ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Park J.
HC 02C03865
Royal Courts of Justice
Strand,
London, WC2A 2LL
Before :
LORD JUSTICE PETER GIBSON
and
LORD JUSTICE LONGMORE
Between :
THE TEST CLAIMANTS IN THE LOSS RELIEF GROUP LITIGATION | Appellants |
- and - | |
COMMISSIONERS OF INLAND REVENUE | Respondent |
(Transcript of the Handed Down Judgment of
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Mr. Graham Aaronson Q.C., Mr. David Cavender and Mr. Paul Farmer (instructed by Messrs Dorsey & Whitney of Finsbury Square) for the Appellants
Mr. Richard Plender Q.C. and Mr. David Ewart (instructed by the Solicitor of Inland Revenue) for the Respondents
Judgment
Lord Justice Peter Gibson:
In Metallgesellschaft Ltd. v CIR and Hoechst v CIR [2001] ECR I – 1727 (I will call the joined cases “Hoechst”) the European Court of Justice (“the ECJ”) has held that it is contrary to Art. 43 of the EC Treaty (relating to freedom of establishment) for a member state by its tax legislation, which affords subsidiaries resident in the member state the possibility of obtaining a benefit where their parent company is also so resident, to deny that possibility where their parent company is resident in another member state. In Hoechst the benefit was the payment of dividends by the subsidiaries to their parent company without having to pay Advance Corporation Tax (“ACT”) on those dividends. The ECJ further held that Art. 43 requires that resident subsidiaries and their non-resident parent companies which have suffered loss in consequence should have an effective legal remedy to obtain reimbursement of or compensation for that loss from which the member state has benefited.
The decision in Hoechst has spawned a huge number of claims against the Revenue totalling many billions of pounds as international groups of companies seek to take advantage of the implications of the decision. Those implications have been seen to go beyond the type of relief in issue in Hoechst. Many cases have been brought in the High Court. We are told that a Group Litigation Order (“GLO”) has been made for each of five different classes of cases.
We are concerned with what is known as the Loss Relief GLO. There are currently 59 claimants in this GLO. They have brought proceedings in the Chancery Division claiming against the defendants, the Commissioners of Inland Revenue, restitution and damages. They say that the U.K. tax rules relating to group loss relief contravene Art. 43 and Art. 56 (relating to freedom of movement of capital) of the EC Treaty. They also claim that those rules contravene the non-discrimination articles in the relevant double taxation treaties because those rules confine group loss relief to cases where all the resident companies are resident in the U.K. or, after 2000, are subject to U.K. corporation tax in respect of activities carried on in the U.K. They say that Arts. 43 and 56 and the non-discrimination articles require group relief to be available irrespective of the place of incorporation, residence or business activities of the companies in the group. We are told that a further 140 companies have made claims in respect of group loss relief which are outside the Loss Relief GLO. Those claims have not been brought in the High Court.
Six test claimants in the Loss Relief GLO have been selected for the purpose of the determination of a procedural dispute which has arisen between the GLO claimants and the Revenue. That dispute is as to whether the claims, so far as they relate to group loss relief, should have been brought pursuant to the ordinary statutory procedure for the determination of tax disputes, that is to say that there should have been a quantified claim made by the appropriate company to the appropriate Inspector of Taxes and, if the claim is not allowed, the company should appeal to the General Commissioners or, at the company’s option, to the Special Commissioners (I will call the General or Special Commissioners hearing such appeal “the Commissioners”), with a right of appeal from the Commissioners’ decision to the High Court in the ordinary way. It is common ground that the other parts of the claims are correctly brought in the High Court as the Commissioners do not have jurisdiction to deal with them. The Revenue applied to strike out those parts of the claims which relate to group loss relief on the basis that the High Court either lacked jurisdiction or, if it had jurisdiction, it should exercise it by refusing to entertain those claims.
Park J. (see Re Claimants under Loss Relief Group Litigation Order [2004] STC 594) on 3 March 2004 acceded to that application and refused permission to appeal. The claimants applied for permission to appeal to this court. Chadwick L.J., considering the application on paper, adjourned the application to a with notice hearing, with the appeal to follow, if permission were granted. At the outset of the hearing we indicated that we gave permission. This hearing has therefore been the hearing of the appeal.
I must now refer briefly to the statutory provisions in point. Corporation tax is assessed and charged for any accounting period of a company on its profits arising in that period (ss. 6 and 12 of the Income and Corporation Tax Act 1988 (“the 1988 Act”). If a company has trading losses, it may set off those losses against its profits (s. 393 of the 1988 Act). Chapter IV of Part X of the 1988 Act contains rules for group loss relief, extending the relief for a company’s own losses to be set off against its profits, so that when one company in a group suffers losses, it may surrender those losses to another company in the same group, if the other company makes a claim so as to set off the losses against its profits. For accounting periods ended before 1 April 2000 the conditions for claims for group loss relief were governed by ss. 402 (2) and 413 (3) and (5) of the 1988 Act. They provide:
“402(2) Group relief shall be available where the surrendering company and the claimant company are both members of the same group.
413(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 subsidiary of the other or both are 75% subsidiaries of a third company; …
413(5) References in this Chapter to a company apply only to bodies corporate resident in the United Kingdom; and in determining for the purposes of this Chapter whether one company is a 75% subsidiary of another, the other company shall be treated as not being the owner –
….
(c) of any share capital which it owns directly or indirectly in a body corporate not resident in the United Kingdom.”
For accounting periods ending after 31 March 2000 the following conditions, in s. 402 (3A) and (3B), apply:
“402(3A) Group relief is not available unless the following condition is satisfied in the case of both the surrendering company and the claimant company.
(3B) The condition is that the company is resident in the United Kingdom or is a non-resident company carrying on a trade in the United Kingdom through a branch or agency.”
Schedule 17A to the 1988 Act contains other detailed provisions relating to the making of group loss claims. It was originally provided by s. 412 of the 1988 Act that such a claim in respect of an accounting period of a company had to be made within two years from the end of that period. That limitation period was later extended to 6 years for accounting periods ending after 30 September 1993. The claim must be for a quantified amount to be included in a corporation tax return. Throughout the Schedule the provisions are worded on the footing that both the surrendering company and the claimant company are companies resident in the U.K. Thus by para. 10 a claim requires the consent of the surrendering company and consent to surrender is to be of no effect unless notice of consent is given by the consenting company to the Inspector to whom the surrendering company makes its returns, and notice of consent to surrender is to be of no effect unless it contains particulars including the accounting period of the surrendering company to which the surrender relates and the tax district references of the surrendering company and the company to which relief is being surrendered.
By para. 12 of Sch. 17A all such assessments or adjustments of assessments shall be made as may be necessary to give effect to a claim. Appeals against assessments are governed by s. 31 Taxes Management Act 1970 which, by subs. (4), provides for appeals to go to the Commissioners.
At the date of the hearing before Park J. the six test claimants were all at different stages in making claims for loss relief to the Inspector. (I will refer to the claimants by the abbreviated names by which they have been known in the proceedings.)
(i) Autologic: there was an appeal pending before the Commissioners.
(ii) Future Network: there was a claim made to the Inspector which had been refused although not yet the subject of an appeal.
(iii) BT: claims had been made to the Inspector but had not yet been determined.
(iv) Caterpillar: a claim had been made to the Inspector but had subsequently been withdrawn.
(v) Heinz: no claim had been made to the Inspector, but time had not expired for making claims for some accounting periods.
(vi) BNP Paribas: no claim had yet been made to the Inspector and the statutory time limit for making a claim had expired.
In the High Court proceedings all the claimants have claims for group loss relief to reduce the amount of corporation tax payable. They are the primary claims, but there are also other claims for damages or restitution. The various claims were summarised by the claimants before the judge as being for at least two and in some cases all four of the following categories:
“(i) For the profits of the UK profit-making company to be relieved by the losses of a non-UK resident company.
(ii) Because of the clear legislative requirement for all the relevant companies to be resident in the UK basic group relief was regarded in every case as not available. In many cases the profit-making companies used other reliefs (e.g. capital allowances or surplus ACT) which they would not have used had basic group relief been available. In these cases the profit-making companies claim restitution of the other reliefs or, in the alternative, compensation for their use.
(iii) In many cases other UK members of the group surrendered their own reliefs to the UK profit-making company; and those companies are reclaiming the reliefs.
(iv) In all of the cases the companies which would have surrendered losses, if the group relief rules were not confined to UK resident companies, may have been paid for allowing their losses to be set-off against the profit-making companies’ profits, and they seek compensation for the loss of these payments.”
It has throughout been the contention of the Revenue that the High Court has no jurisdiction to determine the category (i) claims, as they must proceed by way of the statutory procedure of a claim to the Inspector whose decision can only be challenged by way of an appeal to the Commissioners: alternatively, if the High Court has jurisdiction, it should in the exercise of its discretion refuse to exercise it. It is not in dispute that the High Court has jurisdiction to determine the categories (ii), (iii) and (iv) claims and that the Commissioners have no power to grant those reliefs. The Revenue, however, said that those claims are dependent on the category (i) claims and cannot proceed until the category (i) claims have been determined by following the ordinary statutory procedure including a determination by the Commissioners.
The judge agreed with the Revenue. He said that issues of tax law which are disputed between the taxpayer and the Revenue ought to be resolved by way of appeal to the Commissioners. He rejected the submission advanced by the claimants that the Hoechst decision required the High Court to accept jurisdiction. He thought that it did not matter greatly whether the High Court had no jurisdiction or whether, if it had, he needed to decide whether or not to exercise it since, if there was jurisdiction, he would decline to exercise whatever jurisdiction he had. He reviewed the authorities on jurisdiction and found helpful the statement by Robert Walker J. in Glaxo Group Ltd. v CIR [1995] STC 1075 at pp. 1083-4 where that judge, having analysed the authorities, said:
“Possibly the correct view is that there is an absolute exclusion of the High Court’s jurisdiction only when the proceedings seek relief which is more or less co-extensive with adjudicating on an existing open assessment; but that the more closely the High Court proceedings approximate to that in their substantial effect, the more ready the High Court will be, as a matter of discretion, to decline jurisdiction.”
Park J. said that the category (i) claims where there had been an assessment were precisely co-extensive with adjudicating on an existing open assessment and, where there was no existing open assessment, relief of the same nature was claimed. He was not impressed by the claimants’ arguments that the more convenient course for the parties was for him to accept jurisdiction. He said that the statutory procedure should be followed and it would be wrong to subvert and undermine the jurisdiction of the Commissioners by allowing cases between taxpayer and the Revenue on an issue of tax law to be commenced in the High Court. Accordingly he struck out two paragraphs of the claimants’ pleadings relating to relief sought in respect of the category (i) claims. If I might say so, the attitude adopted by the judge was that which would perhaps appeal to most lawyers experienced in tax matters if Community law considerations could be left out of account.
Mr. Graham Aaronson Q.C. for the claimants took three main points.
(1) By reason of Hoechst the judge should have found that the High Court not only had jurisdiction but was required to hear the category (i) claims.
(2) The judge erred in not deciding whether he had jurisdiction; he should have found on the authorities that he had jurisdiction and should have exercised it.
(3) The judge erred in failing to appreciate or give adequate consideration to the practical difficulties in requiring the category (i) claims to be severed from all the other claims and consigned to the Commissioners; those difficulties should have led the judge to exercise jurisdiction by hearing all the claims in the High Court.
Mr. Richard Plender Q.C. for the Revenue submitted that the judge was right for the reasons which he gave. He said that on the authorities the High Court had no jurisdiction to deal with the category (i) claims and that jurisdiction cannot be created by the admixture of admissible and inadmissible claims. He reminded us of the well-established constraints on this court if it is to interfere with an exercise of discretion by the judge and submitted that in the present case there were no grounds for such interference.
Hoechst
I start with Mr. Aaronson’s first point. In Hoechst question (5) of the questions referred to the ECJ was:
“Is a Member State entitled to plead in answer to such a claim for restitution, tax credit or damages, that the plaintiffs are not entitled to recover, or that the plaintiffs’ claim should be reduced, on the grounds that, despite the terms of the national Statute which prevented them from doing so as a matter of national law they ought to have made a group income election, or claimed a tax credit and have appealed to the Commissioners and, if necessary, the courts against the decision of the inspector of taxes refusing the election or claim, relying upon the primacy and direct effect of the provisions of Community law?”
The Revenue in that case, as in this, had argued that the claims brought by the companies in the High Court were invalid because they should have followed the statutory procedure whereby the companies could have appealed to the Special Commissioners against a refusal by the Inspector to accept a claim to allow the dividend to be paid without an obligation to account for ACT. Mr. Aaronson points out that the procedural issue raised in Hoechst is essentially the same as that in the present case with the deletion of references to tax credit and to claiming a tax credit and the substitution of a reference to a claim for loss relief for the reference to group income election in question 5.
Advocate General Fennelly addressed question (5) in paras. 58 and 59 of his Opinion. He said:
“58. Since I consider that the Court should rule that the denial of the option to make a group income election to subsidiaries whose parent companies were resident in other Member States constituted unlawful discrimination contrary to Article [43] of the EC Treaty, and that the mere fact that the alleged resulting loss suffered by such subsidiaries concerned the time value of the use of the monies paid by way of ACT does not preclude their claim, it is necessary to consider briefly whether the alleged omission of the plaintiffs, over an extended period of time, to challenge that denial, on the basis of the relevant national statutory appeal mechanism, or, indeed, by way of an earlier direct judicial review application than that actually brought in the main proceedings, may be invoked by the defendant Member State to defeat or reduce the damages sought subsequently by them in a claim based on its incompatibility with Community law. It is true that it has been accepted by the Court that a failure to show ‘reasonable diligence’ in order to avoid loss or damage or to reduce its extent and particularly to avail ‘in time of all the legal remedies available’, may, if similar rules would be applied in purely national-law cases, be taken into account by the national court to reduce, and perhaps in extreme cases, eliminate Member State liability. In my opinion, it should not be permissible, save in the most extreme of cases, for a Member State, whose legislation created a difference in treatment to the detriment of non-residents that admitted of no exceptions and which would have required them, on pain of penalties, to continue paying the tax in question even if its compatibility with Community law had been called into question, to rely upon a taxpayer's failure to use a statutory remedy - one which, moreover, was not, in its own terms, applicable to it - for the purpose of making such a Community-law claim, or to rely upon the direct effect and supremacy of Article [43] of the EC Treaty, as an excuse for seeking to limit a subsequent claim for damages based on the incompatibility of that legislation with Community law.
59. This conclusion reflects the important principle that a Member State must not be allowed to profit from its own wrong. It may not, therefore, insist on the application of its rules against taxpayers and then, when those rules are found to be contrary to Community law, deny an obligation to make reparation for the loss it caused on the basis that those rules were not immediately challenged. In my view, in cases such as the present case, where claimants are essentially faced with an unambiguous national legislative rule, on the one hand, and the possible right to oppose the application against them of that rule on the basis of Community law, on the other hand, and where neither the rule in question nor any similar rule of another Member State has previously been considered by this Court, a delay on the part of the claimant in challenging the national rule in question should only be taken into account by the competent national court when considering the possible limits affecting the claim before it flowing from national limitation periods or from other comparable rules regarding laches that would also apply to similar claims based purely on national law.”
The ECJ in para. 102 of its judgment accepted that claimants can be required by national rules of procedure to act with reasonable diligence. It continued:
“103. Next, it is not disputed that in the cases in the main proceedings the tax legislation of the United Kingdom clearly denied resident subsidiaries of non-resident parent companies the benefit of the group income election, with the result that the plaintiffs cannot be faulted for failure to indicate their intention to apply to make a group income election. According to the orders for reference, it is not disputed that, had the plaintiffs applied for that taxation regime, their application would have been refused by the Inspector of Taxes because the parent companies were not resident in the United Kingdom.
104. Finally, the orders for reference make it clear that an appeal against such a refusal by the tax authorities could have been brought before the Special or General Commissioners and then, if necessary, before the High Court. According to the national court, before judgment could be given in such an appeal, the subsidiaries would still have had to pay ACT in respect of all the dividends which they had paid out and, furthermore, if the appeal had succeeded, they would not have obtained reimbursement of the ACT, since no such right to reimbursement exists under English law. If the subsidiaries had chosen not to pay ACT in respect of dividends paid before the determination of their appeals, they would nevertheless have been assessed to ACT, would have had to pay interest on those sums and would have laid themselves open to statutory penalties if they had been judged to have acted negligently and without reasonable cause.
105. It therefore appears that, in the cases in the main proceedings, the United Kingdom Government is blaming the plaintiffs for lack of diligence and for not availing themselves earlier of legal remedies other than those which they took to challenge the compatibility with Community law of the national provisions denying a tax advantage to subsidiaries of non-resident parent companies. It is thus criticising the plaintiffs for complying with national legislation and for paying ACT without applying for the group income election regime or using the available legal remedies to challenge the refusal with which the tax authorities would inevitably have met their application.
106. The exercise of rights conferred on private persons by directly applicable provisions of Community law would, however, be rendered impossible or excessively difficult if their claims for restitution or compensation based on Community law were rejected or reduced solely because the persons concerned had not applied for a tax advantage which national law denied them, with a view to challenging the refusal of the tax authorities by means of the legal remedies provided for that purpose, invoking the primacy and direct effect of Community law.
107. The answer to the fifth question must therefore be that it is contrary to Community law for a national court to refuse or reduce a claim brought before it by a resident subsidiary and its non-resident parent company for reimbursement or reparation of the financial loss which they have suffered as a consequence of the advance payment of corporation tax by the subsidiary, on the sole ground that they did not apply to the tax authorities in order to benefit from the taxation regime which would have exempted the subsidiary from making payments in advance and that they therefore did not make use of the legal remedies available to them to challenge the refusals of the tax authorities, by invoking the primacy and direct effect of the provisions of Community law, where upon any view national law denied resident subsidiaries and their non-resident parent companies the benefit of that taxation regime.”
Mr. Aaronson lays particular emphasis on the last 20 words of para. 107. He says that in the present case on any view U.K. law denied resident companies, having profits liable to corporation tax and being in the same group as non-resident companies having losses, the benefit of the U.K. tax regime which allows a resident company to surrender losses to another resident company to set off against the latter company’s profits. He submits that it is therefore contrary to Community law for a national court such as the High Court to refuse a claim brought before it by the resident company having profits for restitution or damages for the financial loss suffered as a consequence of not being able to obtain group loss relief from the surrender to the resident company of losses by a non-resident company in the same group on the sole ground that the companies did not make use of the statutory procedure.
Mr. Plender distinguishes Hoechst on the basis of the matters referred to in para. 104 which apply to ACT but which do not apply to group loss relief. It is accepted by Mr. Aaronson that nothing comparable to one feature of the ACT regime, viz. that ACT which is paid is not recoverable, is to be found in relation to group loss relief. But he rightly says that just as the non-payment of ACT on dividends paid before the determination of appeals would have led to assessments with interest payable on the ACT not paid and the possibility of statutory penalties, so the non-payment by a resident company of corporation tax by reason of the set-off of losses surrendered by a non-resident company would have led to assessments and interest becoming payable and the possibility of statutory penalties. Mr. Aaronson submits, and I accept, that the irrecoverability of ACT once paid is not the central feature of the reasoning of the ECJ. The ECJ is saying that the member state, which by its legislation breaches Community law in discriminating against groups which have both resident and non-resident companies by denying them a taxation benefit allowed to groups which have only resident companies, cannot defeat claims for restitution or compensation based on Community law solely on the ground that the statutory procedure had not been followed, when the member state’s legislation denied that benefit.
I have been persuaded by Mr. Aaronson that that his submission on this point is correct. It has always been a principle of Community law that every court of a member state must, in a case within its jurisdiction, apply that law in its entirety, protect rights which that law confers on persons in the member state and set aside any provision of national law which may conflict with it.
Thus in Amministrazione delle Finanze dello Stato v Simmenthal[1978] ECR 629 an Italian company, required under an Italian measure to pay inspection fees on importing beef from France, brought an action before the Pretore di Susa for repayment of the fees which had been levied contrary to Community law. The Pretore made an order for repayment. The Amministrazione appealed on the basis that under the Italian constitution only the Constitutional Court could hold the measure to be unconstitutional. On a reference the ECJ held that any provision of a national legal system and any legislative, administrative or judicial practice which might impair the effectiveness of Community law by withholding from the national court having jurisdiction to apply such law the power to set aside national legislative provisions which might prevent Community rules from having full force and effect are incompatible with the requirements of Community law (see para. 22 of the ECJ’s judgment). The ECJ further held that national courts must protect rights conferred by provisions of the Community legal order and that it was not necessary for such courts to request or await the actual setting aside by the national authorities empowered so to act of any national measures which might impede the direct and immediate application of Community rules (see para. 26 of the ECJ’s judgment). Thus, notwithstanding that the Constitutional Court under Italian law was the sole court which had jurisdiction to override the measure which breached Community law, the Pretura was treated by the ECJ as having jurisdiction to deal with the case presented to it.
Similarly in other cases before the ECJ stress has been laid on the duty of national courts to give “direct, immediate and effective protection of the rights which individuals derive from Community law” (see the comments of Advocate General Léger in Köbler v Austria [2004] All ER (EC) 23 at para. 52 of his Opinion). The fact that it is the member state itself which has benefited from the breach of Community law at the expense of the taxpayer militates in favour of the taxpayer being entitled to recover what he has lost without obstacles being put in the taxpayer’s way.
Mr. Plender referred us to the statement by the ECJ in Roquette Frères SA v Direction des Services Fiscaux du Pas-de-Calais[2000] ECR 1-10481 to the effect that it is for each Member state to designate the courts having jurisdiction and to determine the procedural conditions governing proceedings to safeguard rights derived from Community law (see para. 20 of the ECJ judgment). A fuller and more recent statement of the applicable principle is to be found in Hoechst where the ECJ said at para. 85 of its judgment:
“In the absence of Community rules on the restitution of national charges that have been improperly levied, it is for the domestic legal system of each Member State to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, provided, first, that such rules are not less favourable than those governing similar domestic actions (principle of equivalence) and, second, that they do not render practically impossible or excessively difficult the exercise of rights conferred by Community law (principle of effectiveness).”
The importance of the principle of effectiveness in Community law cannot be overstated. Any provision of national law which makes the exercise of a right conferred by Community law practically impossible or excessively difficult cannot prevail. Mr. Aaronson contrasted how relatively easy it was for companies in the Hoechst case to use the statutory procedure with how difficult it was for the claimants in the present case to do so. A Hoechst company resident here would simply withhold paying ACT on a dividend it had paid, and when the Inspector raised an assessment the company could appeal against it to the Commissioners. Nevertheless the ECJ held that the Revenue could not rely on the company’s failure to use the statutory procedure as a defence to the company’s claim based on a Community law right. In the present case there is a very serious difficulty, if not an impossibility, for companies resident outside the U.K. to comply with the formal statutory requirements for group loss relief. I have already drawn attention to the provisions which not only require the surrendering company and the claimant company to be resident in the U.K. or to carry out trade here through a branch or agency, but presuppose that the companies have Inspectors to whom they make their returns. Mr. Aaronson has told us that there are also major difficulties in identifying the accounting period for a non-resident company, in quantifying the appropriate loss to be surrendered and even in some cases (he referred to German companies in particular) in identifying which company would be the surrendering company. He says that, if the judge’s decision stands, a vast amount of work will have to be done and considerable time and cost expended to make a quantified claim to an Inspector so that the statutory procedure can commence. He accepts that in the High Court proceedings at some stage that work may have to be done and that expenditure incurred, but he submits that that should not have to be done and incurred unless and until the points of principle have been decided, most likely with the aid of a reference to the ECJ, in a way which makes it necessary.
Mr. Plender drew our attention to the decision of the ECJ in Telemarsicabruzzo SpA v Circostel [1993] ECR I-423 in which it was said at para. 6 that the need to provide an interpretation of Community law which will be of use to the national court made it necessary for that court to “define the factual and legislative context of the questions it is asking or, at the very least, explain the factual circumstances on which those questions are based.” I do not doubt that it would be possible for a reference to be duly made which would satisfy that test even without the full quantification of the claims. The ECJ is entitled to be satisfied that the case is not purely hypothetical. Provided that there is a non-resident company with losses which it wishes to surrender to a resident company with profits in respect of the same period and the two companies are in the same group, I would have thought it immaterial that the precise amounts of losses had not been determined before the reference was made.
The fact that some claimants are out of time for making claims by reference to the 2-year or 6-year limitation period will no doubt be an issue in many cases. We were told by Mr. Aaronson that many of the claimants had at some stage taken the view that they would be unable to comply with the statutory requirements for claiming group loss relief and consequently in respect of various accounting periods they did not make a claim under the statutory regime and so are out of time. Further, he said that in some cases this was as a result of the Inspector saying that, because of the residence requirements, group loss relief claims were impossible and could not be recognised or accepted; in some cases this was in advance of a decision by a company on whether to make a claim; in some cases it was indicated after a claim had been made, and in consequence the claim was withdrawn. I do not doubt that, if there was a reference to the ECJ, a range of factual circumstances alleged or agreed could be provided to enable the ECJ to give guidance on whether the U.K. tax regime made it impossible or excessively difficult for companies to comply with the requirements within the limitation period.
The judge, in rejecting Mr. Aaronson’s argument based on Hoechst, thought that the answer to it lay in the ability of the Special Commissioners to adjudicate on that argument just as much as the High Court and to refer questions of Community law to the ECJ. He pointed out that if a party was dissatisfied with the way the Commissioners dealt with the case, it was always possible to appeal to the High Court in its appellate capacity and he commented that that is what happened in another group loss relief case, Marks & Spencer plc v Halsey, which ended up by being referred to the ECJ. The judge regarded what happened in that case as the exemplar of the right approach. With due respect to the judge, I do not think that thereby he gave effect to the full import of the ECJ’s decision on question (5) in Hoechst. Given that the U.K. tax law has denied groups of resident and non-resident companies the benefit of group loss relief, it is no answer to the claimants’ claims in the High Court, by which they seek to invoke the primary and direct effect of Community law, to require the claimants to apply for a tax benefit denied to them by national law with a view to challenging the inevitable refusal of that application through the statutory procedure for tax appeals. In my judgment, consistently with Hoechst the High Court was obliged to entertain the claims and, if made out, give effect to them, and the judge was wrong to strike out part of the claims.
I am the happier to reach that conclusion because of the inconvenience, which would flow from the judge’s decision, of part of the claimants’ claims proceeding before the Commissioners (on the assumption that claims are made to the Inspector for group loss relief and that his decision will be challenged by an appeal to the Commissioners) and the remainder proceeding in the High Court. There is an obvious convenience in all parts of the claims being subject to the Loss Relief GLO and managed accordingly. A consequent benefit may be that if questions arising out of the claims are to be referred, that can be done by way of a single reference covering all the referable points rather than by way of successive references with significant delays ensuing.
Jurisdiction as a matter of English law
In the light of the conclusion which I have reached on the issue relating to the Hoechst decision, it is unnecessary to consider the other grounds of appeal and I prefer to say nothing about them.
Conclusion
I would allow the appeal, discharge the judge’s order and dismiss the Revenue’s application to strike out.
Lord Justice Longmore:
I agree. It is, for my part, with considerable hesitation that I part company with Park J on a matter so comprehensively within his expertise. I am, however, satisfied that he has not given full effect to the principle of effectiveness and proper weight to the decision of the European Court of Justice in Hoechst. The purpose of referring question (5) to the ECJ in that case must have been to obtain an authoritative ruling on the question whether the taxpayer in that case was required to go through the procedural steps required by national law. Hoechst decided that if it is impossible or excessively difficult for the taxpayer to comply with such procedural steps, then it was not requisite that those steps be followed.
Order: Appeal allowed, the judge’s order discharged and the Revenue’s application to strike out dismissed with costs here and below; application for permission to appeal to the House of Lords refused.
(Order does not form part of the approved judgment)
POST-JUDGMENT DISCUSSION
LORD JUSTICE PETER GIBSON: For the reasons given in the judgments of the court which have been handed down, this appeal will be allowed, the judge's order discharged and the Revenue's application to strike out dismissed.
2. Yes, Mr Aaronson.
3. MR AARONSON: My Lord, may we ask for our costs and then discuss the terms of the order with your Lordships.
4. LORD JUSTICE PETER GIBSON: Costs here and....
5. MR AARONSON: And in so far as they were awarded to the Revenue in the court below, because there was a split costs order.
6. LORD JUSTICE PETER GIBSON: I have forgotten now what the order that the judge made was.
7. MR AARONSON: It was an issues-based order because the Revenue abandoned a number of contentions very shortly before the hearing and we asked for our costs in preparing those issues and the judge gave us our costs on those. So we ask for our costs on the remainder.
8. LORD JUSTICE PETER GIBSON: Yes.
9. MR PLENDER: My Lord, I cannot resist an application for costs, which I suggest should be subject to detailed assessment forthwith if not agreed.
10. I have a further application to make of which I notified the court, and I hope your Lordship is aware of it.
11. LORD JUSTICE PETER GIBSON: If you have notified I am afraid it has not reached us.
12. MR PLENDER: I did say that I would wish to make an application in this court for leave to appeal, and I did ask for time to be set aside for the hearing of that application.
13. LORD JUSTICE PETER GIBSON: I am very sorry. Perhaps because we were in the other case a little early today, we started earlier than the listed time. So I am afraid it did not get to us.
14. LORD JUSTICE LONGMORE: Have you put anything in writing about this?
15. MR PLENDER: I have not.
16. LORD JUSTICE LONGMORE: No. So we have not missed anything?
17. MR PLENDER: No.
18. In my submission this is a case in which leave to appeal to the House of Lords should be given by this court. The hearing of the appeal by the House of Lords should not be delayed pending determination by the Appeals Committee of the question whether leave should be given, since the Appeals Committee will be bound to give leave. Your Lordships' judgments are based squarely upon Community law and most particularly upon certain paragraphs of the judgment of the Court of Justice in Hoechst. No one I think will suggest those paragraphs in Metallgesellschaft and Hoechst are so clear as to admit of no interpretation other than that that your Lordships have given to it. It is not and cannot be contended to be acte claire. Park J, who has unparalleled knowledge of decisions of the European Court in matters of taxation, and was indeed charged with the Hoechst case himself, read the ruling in Hoechst in the opposite sense to that of your Lordships. It follows that if this court does not give leave, the Appeals Committee would have only two choices: to refer a question to the Court of Justice on the very issue that your Lordships have decided or to hear an appeal. Referring the matter to the Court of Justice would cause such inconvenience at this stage that I very much doubt that either party or any member of their Lordships' House would wish to contemplate it. Their Lordships are therefore practically bound to grant leave to appeal if this court does not do so.
19. It is manifestly desirable that the appeal should be heard by their Lordships' House as soon as possible. That is so because the judgment that your Lordships have given will inevitably affect all of the cases in the group litigation order. Two of those, the class four cases, are due to be heard on 8th and on 28th June, that is the class four and the FII cases. I am told that it is contemplated that on those dates Park J may make references to the Court of Justice. If, however, your Lordships were to give leave to appeal and an early hearing of the appeal arranged by their Lordships, then Park J may consider that the most convenient course would be to defer any reference to Luxembourg until such date as it is clear whether the House of Lords will itself refer questions. There may be an arrangement for simultaneous references, if there are to be references from both places.
20. Your Lordships will not have ignored the fact that the present judgment is likely to affect many litigants other than those in the group litigation order. One category which will obviously be affected are the 140 or so cases which are progressing towards the Special Commissioners. Your Lordships' decision suggests that it is impossible or excessively difficult to pursue the matter before the Special Commissioners and that this court has jurisdiction to hear those claims. So it would exercise no great foresight to see these now coming before the High Court. But the consequences appear to go far wider than taxation. For instance, it is the daily experience of the Administrative Court to be confronted with the argument that procedural rules laid down in such instruments as the Immigration (European Economic Area) Regulations are inconsistent with Community law. Now that the reach of Community law extends also to asylum cases, the numerical consequence of the judgment is likely to be even greater. Hitherto the Administrative Court has taken exactly the same view as was taken by Park J: the litigant must raise before the appellate authorities the argument that a procedural rule presents an obstacle to the enforcement of Community rights. If that argument prevails, then the appellate body -- which is the statutory body -- will treat the procedural rule as inapplicable. In the light of your Lordships' judgment it may very well be that the High Court, particularly the Administrative Court, will find itself confronted directly with claims which have not followed the statutory process. Likewise, Lord Justice Peter Gibson raised the question of the Employment Appeal Tribunal. In that Tribunal claimants asserting rights based on Community law may be faced with the argument that they are out of time.
21. LORD JUSTICE LONGMORE: You are now arguing the case that you would like the House of Lords to accept, rather than just asking for permission to go.
22. MR PLENDER: No. I was trying to persuade both of your Lordships that the reach of your Lordships' judgment is wide. It may affect such a large number of cases that it ought to be heard quickly. The only real question is whether the hearing by the House of Lords is to be delayed by three months or so, which is the probable time that it will take to petition and be granted leave by their Lordships' House. But in those three months it is entirely foreseeable that the High Court will be faced with substantial numbers of cases which hitherto have not been thought to be within their jurisdiction.
23. Of course if your Lordships are right, then the High Court simply has to cope with that. But your Lordships will contemplate the possibility that the judgment may be wrong. If it is wrong, then it is in my submission very desirable indeed that the consequences for the management of justice in the High Court should be reduced to the minimum time possible. That is why I say that time is of the essence.
24. The particular point about time limits in the Employment Appeal Tribunal has been taken to the European Court and back. There has been a history, from the case of Emmett to the case of Steam Horse Learings(?). The currently accepted view is that a national time limit, provided that it is reasonable, does not make it impossible in practice or excessively difficult to vindicate rights based upon Community law, even though the national law, on its face, denies to the individual the right to which he would be entitled by reason of the Equal Treatment Directive. That is a situation very close to the circumstances of the present case. Had I anticipated the line that your Lordships have taken, I would have wished to draw attention more fully than I did to the possible consequences of this judgment for jurisdictions other than those concerned with taxation. I do say that this is a judgment which is capable of having wide-ranging effects upon other tribunals. Therefore, if it is to be reversed there should be an opportunity for that to be done as soon as possible. It is desirable that consideration should be given to it as soon as possible.
25. In paragraph 25 of his judgment, Lord Justice Peter Gibson states that the view taken by Park J was incorrect. Park J took the view that it was for the appropriate statutory tribunal to determine whether the relief claimed was or was not consistent with rights under Community law. His Lordship, that is to say Lord Justice Peter Gibson, said:
"Consistently with Hoechst the High Court was obliged to entertain the claims and, if made out, give effect to them, ..."
26. Then at paragraph 28 he argues that:
"Given that the U.K. tax law has denied groups of resident and non-resident companies the benefit of group loss relief, it is no answer to the claimants' claims"
to require them to pursue their appeal to the Commissioners.
27. I do not wish to multiply too many examples, but I just give one example. It is the daily experience of VAT Tribunals to be faced with just such claims. In the case of an input claim it may be argued that a particular supply is or is not an exempt supply by reason of the Sixth Directive. The consequence of paragraph 28 appears to be that where such claims are advanced they may be advanced in the High Court. I wish to submit to the House of Lords that this court misunderstood Hoechst and it is desirable that the House of Lords should have an opportunity of considering that submission as soon as possible.
28. Unless your Lordships indicate that you already with me, I would proceed to identify the particular provisions of your Lordships' judgment in which I shall submit if necessary to the Appellate Committee that your Lordships fell into error.
29. LORD JUSTICE PETER GIBSON: Briefly, please. These applications, as you know, are usually dealt with rather shortly.
30. MR PLENDER: I know they are. That is why I sought a rather longer than normal appointment.
31. The first is this court has disposed of the appeal wholly on grounds of Community law, expressly disclaiming in paragraph 30 any comment on the domestic rules and authorities cited in argument. This overlooks the fact that only a proportion of the 59 cases in the group litigation order present any element of Community law at all. Mr Aaronson said "every one does". I am instructed otherwise, but I do not think I need quarrel over that. But I go on because I can put it in slightly different words. There are a number of cases, as Lord Justice Peter Gibson acknowledges in paragraph 3, where claims are based not on Community law but on double tax conventions. It matters not whether the claim on the double tax convention is in conjunction with Community law or not. There are claims based on double tax conventions having nothing to do with Community law.
32. In the case of a company resident and trading in the United Kingdom which claims the right to set-off against its taxable profits losses that may have been incurred by an affiliate trading exclusively in Japan, it cannot be right to say that the jurisdiction of the High Court to determine such a matter is to be resolved by reference to principles of Community Law or the principle of effectiveness. Principles of Community law and the principle of effectiveness simply can have no bearing upon the proper interpretation of a double tax convention between the United Kingdom and Japan.
33. I hope your Lordships will not find my suggestion, but it does appear that the speed with which this case has come to be argued may have lead to a simple oversight of the fact that there are cases not governed by Hoechst or by Community law at all. It cannot be right for your Lordships to have decided those matters by reference --
34. LORD JUSTICE LONGMORE: With respect, Mr Aaronson will argue that we have not. But this is all in the realm of argument, is it not?
35. MR PLENDER: Your Lordships have overturned the judgment of Park J, and the judgment of Park J addresses precisely those claims based upon the double tax convention. What is the basis on which the court has done so? If indeed the court has not done so, then no doubt a separate judgment will be required. But at the moment your Lordships have done so.
36. Second, in so far as claims are based on Community law, the court bases its judgment on the proposition that it is impossible or excessively difficult to present appeals to the Special Commissioners. The court reaches that conclusion on the basis of submissions made very vigorously by Mr Aaronson in his reply. In my submission they are without foundation. In two of the six present cases, Autologic and Future Network, the appellants have in fact appealed to the Special Commissioners. None of the procedural obstacles predicted by Mr Aaronson has yet emerged.
37. LORD JUSTICE PETER GIBSON: Mr Plender, speaking for myself, I would be more impressed with arguments that are directed, as it were, to why we should give leave based on general principle, rather than what you regard no doubt as numerous errors on specific points.
38. MR PLENDER: My submissions on general principles are those on which I opened. Let me recapitulate. This is a case in which leave must be given, if there is not to be a reference to Luxembourg. There is no alternative. It must be one or the other. So unless your Lordships contemplate a reference to Luxembourg, the only question is whether leave should be given by the Appeals Committee or by your Lordships. I quite appreciate that it is more usual to leave it to the Appeals Committee. But I do submit that in a case in which the Appeals Committee is so bound by principles of Community law and in which a judgment may have wide consequences for the administration of justice in the period of the next three months, it is right to give leave.
39. I would go on, if it is helpful, to why I think your Lordships misunderstood Hoechst.
40. LORD JUSTICE LONGMORE: I do not think that is helpful really, is it, because that is water under the bridge now.
41. MR PLENDER: It is water under the bridge. If I were to persuade your Lordships to have some doubt in the judgment, it may be right for a fair-minded judge having given judgment to say, "I am not so sure about it now, that is another reason for giving leave to appeal." But I pause at the point of having dealt with the general principles to ask whether it is right to go on. I have dealt with the general principle and I have reiterated it. I do not propose to repeat it a third time.
42. May I just very briefly, extremely briefly, deal with Hoechst, though I should have a great deal more to say to the Appeals Committee were it necessary to do so.
43. Your Lordships were under a misapprehension in considering the passage in Hoechst to which you were referred was concerned with the question whether there should be jurisdiction before one national court or tribunal or another. It is not. The whole context of the argument was the argument of the United Kingdom that the relief granted should be reduced, since the appellants had failed to mitigate their loss. The Court of Justice were saying that a person cannot be accused of failing to mitigate his loss when he failed to go before a tribunal which, on the face of it, could not award the relief. That explains the language used: United Kingdom is blaming the appellant for not taking this course. That the court was concerned with mitigation of loss, not with choice of fora, appears from the face of the judgment I think at paragraphs 99 and 101.
44. Longmore LJ rightly says that is water under the bridge. My Lords, this is complicated litigation. It is part of a series of cases. There is the danger that if no leave is given today Park J will, on 8th and 28th, refer questions which may subsequently appear to be misconceived or inappropriate.
45. LORD JUSTICE PETER GIBSON: Could not submission be made to him to take note of the fact that an application is being made to the House of Lords? I have not decided, do not misunderstand me.
46. MR PLENDER: Such a submission will be a great deal weaker than a submission that your Lordships, having considered it, had thought it right to refer. It will no doubt be said conversely: they have already asked the Court of Appeal and have been turned. It may never be heard." But if your Lordships have taken the view that in the light of the potential breadth of the case and the urgency with which the Revenue would like the matter to be considered by the House of Lords and the consequences for the rest of the litigation, that it is desirable that there should be an avoidance of delay, then the right course would be to grant leave today and that I request your Lordships to do.
47. LORD JUSTICE PETER GIBSON: Thank you.
48. Yes Mr Aaronson.
49. MR AARONSON: My Lords, Hoechst. My learned friend said, his last reference to Hoechst, they were not deciding jurisdiction of the court. Reminiscences of rocket frere (?). The question asked in question five was not whether the restitutional damage should be reduced, but whether the plaintiffs are not entitled to recover or the plaintiffs' claim should be reduced. The reason that jurisdiction as such was not raised was because at the first hearing before Neuberger J, (inaudible) Hoechst in that hearing, the Revenue objected to the court's jurisdiction. After I had addressed the court for a day, Mr Glick, for the Revenue, conceded that there was jurisdiction and abandoned the point. Hence there was no issue of jurisdiction referred to the ECJ. That was acknowledged by the Revenue. Although the parties cannot give jurisdiction, it was accepted by Neuberger J there was jurisdiction and that is the only reason why jurisdiction is not specifically referred to.
50. As to the earliest comment of my learned friend that Park J was somehow involved in Hoechst, he was not and I am not quite sure what my learned friend was saying. I was and to my great annoyance and embarrassment, the (inaudible) counsel in the case decided that I was not but I was, but there we are.
51. Turning to the question as to whether the House of Lords would be bound to refer this issue to the ECJ, with great respect to my learned friend the answer is: certainly not. Leaving aside for one second judgment --
52. LORD JUSTICE PETER GIBSON: They have to decide as the final court.
53. MR PLENDER: They would have to decide. They may decide the matter is acte claire. In fact I would ask rhetorically: what would be acte plus claire than this? Were it not for the judgment of Park J, the question has already been asked in the ECJ in the form of question five in Hoechst. It is the same question. The House of Lords under section 235 and 234 would, in my respectful submission, be unlikely to find it necessary to ask the ECJ again the question that was asked three years ago and which has already been answered. But that would be for their Lordships to decide. Indeed the most appropriate process would be to allow my learned friend, if he wishes to --
54. LORD JUSTICE LONGMORE: But if they thought it was not acte claire then they would be bound to refer?
55. MR AARONSON: Bound to refer or hear the case themselves and then decide after argument. But if they thought it was acte claire, then they would simply refuse leave to the Revenue and the Revenue could then, I suppose, sue the United Kingdom through its courts for depriving the Inland Revenue of the opportunity of defending its claim through the jurisdiction. I am fantasising now.
56. LORD JUSTICE LONGMORE: Whether or not the House of Lords is bound to refer, which may be a question, Mr Plender's real point is that this judgment is going to cause an enormous amount of difficulty in its interpretation to other similar situations, and that the High Court is going to be presented with arguments based on this judgment that other tribunals which it thought had jurisdiction before do not any longer and it would be far better just to get this sorted out on a final basis as soon as possible.
57. MR AARONSON: Yes, that is one look of looking at it, my Lord, yes. That is the way of posing the question. But what is the appropriate answer? In my respectful submission the appropriate answer is leave it to the House of Lords' Judicial Committee. If they decide to refuse leave, that puts to rest the question very quickly. It may be three months, it may be two months, it may be six weeks, and that is the end of the matter. No further deliberation. The committee of three will be looking at the matter will say the whole thing is acte claire. In so far as other tribunals may be affected: they may be affected. Your Lordships have stated general principle. The principle of effectiveness cannot be overemphasised. That is what your Lordships have said. That is what the Court of Justice has said. So the most expeditious way of dealing with this, in my respectful submission, is leave it to the Appellate Committee in the usual way to decide whether they wish to grant leave. If they do, doubtless they will give some degree of expedition to the case. We, for our part, would welcome the expedition.
58. So far as the hearings the week after the next and three weeks' time in the other GLOs are concerned, they will go ahead on the basis of your Lordships' judgment. There is no way the House of Lords is going to convene, consider the case and give judgment in two or three weeks. Park J will be asked to make references to Europe. We will all be sensible. What we will probably do is wait and see what will happen when the Committee decide. If they decide to give leave, then we will suggest that the questions be put in abeyance for the meanwhile pending the hearing. If they do not, then they can be referred. That would be the most sensible way of proceeding.
59. The only other point my learned friend referred to is the double taxation treaty issues. The factual situation he described is one which is not familiar to those instructing me and they are very familiar with every case in the GLO. Every case involving the double taxation convention also involves Article 56. The chances are that we would have as good a chance under Article 56 as on the double taxation convention. It is true that were we to lose at the ECJ on Article 56, there would then remain the issue as to whether the double taxation treaties themselves would give a greater degree of relief. That has not been specifically addressed by your Lordship. It was not specifically addressed by the learned judge, because he said, "Even if I had jurisdiction, I am not going to exercise it." In those circumstances it may be necessary to revisit the question and say to the learned judge, "In the light of the Court of Appeal decision which has overturned your decision, you really now have to answer the question whether you have jurisdiction, and if you do plainly it would be convenient to exercise it simultaneously." It would be madness to have exactly the same issue being heard in two places, one under Article 56 and one under the double tax treaty. But we do not envisage at this stage there being any practical problem here. Our main arguments are under Article 43 and under Article 56. Those have been specifically addressed by their Lordships and we think that is sufficient to get on with. If it should transpire that there is a problem in due course, then doubtless we could revisit it in due course. But that would not be a reason itself to engage the efforts of their Lordships, if their Lordships in the House of Lords were not minded to deal with this issue, thinking your Lordships have dealt with it sufficiently.
60. LORD JUSTICE PETER GIBSON: I do not think we were addressed on double taxation by either side. I noted it because it seemed to be part of the factual background.
61. MR AARONSON: Technically it is one of the questions in the GLO, it is an issue based GLO. But it is very much on the back burner at this stage.
62. LORD JUSTICE PETER GIBSON: Yes, thank you.
63. Do you want to say something?
64. MR PLENDER: Only to correct an inconsequential point of detail on which I misspoke. Mr Aaronson is right in correcting me when I said that it was Park J in Hoechst. What I meant to say was that Park J considered these paragraphs of Hoechst in considerable detail in his judgment in Deutsche Morgan Grenfell. Nothing turns on that.
65. LORD JUSTICE PETER GIBSON: Thank you. We will rise.
(Short adjournment)
66. LORD JUSTICE PETER GIBSON: On this application for permission to appeal we recognise that the decision which we have given is one of some general importance with potential ramifications. However, we take the view that we ourselves should not give permission, that it should be a matter for the House of Lords themselves to decide. On one view of the matter that may expedite a final decision.
67. So I am afraid we are going to refuse permission.
68. MR PLENDER: So be it.
69. LORD JUSTICE PETER GIBSON: We are grateful for the assistance we have received. On costs of course that is not in dispute, so we make the order that you requested.
70. MR AARONSON: May we just thank you Lordships for doing the case so quickly and for giving the judgment so quickly. It is very much appreciated at our end. It makes our life easier next week.