An uninstructed small businessman or his accountant, considering the establishment of a subsidiary in a Member State to market his product, reading the plain words of subsection (3) might well obtain a wholly misleading impression of the United Kingdom tax consequences of doing so.
ix) It has always to be borne in mind that the issue in this case is whether Section 748(3) exceeds what Community law permits Member States to do by legislation restricting the enjoyment of their subjects of rights arising under Community law which they are directly able to enforce and that the Advocate General in the Cadbury case, himself construing the subsection, formed the conditional view that subsection (3) exceeds what is permissible.
"(1) No apportionment under Section 747(3) falls to be made as regards an accounting period of a controlled foreign company if…
(b) throughout that period the company is, within the meaning of Part II of that Schedule, engaged in exempt activities; …"
"6(1) Throughout an accounting period a controlled foreign company is engaged in exempt activities if, and only if, each of the following conditions is fulfilled –
(a) that, throughout the accounting period, the company has a business establishment in the territory in which it is resident and
(b) that, throughout that accounting period, its business affairs in that territory are effectively managed there; and
(c) that any of sub-paragraphs (2), (3), (4) or (4a) below applies to the company
(2) This sub-paragraph applies to a company if
(a) at no time during the accounting period in question does the main business of the company consist of either
(i) investment business or
(ii) dealing in goods for delivery to or from the United Kingdom or to or from connected or associated persons and
(b) in the case of a company which is mainly engaged in wholesale, distributive, financial or service business in that accounting period, less than 50% of its gross trading receipts from that business is derived directly or indirectly from persons falling within sub-paragraph 2A below."
The court's order
"My Lords, it is a fundamental principle of the law of the European Union recognised in Section 2(1) of the European Communities Act 1972, that if national legislation infringes directly enforceable Community rights, the national court is obliged to disapply the offending provision. …
25. Disapplication is called for only if there is an inconsistency between national law and EU law. In an attempt to avoid an inconsistency the national court will, if at all possible, interpret the national legislation so as to make it conform with the superior order of EU law… Disapplication of national legislation is essentially a different process from its interpretation so as to conform with EU law. … In these two appeals it is common ground, at least in your Lordships' House, that the national court is concerned with disapplication, not with trying to find a conforming construction."
"I do not think that the gap in the legislation can be made good on a case by case basis. The nature of the defect is such that a single solution is required that can reasonably be applied to all taxpayers."
"This differentiates [as a target for the disapplication] between taxpayers not merely by reference to i) when they paid the relevant VAT and ii) when they actually made their repayment claim, but also iii) whether, if the amending legislation had included an adequate transitional period from its inception, they would (on a subjective test) have made claims within that period. In other words the court was asked (not as an alternative to the appropriate analysis on the first two points, but as an additional requirement) whether the particular taxpayer would have made a claim during whatever is the correct period."
"It would be contrary to legal certainty, and administratively unworkable, for the extent of disapplication to depend not only on the duration of the transitional period but also on an hypothetical question to be answered by reference to the circumstances and states of mind of particular taxpayers. It would be unworkable regardless of whether the burden of proof lay on the Commissioners or on the taxpayer."