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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Credit Suisse Securities (Europe) Ltd & Ors v HM Revenue and Customs [2019] EWHC 1922 (Ch) (19 July 2019) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2019/1922.html Cite as: [2019] 5 CMLR 17, [2019] BTC 19, [2019] STC 1576, [2019] STI 1362, [2019] EWHC 1922 (Ch) |
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BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)
Fetter Lane, London, EC4A 1NL |
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B e f o r e :
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CREDIT SUISSE SECURITIES (EUROPE) LIMITED CREDIT SUISSE INTERNATIONAL CREDIT SUISSE (UK) LIMITED CREDIT SUISSE AG |
Claimants |
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- and - |
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THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS |
Defendants |
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George Peretz QC and Alan Bates (instructed by HMRC Solicitor's Office) for the Defendants
Hearing dates: 25 and 26 June 2019
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Crown Copyright ©
Mrs Justice Falk:
Introduction
State Aid
"Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market."
"1. The Commission shall, in cooperation with Member States, keep under constant review all systems of aid existing in those States…
2. If, after giving notice to the parties concerned to submit their comments, the Commission finds that aid granted by a State or through State resources is not compatible with the internal market having regard to Article 107, or that such aid is being misused, it shall decide that the State concerned shall abolish or alter such aid within a period of time to be determined by the Commission.
If the State concerned does not comply with this decision within the prescribed time, the Commission or any other interested State may, in derogation from the provisions of Articles 258 and 259, refer the matter to the Court of Justice of the European Union direct.
….
3. The Commission shall be informed, in sufficient time to enable it to submit its comments, of any plans to grant or alter aid. If it considers that any such plan is not compatible with the internal market having regard to Article 107, it shall without delay initiate the procedure provided for in paragraph 2. The Member State concerned shall not put its proposed measures into effect until this procedure has resulted in a final decision.
…"
The issues
Issue 1: Did HMRC's imposition of BPT on the Claimants constitute a State aid measure within the meaning of Article 107(1) TFEU? In particular:
(a) Did the measure confer an economic advantage to the Untaxed Banks?
(b) Was the economic advantage granted by the State or through State resources?
(c) Was the measure selective?
(d) Was the measure liable to distort competition and to affect trade between EU Member States?
Issue 2: If the measure is considered to be a State aid measure, does that give rise to a claim for repayment of tax, as opposed to a recovery of aid from the beneficiaries of that aid?
Issue 4: If, by imposing BPT on the Claimants, HMRC did breach the State aid rules in Articles 107 and 108 TFEU, was that a sufficiently serious breach of EU law which renders HMRC liable to pay damages to the Claimants in accordance with the decision of the European Court of Justice in Joined Cases C-6/90 and C-9/90 Francovich and Bonifaci v Italy [1991] ECR I-5357 and subsequent case law?
Issue 8: Is the Claimants' claim (or any part thereof) precluded by:
(a) paragraph 51(6) of Schedule 18 to the FA 1998 read with paragraph 31(1) of Schedule 1 to the FA 2010? and/or
(b) paragraph 31(2) of Schedule 1 to the FA 2010?
(Issues 6 and 7 relate respectively to causation (and therefore the quantum of damages), and to the question whether Credit Suisse are entitled to interest on a compound or simple basis, and if so in what amount and for what period. Issues 3 and 5 are common ground, being respectively that the imposition of BPT was not notified in advance to and cleared by the European Commission under Article 108(3) TFEU, and that Article 108(3) has direct effect and confers rights on Credit Suisse. It is also common ground that any economic advantage was granted by the State or through State resources, Issue 1(b) above.)
The evidence
The background and policy rationale of BPT
"Supporting growth is vital to provide the future revenue to halve borrowing over the next four years, but, as I have said, it also requires us to take some tough decisions on tax now. I am determined that any tax increases will continue to be guided by our values of fairness and responsibility. Last year, the banks made collective losses of £80 billion in this country alone. This would have been much higher without the unprecedented level of support from the taxpayer. There is no bank that has not benefited, either directly or indirectly, from this help. This should be a time for banks to rebuild their capital base and become stronger. A tax on profits, as has been suggested, would prevent them from doing that, so I have decided against a windfall tax. However, there are some banks who still believe their priority is to pay substantial bonuses to some already high-paid staff. Their priority should be to rebuild their financial strength and increase their lending, so I am giving them a choice: they can use their profits to build up their capital base, but if they insist on paying substantial rewards, I am determined to claw money back for the taxpayer.
I have decided to introduce from today a special one-off levy of 50 per cent on any individual discretionary bonus above £25,000. This will be paid by the bank, not the bank employee, and anti-avoidance measures will be introduced with immediate effect. High-paid bank staff will, of course, also have to pay, as usual, income tax at their top rate on any bonus they receive. On a cautious assumption, which includes our expectation that some banks will rein back on bonuses, this levy is expected to yield just over £500 million. That additional money will be used to pay for the extra measures that I have already announced, such as help for the young and older unemployed to get back into work."[3]
"The Government attaches great importance to tackling the remuneration practices that contributed to excessive risk taking by the banking industry. The Government has made clear that the sector needs to develop sustainable long-term remuneration policies that take better account of risk and facilitate the build-up of loss-absorbing capital. However, evidence suggests that some may be intending to pay bonuses for the current year that are not consistent with a prudent approach to risk.
The Government today announces that where bank (and building society) employees are awarded discretionary bonuses, in whatever form, above £25,000 in the period from the Pre-Budget Report to 5 April 2010, the banks paying these bonuses will pay an additional bank payroll tax of 50 per cent on the excess bonus over £25,000. The tax will not be deductible in computing the taxable profits of affected companies. This tax will encourage banks to consider their capital position and to make appropriate risk adjustments when settling the level of bonus payments above the threshold which is at the level of median earnings in the UK. If banks choose to make awards that are not consistent with a prudent approach to risk, it is only fair that they contribute more to the public finances in a year when profits have been facilitated by significant taxpayer support for the banking sector as a whole.
It is intended that in the longer term, remuneration practices will be changed as a result of corporate governance and regulatory reforms, as outlined later in this chapter. The one-off bank payroll tax will apply until 5 April 2010, but the Government will consider extending the period of the charge so that the tax remains in place until the relevant provisions of the Financial Services Bill come into force. Where there is evidence of avoidance schemes being put in place, the Government will take action to close those schemes."[4]
"… to encourage change in the remuneration practices that contributed to excessive risk taking by the banking industry. The Government wants to encourage the development of sustainable long-term remuneration policies that take greater account of risk and facilitate the build up of loss-absorbing capital.
The bank payroll tax will encourage banks to consider their capital position and make appropriate risk-adjustments when settling the level of bonus payment this year. It is intended that in the longer term the remuneration practices will be changed as a result of corporate governance and regulatory reforms. The one-off bank payroll tax will apply until 5 April 2010, but the Government will consider extending the period of charge so that the tax remains in place until the relevant provisions of the Financial Services Bill come into force."
Credit Suisse's submissions
HMRC's submissions
Issue 1: was there State aid?
Selectivity: the case law
"54. So far as concerns the condition relating to the selectivity of the advantage, which is a constituent factor in the concept of "State aid", within the meaning of art.107(1) TFEU, it is clear … that the assessment of that condition requires a determination whether, under a particular legal regime, a national measure is such as to favour "certain undertakings or the production of certain goods" over other undertakings which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation and who accordingly suffer different treatment that can, in essence, be classified as discriminatory…
55. Further, where the measure at issue is conceived as an aid scheme and not as individual aid, it is for the Commission to establish that that measure, although it confers an advantage of general application, confers the benefit of that advantage exclusively on certain undertakings or certain sectors of activity…
56. As regards, in particular, national measures that confer a tax advantage, it must be recalled that a measure of that nature which, although not involving the transfer of State resources, places the recipients in a more favourable position than other taxpayers is capable of procuring a selective advantage for the recipients and, consequently, of constituting State aid, within the meaning of art.107(1) TFEU. On the other hand, a tax advantage resulting from a general measure applicable without distinction to all economic operators does not constitute such aid…
57. In that context, in order to classify a national tax measure as "selective", the Commission must begin by identifying the ordinary or "normal" tax system applicable in the Member State concerned, and thereafter demonstrate that the tax measure at issue is a derogation from that ordinary system, insofar as it differentiates between operators who, in the light of the objective pursued by that ordinary tax system, are in a comparable factual and legal situation…
58. The concept of "State aid" does not, however, cover measures that differentiate between undertakings which, in the light of the objective pursued by the legal regime concerned, are in a comparable factual and legal situation, and are, therefore, a priori selective, where the Member State concerned is able to demonstrate that that differentiation is justified since it flows from the nature or general structure of the system of which the measures form part…
59. Further, it must be recalled that the fact that only taxpayers satisfying the conditions for the application of a measure can benefit from the measure cannot, in itself, make it into a selective measure…
60. It follows from all the foregoing that the appropriate criterion for establishing the selectivity of the measure at issue consists in determining whether that measure introduces, between operators that are, in the light of the objective pursued by the general tax system concerned, in a comparable factual and legal situation, a distinction that is not justified by the nature and general structure of that system…"
a) it must be determined whether the measure favours certain undertakings (or sectors) over others;
b) those undertakings must be in a "comparable factual and legal situation";
c) whilst a tax advantage can constitute State aid, it will not do so if it results from a general measure applicable without distinction to all economic operators;
d) the starting point is to identify the ordinary or "normal" tax system, and then determine whether the tax measure is a derogation from that system;
e) the question whether undertakings are in a comparable factual and legal situation must be determined in the light of the objective pursued by the ordinary tax system; and
f) even if a measure is a priori selective, there will be no State aid where the Member State shows that the differentiation in treatment flows from the "nature or general structure" of the system.
"92. Such an interpretation of the selectivity criterion would require, contrary to the case law cited in [87] above, that in order for a tax system to be classifiable as "selective" it must be designed in accordance with a certain regulatory technique; the consequence of this would be that national tax rules fall from the outset outside the scope of control of State aid merely because they were adopted under a different regulatory technique although they produce the same effects in law and/or in fact.
93. Those considerations apply particularly with regard to a tax system which, as in the present case, instead of laying down general rules applying to all undertakings from which a derogation is made for certain undertakings, achieves the same result by adjusting and combining the tax rules in such a way that their very application results in a different tax burden for different undertakings."
Selectivity: discussion
The reference system
Challenge to start and end dates
The objectives of the reference system, and whether Taxed Banks and Untaxed Banks were in a comparable situation
Was it a general measure applicable without distinction?
Difference arising from the "nature or general structure"?
Conclusions on selectivity
Economic advantage/impact on trade and competition: evidence
Conclusion on issue 1
Issue 2: claim to repayment of tax?
"Persons liable to pay an obligatory contribution cannot rely on the argument that the exemption enjoyed by other persons constitutes State aid in order to avoid payment of that contribution."
"… art.107(1) of the TFEU prohibits selective aids not a selective imposition of charges. Thus exemptions to tax might be viewed as unlawful and selective state aid but the charge itself would not. However, if the charge or tax itself is used to finance state aid, then the tax or charge itself might be held to be unlawful state aid. There is therefore an exception to the general rule if there is what is termed 'deliberate asymmetric taxation' where a state chooses to tax one group of undertakings while not imposing the tax on a competing group with the objective of distorting competition in favour of the non-taxed groups. In that situation the asymmetric imposition of tax is not the result of the aid but the means by which the aid is granted."
"It can be readily appreciated that, in terms of the general rule, a person is not entitled to withhold a tax or a levy on the basis simply that others are exempted from paying it and those exemptions are, or may be, unlawful and represent state aid. … That general rule is a powerful one and is not easily displaced. However, it is clear that there are exceptions to it. The exception said to exist here was identified in the opinion of the Advocate General [Tizzano] in Air Liquide Industries Belgium SA v Ville de Serang and Province de Liège (Joined cases C-393/04 and C-41/05) [2006] ECR I-5293, para 70 of the opinion at note 29 as follows: 'The answer would have been different had the imposition of the tax itself been unlawful, insofar as it was designed to create an unlawful situation benefiting certain persons, as in Boiron in which I today delivered my opinion… That case concerns a tax established in the form of an asymmetric charge, since it is designed solely to apply to certain economic operators and not to others in a competitive relationship with the former, and is introduced specifically and only to create a situation that favours the undertakings which are not subject to it. There is thus a close link between the tax and the aid, like two sides of the same coin, because the advantage given to the undertakings which are not subject to the tax exactly corresponds to the disadvantage imposed on the undertakings liable to it. In a situation of that kind, therefore, it is the actual imposition of the tax which may be deemed to be unlawful in the light of the Community rules on aid.'"
Issue 4: Francovich: sufficiently serious breach?
"…(1) the importance of the principle which has been breached; (2) the clarity and precision of the rule breached; (3) the degree of excusability of an error of law; (4) the existence of any relevant judgment on the point; (5) whether the infringer was acting intentionally or involuntarily or whether there was a deliberate intention to infringe as opposed to an inadvertent breach; (6) the behaviour of the infringer after it has become evident that an infringement has occurred; (7) the persons affected by the breach or whether there has been a complete failure to take account of the specific situation of a defined economic group; (8) the position taken by one of the Community institutions in the matter".
Issue 8: paragraph 31 Schedule 1 FA 2010/paragraph 51(6) Schedule 18 FA 1998
Conclusion
Note 1 Joined cases C-6/90 and C-9/90 Francovich and Bonifaci v Italy [1991] ECR I-5357. [Back] Note 2 Other than in relation to issue (3), where it has been held that it is for the Member State to establish this justification: Netherlands v Commission (C-159/01) at [43]. [Back] Note 3 Hansard, House of Commons debates 9 December 2009, column 367. [Back] Note 4 2009 Pre-Budget Report, page 44. [Back] Note 5 This Bill was presented to Parliament on 19 November 2009 and eventually became the Financial Services Act 2010, section 6 of which introduced section 139A of the Financial Services and Markets Act 2000. This provision (since replaced) required the Financial Services Authority (FSA) to make rules in respect of remuneration policies. The relevant rules made came into effect from 1 January 2011. [Back] Note 6 The relevant Directive, 2009/111/EC, was adopted in September 2009 and became effective on 31 December 2010. [Back] Note 7 Mr Robertson suggested that Italy v Commission (T-211/05) [2009] ECR I-2777, referred to in Bacon (European Union Law of State Aid, 3rd ed.) at 2.124, was an example of limited duration. But that related to a measure that provided tax reliefs to companies that were newly listed during a specified 15 month period, rather than to a tax that was in force for a limited period. The reliefs were clearly available to some companies and not others, and in practice only to those that were already in the process of preparing for listing, or were ready to do so. The regime also favoured Italian registered companies. (See paragraphs [120] to [122].) [Back]