Revenue and Customs v Vodafone 2

Paragraph 33 of schedule 18 to the Finance Act 1998 (“the 1998 Act”) forms part of a catena of provisions dealing with the powers of Her Majesty’s Revenue and Customs (“the Revenue”) to obtain more information regarding matters which are included or ought to be included by companies in their returns for the purposes of assessments to corporation tax on their profits. The system for companies as for individuals is one of self-assessment, meaning that it is the responsibility of the taxpayer to report all the sources of income that he is bound to do for tax purposes. Parliament has conferred on the Revenue powers to check that information, including powers of investigation, and schedule 18 contains some of those powers. The Revenue must of course act within the four corners of those powers. Parliament has in addition conferred powers on the Special Commissioners (“the Commissioners”) to control Revenue investigations. No reference has been made in argument to the European Convention on Human Rights, but it goes without saying that a company, like other persons, has a qualified right under that Convention to respect for its business correspondence and other data. That right has of course to be balanced against that of the state to raise taxation.

The particular aspect of the Commissioners’ powers to control Revenue investigations at issue on this appeal is the extent of the Commissioners’ powers to give a direction to the Revenue to close an investigation. Under paragraph 33, they must give that direction unless they are satisfied that the Revenue has “reasonable grounds” for not bringing the investigation to an end. The precise issue is this: can the Commissioners decide a point of law, and for this purpose refer a question of Community law to the Court of Justice for the European Communities (“the ECJ”) for a preliminary ruling, if they regard that as necessary for the purpose of determining whether the Revenue’s grounds for continuing with an investigation are reasonable? This may arise where the Revenue are proceeding on the basis of an assumption as to the law, including an assumption as to the compatibility of a domestic taxing provision with Community law, which the taxpayer disputes on substantial grounds. The Commissioners in this case took the view that an issue of compatibility of the provisions referred to below as the CFC provisions had to be determined to enable them to give judgment on the taxpayer’s application under paragraph 33. Park J. dismissed the Revenue’s appeal. In my judgment, for the reasons given below, the Commissioners in these circumstances had jurisdiction to determine points of law, and to make references to the ECJ for a preliminary ruling. This jurisdiction is contained in paragraph 33 on its true interpretation. Accordingly I would dismiss this appeal.

It is necessary to examine paragraph 33 in the context of schedule 18. The relevant provisions of schedule 18 to the Finance Act 1998 provide:

As the judge recognised, paragraphs 31A to 31D did not form part of schedule 18 as originally enacted. However it has not been suggested that this makes any difference to the task of interpreting paragraph 33. Furthermore the Revenue asserts the correctness of the view which the judge expressed in paragraph 18 of his judgment that it was implicit in paragraph 34 that if the Revenue did not make an amendment to a company’s return in the period of 30 days stipulated by paragraph 34(2) they cannot amend it thereafter. If there was no such limit, then, in the words of the judge, “[t]his might incline the Revenue to leave enquiries open for protracted periods.” (judgment, paragraph 19(3)).

The judge made two further points which I would gratefully adopt as a useful summary of the essence of the statutory scheme in the material provisions set out above:

The instant case arises out of the Revenue’s concern that the taxpayer (the respondent) may have failed to disclose profits made by companies which constitute “controlled foreign companies” (“CFCs”) for the purpose of chapter IV of the Income and Corporation Taxes Act 1988 (as amended) (“the 1988 Act”). These are the CFC provisions to which I have already referred. I need not do more than give a very bare outline of the relevant provisions.

The CFC provisions of the 1988 Act were introduced in 1995 and are broadly speaking anti-avoidance provisions aimed at preventing United Kingdom companies from diverting income to “low tax” countries. A CFC is a company not resident in the United Kingdom which is controlled by a United Kingdom taxpayer and which operates in a “low tax” country. So, in broad terms, an apportioned part of its profits will be taxable in the United Kingdom if it is subject elsewhere to less than 75% of the tax to which it would have been subject if resident in the United Kingdom. There are a number of exemptions, for instance for companies which carry on specified commercial activities or which have an acceptable dividend policy. There is a “motive” test whereunder the CFC provisions do not apply in relation to any transaction if it was not the main purpose of that transaction to achieve a reduction in profits. Likewise the CFC provisions do not apply if the diversion of profits was not the main reason for the controlled company’s existence in the accounting period in question.

Section 117(1) of the 1998 Act provides that the provisions of schedule 18 are to apply to company tax returns, assessments and related matters. Paragraph 33 of schedule 18 to the 1998 Act thus applies to all aspects of corporation tax and not just the CFC provisions. However, I give this brief outline to illustrate the complexity that could be involved in determining whether or not a company is a CFC in any given accounting period.

The factual background may be found in paragraphs 6 to 7 and 20 to 32 of the judgment of the judge. Very briefly, in March 2000, Vodafone Group plc (“VG”), the parent company of the respondent, acquired Mannesman AG (“M”). As part of a restructuring, the share capital of M was hived down to a German subsidiary. As a result, the share capital of M was owned by a German company (“VDG”), which was in turn a subsidiary of a Luxembourg company (“VIL”) which was in turn a subsidiary of the respondent, which is a direct subsidiary of VG. As a result of the restructuring, VDG owed some €42.5 bn worth of interest-bearing debt to VIL. The Revenue contends that the receipt of interest on this debt may make VIL a CFC and trigger a tax charge under the CFC provisions of the 1988 Act. For its part the respondent contends that the CFC provisions do not apply because, first, the restructuring satisfies the “motive test” referred to above and, secondly because the CFC provisions as a matter of Community law, unjustifiably restrict VG’s freedom of establishment and the free movement of capital within the European Union and are therefore incompatible with articles 43 and 56 of the EC Treaty. The High Court has already made two requests to the ECJ in other cases for preliminary rulings on various questions as to the compatibility of the CFC provisions with the EC Treaty: see Cadbury Schweppes plc v IRC [2004] STC (SCD) 342 and Test Claimants in the CFC and Dividend Group Litigation v IRC, 18 March 2005. However, on the hearing in the present case, the Commissioners accepted that there were features of this case which were not covered by the earlier references and there was no appeal from that aspect of the Commissioners’ ruling.

The Revenue opened its enquiry in November 2002. The judge sets out the various exchanges between the parties in paras. 20 to 32 of his judgment. Their content is largely irrelevant for the purposes of this appeal and accordingly I will not summarise those paragraphs but the relevant factual background can be found in paragraphs 20 to 32 of the judge’s judgment.

On 1 October 2004, Vodafone applied to the Commissioners for a direction that the Revenue should issue a closure notice. There was a subsidiary issue before the Commissioners as to whether the Revenue had given the respondent a notice under paragraph 27. The Commissioners, whose decision is reported at [2005] S.T.C. (S.C.D.) 549, decided this point against the respondent and we are not concerned with that part of their decision.

On the hearing of that application the Revenue submitted that the question whether the Revenue had reasonable grounds for the purposes of paragraph 33 depended on the belief of the Revenue as to the law or on the reasonableness of that belief. The Commissioners rejected that submission. They went on to hold that the issue of the compatibility of the CFC legislation with the EC Treaty required to be determined before they could determine the application. They held that if the CFC provisions were incompatible with the EC Treaty as a matter of Community law, their decision would be that the Revenue should give a closure notice. If, on the other hand, the CFC provision were compatible with the EC Treaty their decision would be to dismiss the application. The issue of compatibility would not be disposed of by preliminary rulings in response to the references made in the two earlier cases. They held that it was possible to frame a reference to the ECJ in advance of the determination of the facts. They accordingly formulated a reference, which was sent to the ECJ, and they adjourned the application pending the receipt of the preliminary ruling.

The judge essentially agreed with the decision of the Commissioners. He held that there was no difference between the case where a question of Community law arose on which a preliminary ruling by the ECJ was required and any other point of law. In either case it was not enough that the Revenue considered that the law was as they contended it to be. He held:

The judge held that there was nothing unreasonable, unworkable or disruptive about the Commissioners’ decision. He held that as the application had not been determined the Revenue could carry on with their enquiries, though he accepted that if the Revenue serve a notice under paragraph 27 of schedule 18, it would be open to the respondent to appeal under paragraph 28. The effect of that appeal would be to entitle the company to refuse to produce any document relating to the conduct of that appeal (paragraph 27(5)). The judge also noted that the Revenue could exercise their power under paragraph 30 to amend the respondent’s return. Furthermore the period for making an amendment to that return under paragraph 30 was not running against them during the period of the adjournment of the paragraph 33 application. He did not consider that the Revenue were justified in their concern that other taxpayers would use paragraph 33 applications to raise a point of law so as to delay an enquiry. He referred to paragraph 33 as a protection for the taxpayer (judgment, paragraphs 19(3), 43). He saw paragraph 33 as a counter-balance for the extensive powers of investigation given to the Revenue. The judge took the view that it would be very unsatisfactory from the taxpayer’s perspective if a point of law could not be decided on the paragraph 33 application.

The judge went on the deal with a further submission that the Commissioners had exercised their power to make a reference wrongly. He rejected that submission and we are not concerned with it.

Although the Revenue have formulated four grounds of appeal, the essence of their grounds is the same. They challenge the judge’s holding as a matter of law that it was part of the Commissioners’ role on an application under paragraph 33 to determine disputed issues of law rather than simply determining whether the Revenue have reasonable grounds for not giving a closure notice. They contend that it follows from this error of law that the judge’s conclusion that it was necessary for the Commissioners to refer questions to the ECJ for a preliminary ruling was wrong. As another way of putting the point the Revenue contend that they had reasonable grounds for not issuing a closure notice based upon their objectively reasonable view that the CFC provisions were valid and enforceable against the respondent. The respondent has never contended that the Revenue’s view that the CFC provisions are valid and enforceable was not objectively reasonable. The Revenue contend that the Commissioners ought not to have made a reference because no question of Community law arises on an application under paragraph 33. The only issue under paragraph 33 was whether they were satisfied that the Revenue had reasonable grounds for not giving a closure notice within the specified period.

Dr Richard Plender, who appears for the Revenue, relies on many of the submissions that he made to the Commissioners and the judge, and makes some auxiliary submissions.

I will start with what I see as the main point made by the Revenue, namely that paragraph 33 does not give the Commissioners power to determine incidental questions of law. The Revenue’s position is that it wishes the facts to be determined before a reference is made so that the legal position can be determined against the background of the facts. They submit that the only matter as to which the Commissioners have to be satisfied under paragraph 33 is that it is reasonable for the Revenue to carry on with the enquiry.

If the Revenue are right on this point, it would mean that the Commissioners’ role under paragraph 33 is to be satisfied that the Revenue have reasonable grounds for not giving a closure notice within a specified period so that they can continue with their factual investigation. But there are no words of limitation in paragraph 33 which would serve to restrict the Commissioners’ role to that of scrutinising the factual investigation being performed by the Revenue.

It is relevant to examine the statutory context. Paragraph 33 is aimed at ending an enquiry which the Revenue started by giving a notice under paragraph 27 to the taxpayer to produce documents or information. I accept that it can be argued that paragraph 33 should be interpreted in the light of paragraph 27 and that accordingly the Commissioners’ powers under paragraph 33 should be restricted to reviewing whether the Revenue are acting reasonably in continuing with their enquiries seen as fact-finding exercises. I would also accept that, when paragraph 33 was introduced, little thought may have been given to the situation where the protection which the taxpayer sought involved a decision on a point of law, still less the type of point of law which has actually been raised in this case, involving as it does a reference to a supra-national court.

Paragraph 33 on its face, however, would seem to confer on the Commissioners a power to do anything that the Commissioners reasonably consider necessary to enable them to be satisfied as to the matters required by that paragraph. That interpretation also promotes the effectiveness of paragraph 33, which it may be presumed Parliament wished to achieve. On that basis it is legitimate to put the question in the following way, that is to ask whether there is anything in the wording of paragraph 33 to suggest that it does not confer jurisdiction to decide incidental points of law, that is points of law that need to be resolved in order to decide whether there are reasonable grounds for not giving a closure notice. If it was a point of law which the Commissioners could decide for themselves, that would not attract the same attention as a point of Community law which may take many years to determine and where there may need to be more than one reference, but the difference is one of scale and not of principle. Once it is concluded that the Commissioners have jurisdiction under paragraph 33 to determine an incidental point of law, no distinction can be drawn between different types of point of law.

It is, however, relevant to ask whether the conclusion thus far that paragraph 33 confers jurisdiction on the Commissioners to decide incidental points of law is in some way inconsistent with the statutory scheme in the provisions of schedule 18 which I have set out above. If it is inconsistent, that may indicate that the conclusion thus far is wrong and that some other interpretation should be adopted. However, I do not consider that the statutory scheme mandates a different conclusion. On the contrary, it is difficult to see why Parliament should wish to limit the protection given to taxpayers by paragraph 33 to situations where the Revenue is pursuing enquiries into the facts which it can be shown are unfounded as a matter of fact, and not wish to extend the same protection to cases where the Revenue is proceeding on the basis of a particular view of the law, to which the taxpayer raises a serious challenge which the Commissioners can conveniently deal with at that stage. It would mean that the taxpayer would have to resort to judicial review if he wished to challenge the Revenue’s decision to refuse to give a closure notice. The taxpayer would then have to show it was perverse or irrational for the Revenue to continue with their enquiries. But, more significantly, it would be anomalous for Parliament to have provided a dedicated remedy in paragraph 33 in respect of some only of the grounds on which a taxpayer may seek a direction to the Revenue to issue a closure notice, and leave the taxpayer to pursue a judicial review remedy in respect of other grounds. Moreover, in the former case the application would be to the Commissioners and in the latter case the application would be to the High Court, making the Revenue’s proposed interpretation of paragraph 33 yet more unlikely.

The Revenue’s position is that, as regards issues of law, the court should proceed on the basis that it is sufficient if it – the Revenue – holds a view of the law that is reasonable. There would in my judgment need to be clear language if this is what Parliament intended. It would be constitutionally anomalous if the Commissioners could not come to their own decision on a point of law and had to abide by the view of the Revenue as part of the executive, even if the Revenue has to establish that the view is a reasonable one for it to hold.

For all these reasons I conclude that paragraph 33 confers jurisdiction on the Commissioners to decide incidental questions of law rising on an application under that paragraph.

The question of the jurisdiction conferred by paragraph 33 is quite different from the question of the exercise of the power to determine incidental questions of law. In the present case the Commissioners took the view that they were able “to define the factual and legislative context of the questions referred [to the ECJ] as a working hypothesis without the lengthy hearing otherwise necessary to determine the facts.” (paragraph 137, decision of the Commissioners). There are likely to be cases where it is not possible to say that a point of law raised by a taxpayer needs to be, or can be, determined before a closure direction application under paragraph 33 is determined. It will be a matter that the Commissioners will have to consider in the light of the facts surrounding the particular application before them. Because the facts of the individual case inevitably have to be examined, I agree with the judge that the Commissioners will be in a position to prevent paragraph 33 being used by taxpayers improperly as a means of delaying Revenue enquiries. In the present case the Commissioners took into account that the burden on the taxpayer of investigating the facts would be considerable (paragraph 113 of the decision of the Commissioners). I agree that that is a relevant consideration in a decision whether to determine a preliminary point of law before dealing with a paragraph 33 application.

I turn to two subsidiary arguments of Dr Plender. Dr Plender submits that, if paragraph 33 confers the power to determine incidental points of law, it would have been unnecessary to introduce paragraph 31A. This latter provision requires the Revenue and the taxpayer to agree if they wish to refer a point of law to the Commissioners. This limitation is, on Dr Plender’s submission, unnecessary if a taxpayer can have point of law determined by a unilateral application under paragraph 33. I do not accept this argument, or that paragraph 31A is an internal indication in schedule 18 that paragraph 33 is not intended to confer power on the Commissioners to determine a point of law. The two provisions do not cover the same ground. A point of law for the purposes of paragraph 33 would have in general to be so fundamental as to be capable of bringing the enquiry to a halt if decided in a particular way. This will not always be the case under paragraph 31A. The two powers are not therefore mutually exclusive.

Lastly, Dr Plender relies on the decision of this court in Langham v Veltema [2004] STC 544. In that case, the taxpayer contended that under section 29(5) of the Taxes Management Act 1970 the inspector of taxes was precluded from raising an insufficiency in his tax return because the inspector had failed to take action in time on the basis that the time within which the inspector had to take action ran from the time he would have become aware of the insufficiency if he had scrutinised all the information relating to the taxpayer’s affairs in the Revenue’s possession. Section 29(5) provides for the postponement of time where the inspector could not reasonably be expected on the basis of information made available to the Revenue before that time to be aware of the failure by the taxpayer properly to assess his liability to tax. This court held that that time began to run only if the inspector was aware from the information made available of an actual insufficiency. Dr Plender relies on this case by analogy. He submits that it would not be reasonable to expect the Revenue to be aware of information that only became available to it at a later stage. A similar approach should be taken in relation to reasonableness in paragraph 33, and accordingly that it should not be interpreted to permit an enquiry to be delayed when the Revenue still reasonably required the taxpayer to supply information. In my judgment, the decision in Langham v Veltema is of little assistance since there was no question of law in that case. Moreover, as the judge held, the reference in this case would not prevent the Revenue from continuing with their enquiries. Under paragraph 27 the taxpayer could appeal under paragraph 28 but that procedure was available to the taxpayer irrespective of the order for a reference. In other cases, if the taxpayer raises a point of law (not requiring a reference for a preliminary ruling) that the Commissioners agree should be decided before they decide the application for a closure notice direction, there is likely to be little delay caused by the point of law.

Mr Peter Whiteman QC, for the respondent, makes a number of other submissions. He stresses that the Revenue can have no legitimate interest in purporting to subject a taxpayer to a liability to tax that is not lawfully due, and I would accept that that is part of the background against which the task of interpretation falls to be performed in this case. He further submits that the Commissioners are a specialist tribunal to determine tax matters and that it would be quite logical for Parliament to give them power to determine incidental questions of law. He points out that Lord Nicholls in Autologic Holdings PLC v IRC [2006] 1 AC 118 made it clear that Parliament has given the Commissioners power to deal with questions of law, including Community law.

Mr Whiteman also took the court to the opinion of Advocate General Leger in Cadbury Schweppes Plc v Commissioners of Inland Revenue, 2 May 2006, to show that there was genuine legal uncertainty as to the compatibility of the CFC provisions. He submits that the opinion of the Advocate General was that the CFC provisions are not compatible with the EC treaty because they go beyond imposing a charge where there is tax avoidance through the use of “wholly artificial arrangements” as defined by the Advocate General. He further submits that the critical matter in the opinion of the Advocate General was the “motive test” which was not in issue in the Cadbury Schweppes case but which is in issue in the present case.

For my own part, I do not consider that it is necessary to deal with these submissions on the Cadbury Schweppes case because I have reached the conclusion that, on its true interpretation, paragraph 33 of schedule 18 confers the power to make the reference in the present case, and the Revenue take no point on this appeal as to the merits of the reference which was in fact made. The Revenue do not seek to challenge the order for a reference beyond saying that there was no power under paragraph 33 to make it.

For the reasons given above, I would dismiss this appeal.

I agree.

I also agree.