Appeals Numbers: TC/2010/4318, 4320 & 5806

[2011] UKFTT 342 (TC)

TC01202

Appeals numbers: TC/2010/4318, 4320 & 5806

Corporation tax - Closure notice applications under Schedule 18 FA 2008 - Categorisation of proceedings under Tribunal Procedure Rule 23 – criteria for recategorisation as a Complex case

FIRST-TIER TRIBUNAL

TAX

FINNFOREST UK LIMITED

CARD PROTECTION PLAN LIMITED

EXXONMOBIL CHEMICAL LIMITED

Applicants

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMSRespondents

TRIBUNAL: Judge Peter Kempster

Ms Gill Hunter

Sitting in public at 45 Bedford Square, London WC1 on 25 November 2010

Mr Graham Aaronson QC, instructed by Dorsey & Whitney (Europe) LLP, for the Appellants

Mr Richard Coleman and Mr David Yates, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

DECISION

1.The three Applicants (“the Taxpayers”) each applied to the Tribunal for a direction to be issued to the Respondents (“HMRC”) to give closure notices in respect of several open enquiries into the respective corporation tax returns of the Taxpayers. There was also a question for the Tribunal as to the appropriate categorisation of the proceedings under the Tribunal Procedure Rules, which is dealt with separately at the end of this decision notice.

The Closure Notice Applications

2.On 10 May 2010 Card Protection Plan Limited (“CPP”) filed an application pursuant to paragraph 33 of schedule 18 Finance Act 1998 (“Sch 18”) for a direction from the Tribunal that HMRC issue closure notices within 30 days of the date of the Tribunal direction in relation to the accounting periods ended 31 August 2000 and 2001, and 31 December 2001 to 2007.

3.Also on 10 May 2010 Finnforest UK Limited (“Finnforest”) filed an identical application in relation to the accounting periods ended 31 December 2000 to 2004.

4.On 8 July 2010 ExxonMobil Chemical Limited (“ExxonMobil”) filed an identical application in relation to the accounting period ended 31 December 2001.

The Legislation on Closure Notices

5.Sch 18sets out the provisions relating to “Company tax returns, assessments and related matters.” Paragraph 24 provides (so far as relevant):

“(1)An officer of Revenue and Customs may enquire into a company tax return if they give notice to the company of their intention to do so (“notice of enquiry”) within the time allowed. ...”

6.Paragraph 25 provides (so far as relevant):

“(1) An enquiry into a company tax return extends to anything contained in the return, or required to be contained in the return, including—

(a) any claim or election included in the return,

(b) any amount that affects or may affect–

(i) the tax payable by that company for another accounting period, or

(ii) the tax liability of another company for any accounting period, ...”

7.Paragraph 32 provides (so far as relevant):

“(1) An enquiry is completed when an officer of Revenue and Customs by notice (a “closure notice”) informs the company they have completed their enquiry and state their conclusions. The notice takes effect when it is issued. …”

8.Paragraph 34 provides (so far as relevant):

“(1) This paragraph applies where a closure notice is given to a company by an officer.

(2) The closure notice must—

(a) state that, in the officer's opinion, no amendment is required of the return that was the subject of the enquiry, or

(b) make the amendments of that return that are required—

(i) to give effect to the conclusions stated in the notice, …

(2A) The officer may by further notice to the company make any amendments of other company tax returns delivered by the company that are required to give effect to the conclusions stated in the closure notice.

(3) An appeal may be brought against an amendment of a company's return under sub-paragraph (2) or (2A).

(4) Notice of appeal must be given—

(a) in writing,

(b) within 30 days after the amendment was notified to the company,

9.The applications by the Taxpayers before the Tribunal stem from paragraph 33:

“(1) The company may apply to the tribunal for a direction that an officer of Revenue and Customs gives a closure notice within a specified period.

(2) Any such application is to be subject to the relevant provisions of Part 5 of the Taxes Management Act 1970 (see, in particular, section 48(2)(b) of that Act).

(3) The tribunal shall give a direction unless satisfied that an officer of Revenue and Customs has reasonable grounds for not giving a closure notice within a specified period.”

10.Finally in relation to Schedule 18, paragraphs 31A to 31D provide (so far as relevant):

“31A—Referral of questions to the tribunal during enquiry

(1) At any time when an enquiry is in progress into a company's tax return any question arising in connection with the subject-matter of the enquiry may be referred to the tribunal for determination.

(2) Notice of referral must be given—

(a) jointly by the company and an officer of Revenue and Customs, ...

…

(4) More than one notice of referral may be given under this paragraph in relation to an enquiry.

(5) For the purposes of this paragraph the period during which an enquiry is in progress is the whole of the period—

(a) beginning with the day on which an officer of Revenue and Customsgives notice of enquiry into the return, and

(b) ending with the day on which the enquiry is completed.

31B—Withdrawal of notice of referral

(1)An officer of Revenue and Customs or the company may withdraw a notice of referral under paragraph 31A.

(2) Notice of withdrawal must be given—

(a) in writing,

(b) to the other party to the referral and to the Special Commissioners,

31C—Effect of referral on enquiry

(1) While proceedings on a referral under paragraph 31A are in progress in relation to an enquiry—

(a) no closure notice shall be given in relation to the enquiry, and

(b) no application may be made for a direction to give such a notice.

(2) For the purposes of this paragraph proceedings on a referral are in progress where—

(a) notice of referral has been given,

(b) the notice has not been withdrawn, and

(3) For the purposes of sub-paragraph (2)(c) a question referred is finally determined when—

(a) it has been determined by the tribunal, and

(b) there is no further possibility of that determination being varied or set aside (disregarding any power to grant permission to appeal out of time).

31D—Effect of determination

(1) The determination of a question referred to the tribunal under paragraph 31A is binding on the parties to the referral in the same way, and to the same extent, as a decision on a preliminary issue in an appeal.

(2) The determination shall be taken into account by an officer of Revenue and Customs in reaching their conclusions on the enquiry.

(3) Any right of appeal under paragraph 30 or 34(3) may not be exercised so as to reopen the question determined except to the extent (if any) that it could be reopened if it had been determined as a preliminary issue in that appeal.”

11.The applications in the current proceedings relate to a number of returns for each of the Taxpayers. Mr Coleman for HMRC confirmed to the Tribunal that in relation to HMRC’s enquiries into all those returns for all three Taxpayers the only open items are certain cross-border group loss relief claims, discussed below.

Background

12.In 2002 a large number of corporate taxpayers decided to challenge the validity of the UK domestic legislation governing intra-group surrenders of tax losses. The then rules permitted such offsets only where both the surrendering and claimant companies were resident in the UK for UK tax purposes, or, at least, had some taxable presence in the UK. The companies believed – correctly, as it eventually transpired – that the UK residence condition could be contrary to the guarantee of freedom of establishment contained in the European Community Treaty. HMRC contested that challenge, arguing – again correctly, as it eventually transpired – that the reality of national limits to taxation permitted at least some form of restriction on the ability to offset losses cross-border. The companies launched their challengeby a group litigation ordersanctioned by the High Court: the Loss Relief GLO. The three Taxpayers are all participants in the Loss Relief GLO.

13.As soon as it was launched the Loss Relief GLO ran into a jurisdictional problem: should the High Court entertain proceedings concerning tax liabilities when such disputes were, by statute, to be adjudicated in the first instance by the Special Commissioners (a forerunner of the current Tribunal)? That proved to be a knotty problem considered, with various conclusions, by the High Court, the Court of Appeal and theHouse of Lords. The outcome, by a three-to-two majority decision of the House of Lords in Re Claimants under Loss Relief Group Litigation Order [2005] STC 1357 (“Autologic”), was that a distinction was drawn between group relief claims made within the statutory time limits and those claims filed out of time. The in-time claims were to be heard by the Special Commissioners.

14.The Special Commissioners had in December 2002 heard a tax appeal by Marks & Spencer plc (“M&S”), which had also made a group relief claim although was not a participant in the Loss Relief GLO. M&S’s dispute eventually reached the High Court where questions were referred to the European Court of Justice (“ECJ”). The terms of the ECJ’s decision (Marks & Spencer plc v Halsey [2006] STC 237 – “M&S ECJ”) are discussed later. M&S’s dispute is still live, with the state of the proceedings as at the date of thecurrent hearing being that the Court of Appeal is to hear an appeal against a decision of the Tax & Chancery Chamber of the Upper Tribunal.

15.Around 15 of the participants in the Loss Relief GLO are represented by the same solicitors: Dorsey & Whitney. Until Spring 2009 it suited everyone (including HMRC) to leave their disputes over the group loss relief claims in abeyance. The House of Lords had ruled that the (in-time) claims must in due course progress through the normal tax appeals process (now, this Tribunal), and M&S was fighting the vanguard on the issues being challenged by the participants in the Loss Relief GLO. In Spring 2009 Dorsey & Whitney concluded that their clients’ common interests with the M&S ECJlitigation had been outweighed by the distinctions between their positions and that of the M&S group. In particular, the group structures of those companies were not identical to that of the M&S group (the structure considered by the ECJ). So on 3 April 2009 Dorsey & Whitney wrote to HMRC with a proposal. Before exploring the correspondence between the parties from April 2009 we state the decision in M&S ECJand give a summary of the dispute between the parties that gives rise to the current applications.

M&S ECJ

16.The decision of the ECJ in M&S ECJ was as follows (at 267):

“59. ... as Community law now stands, arts 43 EC and 48 EC do not preclude provisions of a member state which generally prevent a resident parent company from deducting from its taxable profits losses incurred in another member state by a subsidiary established in that member state although they allow it to deduct losses incurred by a resident subsidiary. However, it is contrary to arts 43 EC and 48 EC to prevent the resident parent company from doing so where the non-resident subsidiary has exhausted the possibilities available in its state of residence of having the losses taken into account for the accounting period concerned by the claim for relief and also for previous accounting periods and where there are no possibilities for those losses to be taken into account in its state of residence for future periods either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party.”

17.This is commonly and uncontroversially interpreted as invoking a two part test:

(a)Is the connection between the two companies sufficient to give Community law protection from discrimination? – “the Grouping Test”.

(b)Have the possibilities of local use of the losses been sufficiently exhausted? – “the No Possibilities Test”.

Summary of current dispute

18.On the Grouping Test, the particular structure considered by the ECJ in M&SECJ was a loss-making subsidiary in a non-UK member state surrendering losses to a profitable parent in the UK. The M&S group structure does not apply exactly to any of the three Taxpayers. In outline:

(a)Finnforest’s stucture involves a loss-making company in a non-UK member state (and its subsidiaries in the same or other non-UK member states) surrendering losses to a profitable sister company in the UK, all with a parent in a non-UK member state.

(b)CPP’s stucture involves a loss-making company in a non-UK member state surrendering losses to a profitable sister company in the UK, both with a UK parent.

(c)ExxonMobil’s stucture involves a loss-making company in a non-UK member state surrendering losses to a profitable sister company in the UK, both with a non-EU (USA) parent.

19.Can one extrapolate from the particular structure considered in M&SECJ to those three structures? The Taxpayers contend that M&SECJ establishes certain principles clearly applicable to structures similar but not identical to that of the M&S group. HMRC contend that any structure not identical to the M&S group must be considered independently.

20.On the No Possibilities Test, there is a factual question, which must be addressed on a case-by-case basis, of whether the stipulation made by the ECJ can be satisfied by the evidence in each particular case. It was common ground between the parties that a case-by-case approach was necessary, and the nature and quantity of the required evidence would be substantial. The Taxpayers accept they will at some point need to satisfy the evidential burden in relation to the No Possibilities Test. But, they say, the very significant amount of work that will involve should not be required of them earlier than necessary or, in particular, if it would prove futile because the Grouping Test cannot be satisfied. In other words, the Grouping Test should be sorted out first, and only if the answer to that test provides hope to the Taxpayers should they then undertake the evidence gathering and disclosure necessary for the examination of the No Possibilities Test. That approach leads them to propose that the Grouping Test should be addressed as a preliminary issue on their appeals. In particular, they identify that preliminary issue as being one that may require a reference to the ECJ at some point – especially given HMRC’s stance that M&SECJ does not give the answer for the Taxpayers’ own structures.

Correspondence between the parties since April 2009

21.As stated at ¶15 above, on 3 April 2009 Dorsey & Whitney wrote to HMRC outlining a proposal that (a) the in-time claims of their clients (ie those claims that, if not agreed, would be pursued by appeals to this Tribunal) should be progressed in priority to the out-of-time claims that would be heard by the High Court, in accordance with the House of Lords decision in Autologic; and (b) common issues in relation to their 15 clients be discussed with a view to identifying possible representative test cases.

22.On 20 July 2009 HMRC responded stating, in summary:

(a)HMRC agreed that the operation of the group relief regime and its compatibility with the EU Treaty should be litigated before the Tribunal.

(b)That commencing litigation on other claims while the M&S ECJ litigation was ongoing was potentially unnecessary and wasteful of costs unless, by doing so, final determination of those other claims could be reached.

(c)That HMRC had advised their relevant local offices that the Solicitor’s Office would review each of the 15 sets of claims so that responses could be co-ordinated.

(d)That it was always for the claimant to demonstrate that it could fulfil the necessary statutory requirements for a group relief claim and that it met the No Possibilities Test by adducing the relevant evidence before the Tribunal.

23.On 18 August 2009 Dorsey & Whitney replied they agreed that points which would be determined in the context of the M&S ECJproceedings should be so decided, but noting that a number of questions arose in the claims which did not arise in the M&S ECJcase. They suggested that the most sensible and cost-efficient approach to such issues would be to agree a joint reference to the Tribunal. The alternative would be to apply for closure notices in relation to any open enquiries and have the issues ventilated in the context of those applications.

24.On 18 September 2009 HMRC responded including the following:

“Solicitor's Office has received these claims on an ad hoc basis since April 2009 and it is only now that we are aware of the identities and number of claimants who wish to pursue their Taxes Act claims. In order to prepare effectively we need adequate time to properly consider the facts of each claimant and the legal issues which arise in relation to each claim. If any of these claims falls mainly within the terms of the M&S decision then it would appear sensible to await the outcome of the concurrent appeals to decide how that claim should be dealt with - do you agree? ...”

“In respect of proof of the exhaustion of possibilities of loss relief [ie the No Possibilities Test] we will of course need to see documentary evidence. We believe that the evidence which was adduced by M&S in the recent proceedings before the First-Tier Tribunal would also be required in these cases. For ease of reference we enclose at Annex 1 a list of documentary and witness evidence which we feel, as presently advised, should be produced by the claimants if they argue that they fulfil the no-possibilities test. Itmay be necessary to add to this list in the future and HMRC reserve the right to make further requests for information as and when necessary. ...”

“In relation to two of the claimants [including ExxonMobil] these company groups have parent companies which are resident in third countries and which cannot therefore purport to exercise rights of establishment or indeed any Community law rights. We do not understand why you feel these claimants should be able to rely on Community law to advance their claims (or indeed any late claims) particularly bearing in mind the decision of the ECJ in the Thin Cap decision and therefore we would be grateful if you would explain how you feel these claims should proceed?”

Annex 1 to the letter listed:

“Documentary and legal evidence required from claimants:

In relation to the documentary evidence required in respect of each (EU-resident) surrendering company to prove that they have in fact incurred losses in the State of Residence and that those losses satisfy the "no possibilities" test the following information and documents should be produced by the claimant/taxpayer:-