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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Vodafone 2 v Revenue and Customs [2008] EWHC 1569 (Ch) (04 July 2008) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2008/1569.html Cite as: [2009] Ch 123, [2009] Bus LR 96, [2008] STC 2391, [2009] 3 CMLR 30, [2008] STI 1675, [2008] BTC 526, [2009] 2 WLR 210, 10 ITL Rep 1052, [2008] EWHC 1569 (Ch), [2008] 3 CMLR 21 |
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THE
HIGH COURT OF JUSTICE
CHANCERY DIVISION
Strand, London, WC2A 2LL |
||
B e f o r e :
HONORABLE MR JUSTICE EVANS-LOMBE
____________________
![]() ![]() |
Appellant |
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- and - |
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![]() ![]() ![]() ![]() ![]() ![]() ![]() ![]() |
Respondent |
____________________
for the
Appellant
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
parties
The
relevant legislation
"Subject to Section 748, wherethe
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 periodthe
company pursues within
the
meaning of Part I of Schedule 25 an acceptable distribution policy; or
(b) throughout that periodthe
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 respectsthe
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 isthe
case that:-
(a) in so far as any ofthe
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 notthe
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 tothe
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 againstthe
letter of 15th November 2002 and/or
(b) directthe 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 withthe
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, interpretthe
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 thatthe
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 [114] 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 inthe
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, onthe
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 tothe
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 circumventingthe
application of
the
legislation of
the
Member State concerned. …
54 Having regard to that objective of integration inthe
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 [1991] ECR 1-3905, paragraph 20, and Case C-246/89 Commission
v
United Kingdom [1991] 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 orderfor
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 Inthe
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 providingfor 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 bythe
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 inthe
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 [2000] ECR I-11569, paragraphs 52 and 53, and Case C-255/02 Halifax and Others [2006] ECR I-0000, paragraphs 74 and 75).
65 In those circumstances in orderfor 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 isfor 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 Inthe
first case,
the
legislation on CFCs should be regarded as being compatible with Articles 43 EC and 48 EC.
74 Inthe
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 Inthe
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. Ifthe
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, inthe
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 ofthe
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 thatthe
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 tothe
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 isthe
case that –
(a) in so far as any ofthe
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 notthe
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 whetherthe
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 inthe
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 tothe
foregoing provisions of this section."
"111. It isthe
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 [1989] 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 isthe
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 fortiorithe
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 [1993] ECR 1-6911 para. 20)
115. Althoughthe
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 ifthe
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 instancethe
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 referredthe
court to
the
decision of
the
House of Lords in Imperial Chemical Industries plc
v
Colmer (Inspector of Taxes) [1999] 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 thatthe
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."
"[31] …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.
[32] From thisthe
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.
[33] Parliament, however, cannot have intended that inthe
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."
"[87] Lord Rodger also consideredthe
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.
[88]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. …
[89]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.
[90] Lord Nicholls also makes it clear that there is no need to find thatthe
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 thatthe
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 underthe
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 bythe
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 companythe
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"
andthe
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 ofthe
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 [48], 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 [inthe
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 tothe
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 particularthe
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 Insteadthe
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 casesthe
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 ofthe
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 hadthe
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 Ghaidanthe
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 bythe
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 tothe
well-known words of Lord Nicholls of Birkenhead in Re S (minors) Care Order…[2002]
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 bythe
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 inthe
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 Inthe
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, thatthe
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 isfor 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."
"47The
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 periodthe
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 ofthe
following conditions is fulfilled –
(a) that, throughoutthe
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 duringthe
accounting period in question does
the
main business of
the
company consist of either
(i) investment business or
(ii) dealing in goodsfor
delivery to or from
the
United Kingdom or to or from connected or associated persons and
(b) inthe
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 ofthe
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 calledfor
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 thatthe
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 targetfor 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."