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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> HM Revenue and Customs v FCE Bank Plc  EWCA Civ 1290 (17 October 2012)
Cite as:  EWCA Civ 1290
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ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
Mr Justice Henderson and Mr Julian Ghosh QC
Appeal No: FTC/50/10
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE RIMER
LADY JUSTICE BLACK
| THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS
|- and -
|FCE BANK PLC
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7404 1424
Official Shorthand Writers to the Court)
Mr John Gardiner QC and Mr John Brinsmead-Stockham (instructed by Slaughter and May) for the Respondent
Hearing date: 10 July 2012
Crown Copyright ©
Lord Justice Rimer :
'402. Surrender of relief between members of groups and consortia
(1) Subject to and in accordance with this Chapter and section 492(8), relief for trading losses and other amounts eligible for relief from corporation tax may, in the cases set out in subsections (2) and (3) below, be surrendered by a company ("the surrendering company") and, on the making of a claim by another company ("the claimant company") may be allowed to the claimant company by way of a relief from corporation tax called "group relief".
(2) Group relief shall be available in a case where the surrendering company and the claimant company are both members of the same group.
A claim made by virtue of this subsection is referred to as a "group claim". …'
'(3) For the purposes of this Chapter –
(a) two companies shall be deemed to be members of a group of companies if one is the 75 per cent. subsidiary of the other or both are 75 per cent. subsidiaries of a third company; …
(5) References in this Chapter to a company apply only to bodies corporate resident in the United Kingdom; …'.
'(1) For the purposes of the Tax Acts a body corporate shall be deemed to be –
(b) a "75 per cent. subsidiary" of another body corporate if and so long as not less than 75 per cent. of its ordinary share capital is owned directly or indirectly by that other body corporate; …
(2) In subsection (1)(a) and (b) above "owned directly or indirectly" by a body corporate means owned, whether directly or through another body corporate or other bodies corporate or partly directly and partly through another body corporate or other bodies corporate.'
'788. Relief by agreement with other countries
(1) If Her Majesty by Order in Council declares that arrangements specified in the Order have been made with the government of any territory outside the United Kingdom with a view to affording relief from double taxation in relation to –
(a) income tax,
(b) corporation tax in respect of income or chargeable gains, and
(c) any taxes of a similar character to those taxes imposed by the laws of that territory,
and that it is expedient that those arrangements should have effect, then those arrangements shall have effect in accordance with subsection (3) below. …
(3) Subject to the provisions of this Part, the arrangements shall, notwithstanding anything in any enactment, have effect in relation to income tax and corporation tax in so far as they provide –
(a) for relief from income tax, or from corporation tax in respect of income or chargeable gains; …'.
'(1) Individuals who are nationals of a Contracting State and who are residents of the other Contracting State shall not be subjected in that other State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. …
(5) Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned State are or may be subjected.'
Matters of common ground
(i) FCE and FMCL are relevant 'Enterprises of a Contracting State [the UK]' and so capable of benefiting from the protection of article 24(5): they are objects of article 24(5).
(ii) The relevant hypothetical comparator consists of UK-resident companies carrying on the same business and in the same fiscal position as FCE and FMCL, but owned or controlled by a UK-resident company to the same extent as FCE and FMCL were owned by FMC.
(iii) The group relief provisions – including section 413(5) of the Taxes Act as to the availability of group relief – and the denial of that relief fall within the concept of 'any taxation or any requirement connected therewith' in article 24(5).
(iv) The hypothetical comparator companies would have been able to surrender trading losses between one another through a claim for group relief. FCE and FMCL were unable to do so under the terms of the group relief provisions in the Taxes Act. FCE and FMCL were therefore subject both to "other" and "more burdensome" tax treatment than the hypothetical comparator companies would have been, within the terms of article 24(5). This was because of the operation of the group relief provisions, and in particular section 413(5).
(v) The group relief provisions therefore discriminated against FCE and FMCL when their treatment is compared with that of the relevant hypothetical comparator. Mr Glick added that whereas in the case of the hypothetical comparator group relief could have been passed between the subsidiary and the parent as well as between the subsidiaries, in the case of the FMC group it could not have been because FMC was not resident in the UK.
The appeal: the parties' submissions
'1. My Lords, between 1973 and 1999 a company resident in the United Kingdom which paid a dividend was liable to pay advanced corporation tax ("ACT"). This payment could be set off against its liability for corporation tax on its profits ("mainstream corporation tax" or "MCT"). The recipient of the dividend was entitled to a tax credit for the ACT. If the recipient was a company, the dividend and the tax credit constituted franked investment income and could be distributed to its own shareholders without further payment of ACT.
2. The economic purpose of this system was to ensure that a company's profits were not taxed twice: first as profits earned by the company and then again as dividends received by the shareholders. The payment of tax by the company was partially imputed by means of a tax credit to the shareholders. But the system also had to ensure that credit was given only for tax which had actually been paid. Hence the requirement that ACT be paid at the time of the distribution and then set off against MCT.
3. Section 247 of [the Taxes Act], like many other of its provisions, recognised the unity of a group of companies which are in law separate persons but economically a single enterprise. It provided that a parent and subsidiary, both resident in the United Kingdom, could jointly elect that the subsidiary would pay dividends free of ACT and the parent would receive them without the benefit of a tax credit. The dividends would not be franked investment income and the parent would be liable for ACT when it passed them on as dividends to its own shareholders. The advantage to the group was that money could be moved from subsidiary to parent, either with a view to subsequent distribution or for some other purpose, without attracting an immediate liability to ACT.'
'14. The reasoning of the judge and the Court of Appeal was that article 24(5) of the US DTC (for example) requires one to compare the positions of the UK-resident subsidiary of a US parent and the UK-resident subsidiary of a UK parent. If the latter can elect under section 247 and the former cannot, that is discrimination contrary to article 24(5). It is irrelevant that an election would transfer liability for ACT to the UK parent but not to the US parent. The DTC is concerned with the taxation of enterprises in the UK and not with the tax position of their foreign-resident shareholders. The authoritative commentary on the equivalent article of the OECD Model Convention with Respect to Taxes on Income and on Capital 1963 says that its object is:
"to ensure equal treatment for taxpayers residing in the same state, and not to subject foreign capital, in the hands of the partners or shareholders, to identical treatment to that applied to domestic capital."
15. I respectfully think that this particular observation does not take the matter much further forward because it is directed to a different point. It draws attention to the limited application of the non-discrimination article, which provides only for treatment of resident tax payers and does not prevent a state from discriminating in its treatment of the income of foreign shareholders; for example, by imposing a withholding tax. It does not say that parentage cannot be a relevant characteristic of a resident tax payer.
16. The question, as it seems to me, is whether section 247 discriminates against a UK company on the ground that its capital is "wholly or partly owned or controlled, directly or indirectly" by residents of the US, or Japan, or some other foreign state. In relation to article 24(1) of the OECD Model Convention, which prohibits discrimination between residents on grounds of nationality, the commentary says that the "underlying question" is whether two residents are being treated differently "solely by reason of having a different nationality". It does not repeat this observation in relation to article 24(5), but the principle must be the same. Does section 247 discriminate on the grounds that the capital of the subsidiary is controlled by a non-resident company? [Lord Hoffmann's emphasis].
17. In my opinion it plainly does not. For example, if a US parent were to interpose a UK-resident holding company between itself and its UK-resident subsidiary, the control would remain in the US but there would be no objection to an election by the UK subsidiary and its immediate, UK-resident parent. On the other hand, an individual US shareholder and the company he controls in the UK could not elect, but the reason is not because the company is subject to US control. An individual UK shareholder and his company could not elect either, for the same reason that a non-resident company cannot elect. It is because an individual is not liable to corporation tax. An election is a joint decision by two entities paying and receiving dividends that one rather than the other will be liable for ACT. This is not a concept which can meaningfully be applied when one of the entities is not liable for ACT at all.
18. Unfortunately the judge and the Court of Appeal did not have the benefit of the discussion of the nature of the section 247 election in the speeches in this House in Pirelli Cable Holding NV v. Inland Revenue Commissioners  1 WLR 400. The point was luminously made by Lord Nicholls of Birkenhead, at para 19, in a speech with which the rest of their Lordships agreed:
"A group income election is a group election. A group income election cannot be made by a subsidiary alone. It is an election made jointly by the subsidiary paying the dividend and the parent receiving the dividend. By making such an election both companies seek the fiscal consequences of making the election. One consequence is that by making the election the subsidiary will obtain the advantage of not paying ACT in respect of the relevant dividend. Another consequence is that the subsidiary will obtain this advantage at the cost of depriving the parent of a tax credit in respect of the dividend. These two fiscal consequences are inextricably linked. You cannot have one without the other. That is why the election has to be made jointly. The advantage to the paying subsidiary comes at a price to the recipient parent."
19. In my respectful opinion, it is not possible to decouple the positions of parent and subsidiary as the judge and the Court of Appeal sought to do. To allow an election by a group with a US-resident parent would not be to give a relief available to a group with a UK-resident parent. It would be something different in kind. It would not be an election as to who would be liable for ACT but as to whether the group should pay it at all.
20. These arguments were in substance those put forward by the UK Government to the Court of Justice in the Hoechst decision  Ch 620. But they were rejected. Why? Because the prohibition on discrimination implied in article 43 of the EC Treaty has an altogether different purpose from the prohibition on discrimination in the DTCs. Freedom of establishment under article 43 is the freedom of the resident of a member state to establish itself in another state. In the case of parent and subsidiary, it is the freedom of the parent to establish a subsidiary. As Lord Scott of Foscote explained in the Pirelli case  1 WLR 400, para 77:
"the right to freedom of establishment conferred by article  is the right of a company (or an individual) with its seat in one member state to establish itself in another member state. Unwarranted restrictions imposed by the latter member state on the branch or agency or subsidiary company by means of which the parent company is seeking to establish itself in that member state is plainly a breach of the … right to freedom of establishment of that parent company."
21. Discrimination against the group as a whole is thus a restriction on the parent's freedom of establishment. If a group with a UK parent has a cash flow advantage which a group with a parent in another member state does not enjoy, that is a restriction on the latter's freedom of establishment. Fortunately, by the time of the decision in Hoechst, ACT had been abolished. So no one had to decide how the decision should be given effect for the future. But it obviously would not have been possible simply to give a group with a parent in another member state the right to elect under section 247. That would have enabled it to elect not to pay ACT and put it in a better position than a group with a UK parent. It would have been necessary either to repeal section 247 or abolish ACT.
22. A DTC, on the other hand, does not give a company or individual resident in one country a right of establishment in the other. As the commentary on the OECD model says, the equality it ensures is only that any enterprise it owns in the other country will not be subject to taxation which discriminates on the ground of its foreign control. In my opinion, the denial of the right of election was not on the ground of the company's foreign control but on the ground that section 247 cannot be applied to a case in which the parent company is not liable to ACT.'
'… The evident purpose of s. 258(1) was to enable a parent company and its 75% subsidiaries to be treated as a single entity for tax purposes, merging the profits and the losses of individual members of the group in order to arrive at the taxable profit (if any). It is to be noted that in the case of what might be called ordinary group relief under s. 258(1) the relief which may be claimed is not limited to the extent of the equity participation: a claim for 100% of the loss may be made under s. 259(1) even if the equity participation is no more than 75%. …'.
Discussion and conclusion
'We observe at this point that this crucial part of Lord Hoffmann's reasoning has no relevance to the present case, because the claim for group relief was a claim that only affected the UK tax position of the two UK subsidiaries. The claim had no effect at all on the tax position of the US parent, and the only relevance of the parent company was to establish (or not, as the case may be) the necessary group relationship between the two UK companies which surrendered and accepted the trading losses. It is conceptually quite irrelevant whether the US common parent is within the charge to UK corporation tax or not, in relation to the question of whether two UK tax resident companies are sufficiently connected to each other so as to form a group which permits the surrender of losses from one to another.'
Lady Justice Black :
Lord Justice Pill :