The Trustees of the Panico Panayi Accumulation and Maintenance Settlements Numbers 1 to 4 & Anor v The Commissioners for HMRC

Capital gains tax is charged on chargeable gains computed in accordance with the TCGA and accruing to a person on the disposal of assets (s1(1) TCGA).

Provision for the treatment of settled property is made in Part III TCGA. Section 69(1) TCGA specifies that (a) the trustees of a settlement “shall for the purposes of this Act be treated as being a single and continuing body of persons (distinct from the persons who may from time to time be the trustees)”; and (b) that body “shall be treated as being resident and ordinarily resident in the United Kingdom unless the general administration of the trusts is ordinarily carried on outside the United Kingdom and the trustees or a majority of them for the time being are not resident or not ordinarily resident in the United Kingdom.”

Section 80 TCGA addresses the situation where trustees cease to be resident in the UK. As it was in force for the 2004/05 tax year it relevantly provided as follows:

Trustees were required to file a return for tax year 2004/05 not later than 31 January 2006 (ss8A(1) and (1A) Taxes Management Act 1970 (“TMA”)). The difference between the amount of capital gains tax contained in the trustees’ self-assessment for a tax year and the aggregate of any payments on account made by them in respect of that year “is payable or repayable on or before the 31st January next following the year of assessment” (ss59B(1) to (4) TMA).

Corporation tax is charged on the taxable profits of a UK resident company arising in an accounting period (Footnote: ³). Taxable profits include chargeable gains accruing to the company in the relevant accounting period (s6 Income and Corporation Taxes Act 1988 (“ICTA”) and s8 TCGA).

Section 185 TCGA addresses the situation where a company ceases to be resident in the UK. As it was in force for the 2007/08 tax year it relevantly provided as follows:

For the material period, Chapter 2 of Part 4, and Schedule 9, Finance Act 1996 provided for the computation of all profits and gains arising to a company from its loan relationships. Para 10A provided that, on a company ceasing to be resident in the UK, the company was treated as if, immediately before the time at which it ceased to be resident in the UK, it had assigned the assets and liabilities that represent its loan relationships for a consideration equal to their fair value at that time and immediately reacquired them for the same consideration. The relevant provisions of para 10A were as follows:

Section 130 Finance Act 1988 (“FA 88”) applied to any company intending to cease to be UK tax resident. It relevantly provided as follows:

Corporation tax for an accounting period is generally due and payable nine months after the end of that period (s59D TMA).

Finance Act 2013 (“FA 13”) provided that TMA be amended by the inclusion of a new Schedule 3ZB (“Sch 3ZB”). Sch 3ZB provides that where a company ceased to be UK tax resident, it could enter into an agreement with HMRC for the payment of any exit taxes (including the liability under s185 TCGA) in six equal instalments over five years: the first instalment payable nine months after the company ceased to be resident, and the subsequent instalments paid at 12-monthly intervals thereafter. FA 13 provided that that Sch 3ZB was treated as having come into force on 11 December 2012 in relation to an accounting period if the relevant day, in relation to that period, fell on or after 11 December 2012 (Footnote: ⁴).

Finance Act 2019 provided that TMA be amended by the inclusion of a new Schedule 3ZAA (“Sch 3ZAA”). Sch 3ZAA provides that where (amongst other things) trustees ceased to be UK tax resident, they could enter into an agreement with HMRC for the payment of any exit taxes (including the liability under s80 TCGA) in six equal instalments over five years: the first instalment payable on the normal due date for payment, and the subsequent instalments paid at 12-monthly intervals thereafter.

The background facts are not in dispute, and we summarise them, based on the respective decisions of the FTT, as follows.

Mr Panayi was born in Cyprus. He moved to the UK as a child in the late 1940s. He lived and worked in the UK after that date until he returned to Cyprus as set out below. Mr Panayi had never acquired a UK domicile.

In 1992 Mr Panayi established four settlements for the benefit of his children and other members of his family. He transferred into the trusts some of the shares which he owned in Cambos Enterprises Ltd (“Cambos”). Mr Panayi and a UK trust company were the original trustees. Later Mrs Panayi was added as a trustee. The four trusts were accumulation and maintenance trusts and the Trustees of those settlements are the Appellants in this appeal.

Early in 2004 Mr and Mrs Panayi decided they wished to return to live in Cyprus. To that end, amongst other things, on 19 August 2004 Mr and Mrs Panayi resigned as trustees of the four trusts; in their place three individuals resident in Cyprus were appointed as trustees. The UK resident trust company remained as a trustee; but the effect was that three out of the four trustees were then non-UK resident.

The following month, Mrs Panayi moved back to Cyprus with their youngest child. Mr Panayi moved there in early 2005.

On 19 December 2005 the Trustees sold the shares in Cambos. The sale took place after the migration of the trusts but before the due date for payment of any capital gains tax arising under s80 TCGA.

The value of the Cambos shares at the time the majority of the Trustees ceased to be resident in the UK has been agreed by the parties at about £30 million. After indexation and taper relief, it is agreed that the tax in dispute amounts to £332,952 plus interest (£83,128 plus interest per trust).

While the facts relating to the change in the Trustees’ residence and the disposal of the shares were given to HMRC in the Trustees’ self-assessment returns for 2004/5, the returns did not include a self-assessment of any liability under s80 TCGA.

In January 2007 HMRC opened enquiries into the Trustees’ tax returns. On 29 September 2010 HMRC issued closure notices to the Trustees, assessing tax on the basis that there was a liability under s80 TCGA.

Redevco, which owned a portfolio of retail estate investments, was incorporated in the UK and, until 15 January 2008, was resident solely in the UK for tax purposes. It is a member of a corporate group, the origins of which can be traced to the C&A fashion retail stores founded in the Netherlands in 1841. COFRA Holding AG ("COFRA") is the ultimate parent company of that group.

The C&A stores began trading in the UK in the early 1920s. Stores were opened throughout the UK, and C&A companies bought properties (in the main either as freeholds or on long leases) as the business expanded. The properties acquired were mostly retail stores but also included storage facilities and office accommodation held by local UK subsidiaries which the stores occupied under licence arrangements. In 2000, although it continues to be a major retail chain throughout much of Europe, it was decided to close the C&A stores in the UK due to their poor performance.

Between 1999 and 2002 the business of the group was reorganised and COFRA (which is resident in Switzerland) was introduced as the ultimate parent company. The group’s business consisted of a fashion retail division trading under the “C&A” name, a property investment management division, Redevco Properties Holding BV (“Holding”), with its managerial headquarters in the Netherlands, and (from around 2002) a private equity investment division known as “Bregal”.

The former C&A properties in the UK remained in the ownership of the original subsidiaries, whose shares were transferred to a UK intermediate holding company, UK Redevco Properties, a private unlimited company incorporated in England and Wales whose parent was Holding in the Netherlands. New tenants were found where vacancies had arisen due to the closure of the C&A stores. Those properties in the less attractive or secondary locations were sold so that UK Redevco Properties could focus on developing and acquiring properties in prime locations.

The incorporation of Redevco, on 16 November 2004, was part of an asset-backed securitisation undertaken by Holding which sought to raise capital to invest in the expansion of its property investment business in the UK by releasing value from its existing portfolio of mostly prime retail properties.

In late 2006 the management of Holding started to consider whether it was feasible to transfer the management of Redevco to the Netherlands in order better to co-ordinate its management with that of the group and, in particular, with that of the securitised sub-group of which it was the only member managed outside the Netherlands. As part of that process advice was sought from leading counsel as to whether the UK would be able to impose an exit tax charge on Redevco’s migration. Counsel advised that:

On the basis of the advice received (in the words of a former Redevco director) that “there was a very good chance of succeeding in arguing that the tax was not due”, Redevco decided to move its place of effective management to the Netherlands.

The FTT found that:

On 31 October 2007 Redevco notified HMRC pursuant to s130 FA 88 of its intention to migrate. In the initial notification Redevco set out its view that no exit tax was due because it was “invalid under European Community law”. Following the provision of an adequate guarantee from another UK resident group company and a power of attorney to the UK resident legal counsel, HMRC granted consent to the migration.

On 15 January 2008, Redevco moved its place of effective management to the Netherlands, thereby ceasing to be resident for tax purposes in the UK.

On 22 March 2011 Redevco sold all of the relevant properties to another group company.

In December 2010, HMRC opened an enquiry into Redevco’s corporation tax return for the accounting period ended 15 January 2008. On 2 August 2021 HMRC issued a final closure notice. The relevant parts of the closure notice determined that Redevco was liable to corporation tax in respect of: (a) chargeable gains of £139,700,000 arising under s185 TCGA and (b) profits on loan relationships of £2,700,114 arising under para 10A.

It is well-established that the imposition of an exit tax, on a person transferring his tax residence from one EU member state to another, may constitute a restriction on that person’s freedom of establishment or on the free movement of capital. Exit taxes place a person that chooses to transfer to another member state in a worse position than if he had not done so. This renders any decision to transfer less attractive: National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond (Case C-371/10):

It has also been recognised that exit taxes may be justified by reference to the legitimate objective of preserving the origin member state’s right to tax activities carried on within its own territory: N v Inspecteur van de Belastingdienst Oost (Case C-470/04):

There have been a number of cases before the CJEU which have considered the extent to which exit tax provisions of EU member states are so justified. In National Grid Indus and Commission v Portuguese Republic (Case C-38/10), the CJEU held that, because the underlying domestic law did not permit deferral of payment, the exit taxes levied in those cases were disproportionate and unlawful.

In DMC (Case C-164/12) and Verder LabTec GmbH & Co KG v Finanzamt Hilden (Case C-657/13), the underlying domestic laws permitted the taxpayer to elect to make payments in annual instalments over a period of five and ten years respectively. The CJEU held that the options were proportionate restrictions, and compatible with EU law. The CJEU noted that whilst member states were not required to defer the payment of tax until the ultimate disposal of the taxpayer’s assets, such an option is not unlawful (Verder LabTec at [45]). In the case of Wächtler (C-581/17) deferral of payment until the disposal of the asset was held to be proportionate.

The CJEU has held that payment of interest in respect of exit taxes is a matter for the member states concerned - see for example DMC at [61] where the Court stated that interest may be charged in accordance with the applicable national legislation.

The CJEU decided in Panayi CJEU that a trust established in the UK could benefit from the four EU law freedoms. It went on to consider whether the imposition of a “charge to tax on unrealised capital gains on the increase in value of assets held by trusts at the time when the majority of the Trustees cease to be resident or ordinarily resident in that Member State” had disproportionately interfered with the Trustees’ right to freedom of establishment. In her opinion Advocate General Kokott said:

The Court agreed with the Advocate General and held that:

It is not in dispute that UK law at the relevant times, at least on its face, interfered with the EU law right of freedom of establishment of both appellants. What is in issue in this appeal is how those rights are to be vindicated. Does a conforming interpretation of the legislation exist which would give effect to the EU law rights of the appellants?

If a conforming interpretation is not possible the jurisprudence of the CJEU is that:

So, where a conforming construction is not possible, the proper approach is to disapply the incompatible provision. In such circumstances, the disapplied provision remains applicable, save to the extent that it is incompatible with EU law. An example given to us was in Factortame, where the court held that the restriction in Part II of the Merchant Shipping Act did not apply to nationals of other EU Member States, although it continued to apply to persons who were not EU nationals.

In both Panayi FTT and Redevco FTT, the FTT held that an appropriate conforming interpretation exists. The Trustees and Redevco submit that the FTT was wrong, no such conforming interpretation exists, and the exit tax provisions of UK legislation should be disapplied.

All of the parties agree on the principles that apply to the adoption of a conforming interpretation or construction. They disagree on their application to the issues in this appeal.

The principle of a conforming interpretation was set out in the decision of the CJEU in Marleasing SA v La Comercial Internacional de Alimentación SA (Case C-106/89), as follows at [8]:

Both the UK courts and the CJEU have held that whether a conforming interpretation is possible, or alternatively, what disapplication is required, is a matter for domestic law, and is not a matter for the CJEU: see, for example Teckal Srl (Case C-107/98):

The Court of Appeal summarised the approach to be taken by English courts when applying a conforming interpretation in its decision in Vodafone 2 v RCC [2010] Ch 77. In his judgment Sir Andrew Morritt C quoted at [37] and [38] with approval a summary prepared by counsel for HMRC of the principles established in case law (and from which counsel for Vodafone did not dissent). These principles are:

In FII Group Test Claimants v RCC [2012] UKSC 19 at [176] (“FII SC1”), Lord Sumption described the adoption of a conforming interpretation as a:

It is agreed that the authorities make it clear that the case law on the application of s3 Human Rights Act 1998 (“HRA”) and the case law on conforming interpretations are interchangeable - see for example the speech of Lord Steyn in Ghaidan v Godin-Mendoza [2004] 2 AC 557 at [45]:

In both Panayi FTT and Redevco FTT, the FTT held that a conforming interpretation of the legislation existed.

Judge Mosedale held at [80] that:

As a conforming interpretation existed, the FTT decided that disapplication was not applicable.

Judge Brooks decided that it was not appropriate to distinguish the decision of the FTT in Panayi FTT or to consider that it was wrongly decided. He considered a conforming construction to be appropriate and followed Judge Mosedale’s decision in Panayi FTT. At [62] he adopted Judge Mosedale’s reasoning in relation to s59B TMA and held that a corresponding conforming construction should be applied to s59D TMA which is to be read as follows:

It is convenient to address the submissions of the parties under the following broad headings.

While the imposition of an exit tax may constitute a restriction on the freedom of establishment or the free movement of capital (see National Grid Indus at [37]), the CJEU has recognised that such taxes may be justified by reference to the legitimate objective of preserving the right of the origin member state to tax activities that were carried on within its own territory (see N at [46]). The authorities on exit taxes are therefore concerned with issues of proportionality. Mr Johnston referred us to two decisions in particular of the CJEU addressing this point.

The first was European Commission v Portuguese Republic which was an infraction proceeding against Portugal whose law required capital gains tax on departure – which Mr Johnston submitted was on all fours with the circumstances in this case. The Court held that:

The second was the CJEU’s decision in Verder LabTec:

Mr Johnston acknowledges that it is lawful for the United Kingdom to levy capital gains tax in respect of gains attributable to the period when the taxpayer was resident in the UK. However, the UK must give the taxpayer the option of either paying that tax when it ceases to be UK tax-resident, or being able to defer payment. Mr Johnston derives from the decisions of the CJEU that the UK has a number of choices as to how to determine the amount of the gain and the date(s) on which it is payable. He submits that paragraph [45] of Verder LabTec is authority for the proposition that not only is it compatible for a member state to provide that the exit tax is calculated on the basis of the value of the taxpayer’s assets at the date of exit and the tax payable in instalments, but it is also compatible with EU law for a member state to determine that the exit tax is levied at the time when the relevant asset is ultimately sold (or otherwise disposed of) based on the disposal value at the sale date. Mr Johnston notes that Judge Mosedale in the FTT in Panayi (at [39]) and the CJEU in European Commission v Kingdom of Denmark (Case 261/11) (for which there is no official translation into English) support this contention.

Mr Johnston notes that it is not the charging provision for the exit taxes that gives rise to the incompatibility with EU law, but rather the payment provisions. This can be seen from the opinion of the Advocate General in Gallaher before the CJEU:

Mr Margolin identifies the breach of EU law differently, as being the imposition by the UK of a restriction on Redevco’s freedom of establishment by imposing an exit tax without including a deferral provision. Mr Margolin submits the tax charges in these appeals will be unduly levied unless they are both justified and proportionate. Whilst HMRC accept that the charge cannot be justified without deferral provisions, as there were no deferral provisions at the time, he submits that the charge cannot be justified. Proportionality would address whether any deferral provisions went beyond the minimum required to achieve their objective. But as there simply were none, we do not even proceed to the proportionality stage of the analysis.

Mr Johnston referred us to the opinion of Advocate General Bobek in Joachim Pöpperl v Land Nordrhein-Westfalen (Case C-187/15) where he said:

Mr Johnston submits that although the precise application of a conforming construction is a matter of national law, the opinion of the Advocate General offers a helpful framing – in particular that the courts should not embark on the exercise with the assumption that a conforming construction takes priority over disapplication. Rather, each case has to be considered on its own merits – taking account of the extent to which it has an impact on the national legal system. The court has to consider whether the proposed conforming construction complies and is compatible with EU law. Mr Johnston submits that in this case it does not.

Both Mr Johnston and Mr Bremner referred us to the submissions of the taxpayer’s counsel in Vodafone 2 which are set out in the decision of Sir Andrew Morritt C in the Court of Appeal at [55] et seq:

Mr Johnston accepts that a conforming interpretation is determinative of what the law has always been – and therefore (in that sense) is retrospective in operation. However, in the circumstances of the Trustees' appeal, he submits that a conforming interpretation is unable to give effect to the rights of the taxpayer – and therefore cannot remedy the breach of EU law. This is because the taxpayers are as a matter of EU law entitled to choose between paying tax on their exiting the UK, or choosing to defer payment. It is now impossible to give effect to that choice – as that choice would have had to be made some 20 years ago. Mr Johnston does not disagree with what is said in Vodafone 2 but submits that it does not bite in the case of the Trustees’ appeal. Whilst a conforming interpretation has retrospective effect, in the sense that it declares what the law has always been, the question is, whether such a declaration remedies the Appellants’ EU law rights? Mr Johnston submits that a conforming interpretation does not remedy the EU law rights of the Trustees because they cannot now be given an effective choice in respect of the events of 2004-05. The object of a conforming interpretation is to vindicate the Trustees’ EU law rights, and the vindication of their EU law rights requires a conforming construction that gives effect to their rights. Mr Johnston submits that the finding by Judge Mosedale in Panayi FTT that payments in stages vindicates their rights is wrong. It does not vindicate their rights, because they were not given a choice of payment at the time of exit or payment in instalments. The question is whether the entitlement to a retrospective choice, which is entirely hypothetical and could never be exercised, gives effect to the EU law rights of the Trustees – and Mr Johnston submits that the answer to this question is “no”. Further – even if (hypothetically) the Trustees had sought to make such a choice at the time they ceased to be UK resident – HMRC would have rejected any such choice – and this can be inferred from the fact that HMRC’s position at the time was that trusts were not entitled to benefit from the EU law freedoms (and this was one of the issues that was resolved by the CJEU in its decision in Panayi CJEU).

Mr Johnston distinguishes the circumstances in the appeals before us from the circumstances in Vodafone 2. The dispute in Vodafone 2 related to the application of the UK’s controlled foreign company (“CFC”) regime to companies established in the EEA. In the circumstances of Vodafone 2, the conforming interpretation advanced was relatively straightforward, being the addition of a further exemption to the application of the CFC regime – and such an addition was sufficiently certain. However, submits Mr Johnston, in the circumstances of these appeals, “a whole series of complex policy choices have to be made”, which means that the adoption of a conforming interpretation cannot be sufficiently certain, and offends against the legal certainty principle.

Mr Margolin submits that the obligation of adopting a conforming interpretation derives from the national courts’ duty of cooperation and the general principles of the supremacy and effectiveness of EU law. It is important in ensuring that EU law is effective and that EU nationals can assert and vindicate their EU law rights. However, this obligation is subject to various constraints, two of which are particularly relevant in Redevco’s case. The first is that a national court is not required to interpret legislation in a manner that is contrary to its drafting. Secondly, the retrospection inherent in the adoption of a conforming interpretation must not offend against the principle of legal certainty. Mr Margolin submits that this is of particular importance in the case of tax and criminal law, and that this principle requires that the meaning of legislation affecting a taxpayer must be established with clarity in advance. Failure to comply with that principle may infringe the right of a taxpayer to assert their EU law rights. Those subject to the law must know in advance what the law is so as to be able to plan their actions accordingly. Mr Margolin submits that the retrospective nature of a conforming interpretation in this case has the effect of depriving Redevco of its ability to make a commercial decision (whether or not to migrate) on the basis of legislation which was incompatible with Redevco’s right of freedom of establishment. Further, it does that in circumstances where there is no obligation on the national court, under EU law, to do anything other than to disapply the tax charge. Mr Margolin distinguishes Redevco’s circumstances from the circumstances in IDT, which concerned the failure of the UK to properly implement the Sixth VAT Directive into UK law. In contrast, in Redevco’s case, the only EU law obligation is that the UK must not impose an immediate tax liability on exit – there was at the time no EU law obligation to impose an exit tax.

Mr Margolin distinguishes the circumstances in Redevco’s case with the circumstances in many of the authorities cited to us, and submits that in Redevco FTT, Judge Brooks was persuaded to adopt a conforming interpretation which was inconsistent with the legislative provisions that actually applied at the relevant time, and which imposed a charge to tax which was not lawfully due and for which there was no EU law duty to impose (Footnote: ⁵). Mr Margolin referred us to the judgment of Lord Sumption in FII SC1 at [176] (cited above) where he refers to Marleasing as being authority for the “highly muscular” approach of conforming interpretation.

Mr Margolin submits that there was a breach of UK law, irrespective of any conforming interpretation or disapplication which might subsequently be effected: conforming interpretation is part of the principle of effectiveness - the requirement of an effective remedy. It applies at the stage of determining the consequences of a breach, it is not part of determining whether a breach had occurred. Mr Margolin submits that the conforming interpretation mechanism is intended to give effect to, and safeguard, an EU national’s rights – but in this case HMRC are seeking to use it to retrospectively amend non-compliant UK legislation in order to make it hypothetically compliant, and thereby nullify the UK’s breach of EU law – all to the disadvantage of the taxpayer. This, he submits, goes beyond the proper limits of a conforming construction pursuant to Marleasing.

Mr Margolin referred us to the decision of the House of Lords in Fleming and Conde Nast v RCC [2008] UKHL 2, which concerned the absence of transitional provisions when the UK reduced the time limit for VAT refund claims. In considering whether courts could adopt a conforming interpretation which allowed for a transitional period (where none was included in the legislation) Lord Scott said the following:

Mr Margolin submits that Lord Scott’s speech has clear resonance to these appeals. The circumstances in these appeals are similar to the circumstances in Fleming, in that in these appeals there is a legislative void that the courts are not equipped to fill.

We were referred to various decisions of the House of Lords and the Supreme Court.

The first is the decision in Re S [2002] 2 AC 291 which concerned the interpretation of the Children Act 1989 in a manner to give effect to rights under the European Convention on Human Rights pursuant to s3 HRA. In issue in Re S was the failure by local authorities to give effect to care plans and to meet key milestones. The Court of Appeal decided that the answer was to impose a series of “starred” milestones – and that if these starred milestones had not been achieved by a specified time, there was a requirement on the local authority to return to the court and explain why. Lord Nicholls in his speech said the following:

Mr Johnston submits that the limit of what is permissible by conforming interpretation can be seen in Lord Nicholl’s speech. A Tribunal is not able to evaluate possible ramifications of the different policy decisions and assess what Parliament would have done if changes were needed. To adopt a conforming construction in these circumstances would be undertaking statutory amendment and not statutory construction. Mr Bremner submits that the “starring” arrangements went against the grain of UK domestic law, as it was inconsistent with the scheme of the Children Act, as it would give the courts a continuing supervisory role, whereas the underlying policy of the legislation was that the courts would have no continuing role once it had determined that the threshold condition for taking children into care had been met.

In R (oao Anderson) v Secretary of State for the Home Department [2003] 1 AC 837, reference was made to Ghaidan v Godin-Mendoza [2004] 2 AC 557. In Ghaidan, the defendant had lived in a long-term same-sex relationship with a protected tenant of a flat. The tenant died and possession proceedings were begun. The statutory provision referred to somebody who had lived "as his wife or husband". The question was whether these words could be read in as if a partner in a same-sex relationship were his wife or husband, with the result that the surviving partner could enjoy the benefit of the protected tenancy. In his speech, Lord Steyn considered the limits on a court’s power to adopt a “possible” interpretation:

In Anderson, the House of Lords held that having the Home Secretary decide the tariff for a life sentence breached the right of the prisoner under Article 6 ECHR. However, it declined to make a s3 interpretation as there were too many variables – and to do so would be to produce a “substitute scheme” – which, submitted Mr Johnston, moved from construction to amendment. Mr Bremner submits that the nature of the underlying incompatibility of the legislation with the human rights of the prisoner made it impossible for the courts to adopt a conforming interpretation. This is because the legislation gave to the Home Secretary “and no one else” the power of release and the power to determine how long a convicted murderer should remain in prison for punitive purposes. Once the court had found that was incompatible with Article 6 for the Home Secretary to have that power, there was nowhere to go other than a declaration of incompatibility - as the legislative policy was that only the Home Secretary had the power of release, the court cannot by the mechanism of conforming interpretation give the power to somebody else.

We were also referred to Pickstone v Freemans and Litser v Forth Dry Dock. In all of these cases, the Appellants submit that the nature of the conforming interpretation was to make a relatively minor amendment to the legislative wording, and one that was wholly consistent with the purpose of the UK provisions.

An example of circumstances where a conforming interpretation would raise policy issues which only Parliament should resolve was given by Arden LJ (as she then was) in her judgment in IDT at [113]:

Mr Johnston submits that it would be improper to adopt a conforming interpretation in circumstances where it involves making policy choices that should be reserved to Parliament. This can be seen from Sir Andrew Morritt C’s judgement in Vodafone 2 at [59]. Mr Johnston distinguishes the circumstances in Vodafone 2 from those in the appeals before us. In Vodafone 2 the court was presented with only one possible conforming interpretation, and the CJEU had already identified how the legislation should be made conforming – all that was required was to add a further exception to the CFC rules that directly mirrored the test identified by the CJEU.

Mr Margolin submits that whether it would be improper to adopt a conforming interpretation may be informed by the extent of the choices which fall to be made in relation to what is then required to be compliant with the requirements of EU law or the ECHR. Where there is a clear indication in an EU directive as to what UK law ought to be, that gives a very clear steer as to what conforming construction should be adopted – for example the terms of the EU law underpinning the Equalities Act provided a clear purpose for which the domestic legislation has to be given a conforming construction so as to give effect to those clear legal principles underpinning it.

Mr Johnston referred to paragraphs [39] to [40] of the decision in Panayi FTT, and noted that it referred to “a range of options any one of which the national legislature could select”. It was agreed by the parties before the FTT that there were multiple different lawful mechanisms by which exit taxes could be levied that were compliant with EU law. By choosing from “a range of options”, Mr Johnston submitted that the FTT was making policy decisions which ought properly to be reserved to Parliament. Mr Johnston referred to three such policy choices:

The FTT did not, submitted Mr Johnston, adopt a conforming interpretation, but effectively amended the legislation. Mr Johnston noted that in Gallaher [2019] UKFTT 207 (TC), the FTT (Judge Beare) reached the conclusion that a conforming interpretation of the exit tax provisions was not possible. In an appeal with materially similar facts, Judge Beare held that:

Judge Mosedale in Panayi FTT and Judge Brooks in Redevco FTT held that Gallaher was wrongly decided. Mr Johnston submits that Gallaher was correctly decided and that the FTT in Panayi FTT (and presumably Redevco FTT) was wrong. He submits that this is because the conforming interpretation adopted in Panayi FTT involves, says Mr Johnston, a substantial amendment to the existing statutory scheme. It adopted a novel and complex mechanism for deferred payment of the exit tax. Mr Johnston submits that this is evident from the content of Sch 3ZB and Sch 3ZAA. When Parliament implemented a framework that was similar – but not identical – to that selected by the FTT, it required the addition of whole new schedules to the TMA. They run to several pages and contain a number of paragraphs setting out the method by which a company may enter into an Exit Charge Payment Plan. This is the kind of amendment by interpretation that has been deprecated in the authorities. It was wrong for Judge Mosedale to take comfort from the fact that her conforming interpretation was similar to Sch 3ZB – rather her construction involved the creation of a substitute scheme that required lengthy legislation. This was an indication that her preferred interpretation amounted to amendment rather than a conforming interpretation.

Further, submits Mr Johnston, Judge Mosedale applied the wrong test for a conforming interpretation. At [137] to [138] she held that the Tribunal was only precluded from “making decisions with far-reaching consequences that are difficult to assess or where it involves making choices between competing rights of different persons”. Mr Johnston submits that the test the FTT should have adopted is whether the Tribunal is making a decision which properly ought to be one for Parliament, as the Tribunal could not know what Parliament would have decided. By adopting the wrong test, the FTT sidestepped the difficult questions relating to the timing of payment, interest, security and acceleration of payment on realisation, by relying on the proposition that conforming constructions should be simple. In doing so, the FTT evaded the fundamental issue that it was choosing between different options that had considerable and wide-ranging ramifications, and that choice should have been left to Parliament.

We note that in his speech in R v Lambert [2002] 2 AC 545 at [78], Lord Hope referred to the interpretation powers under s3 HRA as being “far-reaching”. But he went on to say that they should be “employed consistently with the need (a) to respect the will of the legislature so far as this remains appropriate and (b) to preserve the integrity of our statute law so far this is possible”. He went on to say at [81] that “[…] the interpretation of the statute by reading words in to give effect to the presumed intention must always be distinguished carefully from amendment”, the latter being “an exercise which must be reserved to Parliament.”

Mr Johnston submits that another example of where Judge Mosedale adopted the wrong test is at [153] where she referred to “Option 4” (assessment when the asset was realised) as going “further than required”. The issue arises at [163] to [165] where she finds that payment in instalments over five years is the “minimum recognised as lawful”, and that a conforming interpretation should be “as simple as possible”. Mr Johnston submits that what Judge Mosedale is implying is that a conforming interpretation should not be too generous to the taxpayer. This, he says, is the wrong test. The test that should be adopted is how best to interpret the UK statute so that it adheres to the requirements of EU law - Judge Mosedale's finding that the Tribunal was precluded from making decisions which may have “far reaching consequences that are difficult to assess” (at [137]) places the threshold too high.

Although the FTT held (at [138]) that the conforming interpretation it adopted would not affect anyone else’s rights, Mr Johnston submits that this statement is not correct. The fact that the appeal to the Upper Tribunal was stayed behind Gallaher, and that Redevco has been joined, shows that other taxpayers (and not just the appellants in those cases) will be affected by the FTT’s decision. How they will be affected will depend on their particular circumstances – but it was not correct to state that the conforming interpretation will have no effect on others.

The decision of the FTT did not, submits Mr Johnston, vindicate the Trustees’ right to freedom of establishment, which is the whole purpose of a conforming interpretation. In Panayi CJEU, the Court held at [57] that:

Mr Margolin submits that the decision of the FTT in Panayi FTT and in Redevco FTT involve the insertion, in practical terms, of an entirely new payment deferral scheme, which did not exist at the relevant time, in order to fill a legislative void. Mr Margolin submits that the fact that the wording introduced by the FTT is relatively brief is irrelevant, because of the need to consider the fundamentally different effect which it gives to the exit tax provisions, particularly against the backdrop of legal certainty in the commercial decision which Redevco had to make. Further, the language used by the FTT is prevalent with unstated assumptions of various kinds.

He submits that the FTT went too far in its process of conforming construction. Unlike the circumstances in Vodafone 2 or Lister, for example, a conforming interpretation is not required in the circumstances of these appeals to give effect to the requirements of EU law. Mr Margolin draws a distinction between the current position, where exit taxes are mandatory under Article 5 of ATAD, and the position then, which was that they were permitted but not required. He submits that EU law neither requires, nor permits, the Tribunal to devise a deferral regime of its own in circumstances where EU law does not mandate that an exit tax must be levied. He submits that the approach which the FTT was persuaded to take is inconsistent with the legislative provisions which actually applied at the relevant date and imposed a charge which was not lawfully due and for which there was no duty to impose.

Mr Margolin referred us to the consultative document that preceded the adoption of Sch 3ZB, and in particular to the range of choices that were considered in the document, namely the payment by six annual instalments, deferral until the eventual disposal of the assets, or some combination of the two. The fact that number of different options were under consideration reinforces the submissions made by Mr Johnston that in adopting a conforming interpretation, the FTT were going beyond the bounds of what is permissible.

Mr Bremner referred us to the decision of the Upper Tribunal in Banks v HMRC [2020] UKUT 101 (TCC), a decision of Falk J (as she then was) and Judge Herrington. Having dismissed the appeal on other grounds, they went on to consider a conforming interpretation of the Inheritance Tax Act 1984, and in that context considered Panayi FTT and the refusal of Judge Mosedale to follow Gallaher:

In his judgment in Vodafone 2, Sir Andrew Morritt C held that one of the constraints in adopting a conforming interpretation was that it had to “go with the grain of the legislation” and be “compatible with the underlying thrust of the legislation being construed”. A conforming construction will amount to amendment where the court is required to speculate as to what Parliament’s intention would have been.

In the franked investment income litigation in the High Court [2014] EWHC 4302 (Ch) (“FII HC2”), this requirement was expressed by Henderson J as follows:

Mr Johnston submitted that in circumstances where UK legislation was intended to give effect to EU legislation – but failed adequately to do so (such as in the case of Lock v British Gas Trading Ltd [2016] EWCA Civ 983, per Sir Colin Rimer at [111]) – it should be relatively straightforward to identify the “grain” of domestic legislation. However, in circumstances where Parliament intended to achieve an outcome which was subsequently determined to be incompatible with EU law rights, it may be more difficult to identify the “grain”. Similar issues arise in circumstances where Parliament did not intend to comply with EU law, or intentionally sought as narrow an application of EU law as possible. In such cases, submitted Mr Johnston, a court will be slower to reach a conforming construction. Parliament did not intend to give effect to EU law, and it may not be possible to render the domestic law conforming. Where a conforming construction is not possible, the proper approach is to disapply. As Lord Keith explained in R v Secretary of State for Employment ex p Equal Opportunities Commission [1995] 1 AC 1 at 27A, the disapplied provision remains applicable, save to the extent that it is incompatible with EU law.

The conforming interpretation adopted by the FTT, submits Mr Johnston, also does not go with the grain of the legislation. Section 80 TCGA provides for there to be a deemed disposal and reacquisition at the point in time when the Trustees exit the UK. That provision needs to be read together with s59B TMA, showing that Parliament envisaged that calculation, assessment to tax, and liability to the exit tax is established at that one point. It was no part of Parliament's thinking that payment would be deferred.

Mr Margolin referred us to the judgment of Lord Sumption in FII SC1 at [205]:

Mr Margolin submitted that an example of these limits can be seen in the decision of the Supreme Court in Routier v RCC [2019] UKSC 43. This case concerned a charitable trust established in Jersey, and whether it was entitled to benefit from the statutory exemption from inheritance tax (“IHT”). On the basis of the legislation as interpreted by reference to the long-standing Dreyfus case, a charitable trust established and governed by Jersey law could not benefit from the relief. The Court of Appeal gave the legislation a conforming interpretation to permit relief, where the relevant charity satisfies UK law requirements concerning a charity and is based in an EU member state or a third country which has an information exchange agreement with the UK. In the Supreme Court, Lords Reed and Lloyd-Jones (with whom the rest of the Court agreed) in their judgment said the following:

Mr Margolin submits that Routier shows that what the court should not do is to try to think up whatever might be the minimum protection required by EU law and then by means of a purported interpretation of the statutory language, introduce that. The fact that something might have been in conformity if it had existed did not mean that the Court of Appeal was entitled to devise a compliant scheme of its own in the way which it did. Mr Margolin submits that the FTT was wrong in Panayi FTT to hold that Routier concerned the effect of an entirely judge-made restriction and as such, provided little, if any, assistance in the present case. Rather, says Mr Margolin, there is nothing that limits the application of Routier to the interpretation of judicial decisions and nothing in English or EU law to distinguish the operation of a conforming construction in that way. He submits that Panayi FTT is inconsistent with Routier, and the Supreme Court in its decision gives a clear indication of what a court or tribunal can legitimately do when it is seeking to give a conforming construction to the words adopted by Parliament.

Mr Margolin submits that the conforming interpretation adopted by the FTT was contrary to the express will of Parliament. FA 2013 provided that Sch 3ZB was treated as having come into force on 11 December 2012 in relation to an accounting period if the relevant day, in relation to that period, fell on or after 11 December 2012. If Parliament had considered it appropriate to introduce the regime with a further element of retrospectivity it would have done so. Adopting a conforming interpretation which would have retrospective effect back to the original enactment of the exit taxes goes against the grain or thrust of the legislation and is, says Mr Margolin, contra legem. Further the provisions of Sch 3ZB are materially different from, and more liberal than, the conforming interpretation adopted by the FTT.

Mr Margolin submits that it is “eccentric” for HMRC to suggest that a conforming interpretation could be moulded by reference to s281 TCGA, which provides that a taxpayer may elect to pay CGT arising on some disposals by way of gift in ten equal yearly instalments. The submissions by HMRC that s281 has relevance to these appeals just goes to show the range of choices facing the Tribunal in adopting a conforming interpretation.

Mr Margolin submits that the FTT in Redevco FTT erred in law by not distinguishing Redevco’s case from that of the Trustees. He submits that Judge Brooks ought to have distinguished Redevco FTT from Panayi FTT because, the question of legitimate expectation did not arise in Panayi.

Mr Margolin submitted that a conforming interpretation must not breach the EU law principle of legal certainty. In order to set Redevco’s decision to emigrate from the UK in the context of its understanding of the risks it thereby assumed, he referred us to the witness statements of Mr Faber and Mr Drury before the FTT, which showed that they believed (on the basis of clear and robust advice from leading counsel) that it was likely (70% to 80% in Mr Drury’s evidence) that an exit tax was unlawful. He referred us in addition to a number of publications (including the specialist tax press) which supported this view.

He also referred us to the HM Treasury/HMRC consultation document published on 11 December 2012 which led to the FA 2013 amendments which introduced the deferral arrangements in Sch 3ZB. The consultative document refers to the CJEU decisions in National Grid Indus and Portugal, and states that a deferral option is required to make the UK’s exit tax provisions proportionate. However, there is no mention in the document of the possibility of a conforming interpretation. Nor is there any reference in the Law Society’s response to the consultation to the possibility of the UK’s exit tax being “saved” by the adoption of a conforming interpretation.

Whilst the consultation document (and response) post-dates Redevco’s decision to migrate, this (and the other documentary references) are, says Mr Margolin, consistent with Redevco’s reasonable belief that the exit tax was unlawful.

We were referred by Mr Margolin to the judgment of Lord Sumption in FII SC1 at [152]:

Mr Margolin submits that it is necessary for a taxpayer to know with clarity the liabilities it will suffer before, not after, undertaking its transaction. If a law can be interpreted so as to insert a deferral provision with retrospective effect, the law itself lacks certainty, and that is itself in breach of EU law. Redevco cannot be expected to have ordered its affairs when undertaking its migration, or, when subsequently undertaking its intra-group transfer, on the basis of a fundamentally different regime which a tribunal might hypothetically consider it would be appropriate to introduce many years later. This, he says, is self-evidently incompatible with the principles of legal certainty and legitimate expectation.

Redevco, says Mr Margolin, had to make its decision whether or not to migrate on the basis of the legislation as it stood and cannot be taken to have been in a position where it could have foreseen what might eventually be determined, whether by way of conforming construction or partial disapplication, to be an EU law compliant regime. It could not have anticipated what a tribunal might do some 15 years later and might materially have altered the assessment of the legality of the legislation which Redevco had to make, in deciding whether or not to exercise its right to migrate.

Mr Margolin submits that Redevco had a legitimate expectation that the exit tax provisions in s185 TCGA would be declared to be incompatible with EU law, and disapplied. He submits that it is common ground that they were incompatible.

Mr Margolin confirmed to us that counsel's advice was not the source of Redevco’s legitimate expectation, but his opinion reinforced its understanding of the legislation in terms of the clarity and robustness of that advice and the fact that leading counsel said he was not aware of anybody else at the tax Bar who took a different view. Redevco’s legitimate expectation is based on its understanding of the law, which was informed by or reinforced by the advice which it received.

Mr Margolin does not challenge the FTT’s finding that Redevco would have migrated to the Netherlands, irrespective of counsel’s advice. However, he submits that the FTT’s finding does not extend to the application of the legislation. Bearing in mind the findings that were made about taking tax considerations into account, along with the primary commercial reasons for the migration, he submits that it is highly unlikely that Redevco would have exposed itself to a very substantial and wholly unavoidable tax charge by migrating if they were aware of the existence of a conforming interpretation. In any event, the Tribunal cannot second guess that decision because that wasn't the option that was on offer under the legislation at the time. The only way that Redevco, in the circumstances, could assert its right of freedom of establishment was by migrating and taking action, practically, to exercise that right. The effect, says Mr Margolin, of adopting a conforming interpretation, is that Redevco is now caught out and required to suffer a tax liability in consequence of its exercise of its right of freedom of establishment by reference to something that was neither foreseen nor foreseeable at the time. This offends against the principle of legal certainty. He submits that the importance given to that principle of legitimate expectation can be seen in the speeches of the House of Lords in Fleming.

In addition to the application of the principle of legal certainty, Mr Margolin submits that the FTT made a further error of law in Redevco FTT by failing to distinguish Panayi FTT on the grounds that (i) Redevco's motivations for migration were primarily commercial, and (ii) the assets were transferred to another group company following the migration, and that there was an intention for the group to hold the assets for the long term. In the absence of any finding (or indeed allegation) of abuse or artificiality, Mr Margolin submits that the fact that, according to the FTT’s findings, “tax considerations certainly played a part in the decision” cannot have the effect of depriving Redevco of its EU law rights or its entitlement to assert such rights.

Mr Margolin raises a number of points in relation to the FTT’s treatment of the evidence in Redevco FTT, in particular the finding by the FTT, by reference to the advice of leading counsel, that it did not have a legitimate expectation that it would not have to pay exit taxes. Mr Margolin submits that the FTT misinterpreted the note of conference and purported conforming constructions. In fact, these references were to potential statutory amendments that might be made to the legislation by Parliament to bring it into conformity with EU law, and not to the court adopting a conforming construction. He submits that this finding gives rise to an error of law in Edwards v Bairstow terms.

In addition, challenges to the FTT’s factual findings were raised in Redevco’s notice of appeal, and although they were not pursued at the hearing, they were not abandoned. In essence these challenged the findings by the FTT that:

Mr Johnston also challenged the jurisdiction of the FTT to apply a conforming interpretation of s59B TMA. The jurisdiction of the FTT on an appeal under s31 TMA extends only to increasing or decreasing an assessment. Section 50 TMA provides that on an appeal the FTT may decide that the appellant has been “overcharged” or “undercharged”. It does not provide that the FTT has jurisdiction to decide that the tax was due on a different date. For this reason, a conforming construction of ss59B goes beyond the competence of the FTT and the FTT was bound to disapply s80 instead.

Mr Johnston went on to submit that if we were against him on his submission that there was no possible conforming interpretation, then the only conforming interpretation that went with the grain of the legislation was to assess and require payment of CGT at the time the asset was realised. Judge Mosedale was wrong to say that the offending provision was s59B TMA (at [91]) and that s80 TCGA was consistent with EU law (at [155]). She was wrong to say that the CJEU “allowed tax to be assessed at the point of exit” (at [154]) – the CJEU’s decision was that although the amount of tax can be quantified at that point, it cannot be assessed – as it is the assessment that generates the liability to pay, and it is the liability to pay being triggered at the time of the Trustees’ emigration that offends against EU law. The decision of the CJEU and the Advocate General’s opinion in Panayi CJEU made no reference to s59B – the finding of the CJEU was that it was s80 TCGA that offended EU law. The defect found by the CJEU can (and should) be rectified by adopting a conforming interpretation of s80 TCGA. Section 80 is the provision that governs the exit tax and provides for the quantification and the assessment of the charge at the time the Trustees leave the UK. It is the assessment that creates the obligation to pay on 31 January following the end of the relevant tax year. Therefore, an amendment to s80, that creates a choice to delay to the date of assessment, remedies the defect identified by the CJEU. This, he says, is consistent with the scheme of CGT, and the decision of the CJEU in Panayi CJEU.

Mr Johnston submits that a conforming interpretation that allowed for an option that the exit tax be assessable and payable at the time of the asset’s realisation was to be preferred for the following reasons:

We accept the submission of Mr Bremner that the exercise the courts have to undertake is first to identify the manner in which UK domestic legislation is incompatible with EU law. Having done so, the courts can then consider what is required to remedy the defect. The court can then consider whether this can be done by adopting a conforming interpretation, and if so its terms. If it cannot, then the court moves on to consider disapplication, and the effect of the disapplication. This is an approach regularly adopted by the courts, and an example to which Mr Bremner referred us can be seen in the judgment of Henderson J in Prudential Assurance Co Ltd and another v RCC [2013] EWHC 3249 (Ch):

We disagree with the submission of Mr Johnston that there is no presumption that a conforming interpretation has to take precedence over disapplication. The obligation of the tribunals and courts in the UK is to give effect to legislation that has been enacted by Parliament. They can only disapply UK legislation if they cannot lawfully give effect to it (including giving effect by the use of conforming interpretations).

Our first task is to understand precisely what relevant aspects of UK domestic law infringe the EU law rights of the Trustees. We draw the following conclusions from the jurisprudence of the CJEU:

It was acknowledged by Mr Johnston in his submissions in relation to the Trustees that the UK was entitled to charge tax on unrealised chargeable gains that had arisen in the UK at the time of exit. This can be seen from the decision of the CJEU in Panayi CJEU at [52] where the court states that:

We find that the breach of the EU law rights of the Trustees does not arise because of the imposition of an exit tax, rather it arises in respect of the failure of the UK to allow a deferral of the payment of that liability. This follows from Panayi CJEU at [57] where the Court said that:

The CJEU goes on to state at [58] that the member state of origin is not obliged to take account of losses arising after the migration.

We find that the imposition of an exit tax under s80 TCGA is not the aspect of UK domestic law that infringes the EU law rights of the Trustees. Rather it is the failure of UK domestic law to provide for deferral of the payment of that liability. The breach (in the case of the Trustees) is in s59B TMA. This is the finding correctly reached by Judge Mosedale in Panayi FTT at [92]. A similar analysis in respect of the corresponding corporation tax provisions applies to Redevco.

The next step in the analysis is to consider what is required to remedy the defect. We can then consider whether this can be done by adopting a conforming interpretation of s59B TMA (in the case of the Trustees) and s59D (in the case of Redevco), and if so its terms. Whether a conforming interpretation is possible is a matter for domestic law, and not a matter for the CJEU.

We note that the CJEU in Panayi CJEU did not consider what deferral right the UK would need to give to the Trustees in order for UK legislation give effect to their EU law rights. This follows from the scope of the terms of the reference made to the CJEU by the FTT. However, in its jurisprudence the CJEU has found that payment in instalments over five or ten years is compatible with taxpayers’ EU law rights (see DMC, Verder LabTec, and Wächtler). This can also be seen in the opinion of AG Kokott in Panayi CJEU:

The legal principles governing conforming interpretations were identified by the Court of Appeal in Vodafone 2, and have been set out above. These principles are not in dispute. What is in dispute is their application to these appeals.

In essence, the submission of the Appellants is that a court cannot apply a conforming interpretation in the particular circumstances of these appeals. To do so, they say, would involve having to make policy choices of a kind that should be reserved to Parliament. They point to Sch 3ZB and Sch 3ZAA to demonstrate issues that arise in putting into place a scheme for the deferral of payments of exit taxes – and the choices that Parliament had to consider when legislating such a scheme – including number of instalments, timing, security, etc. Mr Johnston points to the “buffet” of “possible lawful options” that Judge Mosedale considered in the course of her decision in Panayi FTT to show the difficulties for a court in determining the nature of a conforming interpretation.

However, we do not consider that the “options” to which Judge Mosedale referred in her decision were in reality different choices that were all potentially open to her. These “options” never constituted a smorgasbord of delicacies from which she could freely select. Rather Judge Mosedale considered a range of different potential conforming constructions that were raised in the course of argument before her, and which of these satisfied the criteria in Vodafone 2 and best remedied the defect in UK domestic law.

In determining whether a conforming interpretation is available, we need to consider whether a muscular approach to interpretation is able to remedy the breach of EU law. In adopting a conforming interpretation, we cannot go beyond what is necessary to remedy the breach (see Re S). The precise form of words does not matter, and we do not need to engage in legislative drafting.

We find that it is possible to apply a conforming interpretation to ss59B and 59D TMA. This can be achieved by reading words into those sections to provide that, at a time before the legislation was actually amended to comply with EU law, those provisions should be read in cases where the taxpayer’s right of freedom of establishment would otherwise be infringed, as including an option to defer payment of the exit tax in five equal annual instalments, with the first instalment payable on the normal due date for payment, and at yearly intervals thereafter.

Such a conforming interpretation gives effect to the EU law rights of the Trustees and Redevco, and provides the “best fit” with the EU law requirements. To the extent that we have made any choices, those choices were resolved by the application of the principles that apply to a conforming construction. In particular that the construction should not go further than is necessary to give effect to the EU law rights of the Appellants, should go with the grain of UK law, and recognise that the other provisions of UK law continue to apply.

We find that this conforming construction does not require us to choose between competing rights of different persons. The examples given by Mr Johnston of rights of third parties that might be affected by this interpretation do not compete with the rights of the Appellants. Rather they are persons who also might benefit from the conforming interpretation we have given, as they would be able to defer payment of any exit tax.

Nor does the construction give rise to unpredictable ramifications. The only consequence of the interpretation is to delay the payment of tax by a few years.

We find that the conforming interpretation we have adopted respects (in the words of Lord Hope in Lambert) the will of Parliament as far as this remains appropriate, and preserves the integrity of statute law as far as possible. We recognise that in adopting a conforming interpretation we must not stray into interpreting legislation in a way that in effect involved statutory amendment of a kind that should be reserved to Parliament, and we consider that we have not done so.

We know from the CJEU’s decision in DMC that providing for payments over five years is proportionate. Whilst other deferral periods (including deferral until realisation) may also give rise to a proportionate result, the fact that there may be other potential conforming interpretations that could give effect to the Appellants’ EU law rights is not a reason why this Tribunal cannot adopt the conforming interpretation given above. In making a conforming interpretation, it is open to us to make choices providing they are not of a type that require Parliamentary deliberation; choices that involve competing rights of different persons; or consequences that we cannot evaluate.

Having adopted a conforming interpretation that provides for payments over five years, UK law now conforms to EU law. There is therefore no need, and no ability on our part, to introduce any further provision to allow for acceleration of payments in the event of a disposal of the assets before the end of the five-year period.

As regards the payment intervals, annual intervals are consistent with the judgment in DMC. We find also that they go with the grain of UK law, as provisions in UK law that allow for payment of CGT in instalments (such as s281 TCGA) provide for annual payments. We find that the conforming interpretation we have adopted does not go against the grain of UK law, as UK law at the time provided for instalment payment of CGT – for example on gifts (s281 TCGA) and where the consideration for the disposal is paid in instalments (s280 TCGA).

Mr Margolin has submitted that the conforming interpretation goes against the grain and is contra legem. He submits that adopting a conforming interpretation that allows for deferral of payment is contra legem to the UK domestic law which clearly provides for immediate payment without deferral. Further, the fact that Parliament gave limited retrospection to the enactment of Sch 3ZB, and chose not to legislate for the retrospection to apply back to the original time that the exit charge provisions were enacted shows that it must be contra legem to adopt a conforming interpretation that has retrospective effect. Finally, the fact that Sch 3ZB is in some respects more liberal than the conforming interpretation shows that the conforming interpretation is contra legem. We find that these submissions are misplaced. First, it is not the exit charge itself that gives rise to the breach of EU law, rather it is the failure of UK law to allow for deferral of payment. The adoption of a conforming interpretation gives effect to the EU law rights of the Appellants. By the logic adopted by Mr Margolin, the fact that Parliament subsequently enacted a deferral scheme for payment, suggests that the conforming interpretation goes with the grain of UK law – however for the reasons we give below, we do not accept Mr Margolin’s use of later legislation as an aid in considering whether a conforming interpretation is appropriate or goes with the grain. As regards the limited retrospective effect of Sch 3ZB, it is common for tax legislation to be given retrospective effect back to the date on which the legislation was first published in draft form. In the case of FA 13, draft legislation (including the provisions which were to become Sch 3ZB) was published on 11 December 2012. But more importantly, the nature of a conforming construction takes effect by reference to the incompatibility of UK law with EU law rights – what was described by Henderson J in Prudential (at [105]) as a prima facie breach. The conforming interpretation is required to give effect to the EU law rights of the relevant parties. If, however, Parliament subsequently legislates to bring UK law into conformity with EU law, there is no longer any requirement to adopt a conforming interpretation, and it does not matter if Parliament adopted a scheme of legislation to rectify the breach that was different to the conforming interpretation. This can be seen in relation to the FII litigation, where the breach of EU law was ultimately resolved through the enactment by Parliament of an exemption from taxation. It did not enact a tax credit at the foreign nominal rate – that does not mean that it was wrong for the courts to adopt a conforming interpretation to read in a nominal rate credit.

We recognise that when Parliament enacted a statutory deferral scheme in Sch 3ZB and Sch 3ZAA, the provisions were lengthy, and involved policy choices. But such drafting – involving those policy choices – is neither required nor permitted for a conforming interpretation. We have identified the breach of the Trustees’ EU law rights as being the failure of UK law to allow a deferral of payment of the exit tax. The remedy is to provide an option to defer payment – and such an option does not require extensive drafting. There is no need for us to engage in the kind of drafting included in Sch 3ZB and Sch 3ZAA to provide such a deferral – indeed to do so would go beyond what is merely necessary to remedy the breach of EU law. We therefore do not need to concern ourselves with such matters such as the provision of security or the payment of interest – as these are not issues in the scheme of UK legislation at the time of the migrations that breached the Appellants’ EU law rights. We note that UK domestic law already provided for the provision of security (see s130 FA 88) for companies migrating out of the UK, and s86 TMA makes provision for the payment of interest.

We contrast the conforming interpretation we give to ss59B and 59D to the circumstances in Re S or in Anderson. In both those cases, the conforming interpretation under consideration was fundamentally incompatible with the policy objectives of the underlying UK legislation. In the case of Re S, the “starring” system proposed by the Court of Appeal was incompatible with legislative policy which provided that the courts would have no continuing supervisory role over children in care once the courts had determined that the threshold conditions for taking a child into care had been met. In Anderson, the legislation gave to the Home Secretary, and no one else, the power of release – the court having decided that this was incompatible with Article 6 ECHR, there was no possible interpretation that could give that power to anyone else. We find that there is no incompatibility of a conforming interpretation allowing for deferral of tax in these appeals with the policy of the TCGA, as the TCGA includes provisions for deferral of payment of tax in a number of specified cases.

Nor do we consider that the decision of the Supreme Court in Fleming is relevant to these appeals. In Fleming the UK retrospectively removed the right of the taxpayers to make claims, without any transitional period. The courts found that the taxpayers had a right to be told in advance that their rights were going to be restricted, and that there had to be a sufficient transitional period. These circumstances are in complete contrast to the circumstances in these appeals. The exit tax levied by the UK is compatible with the Appellants’ EU law freedom of establishment. The mischief lies in the failure of UK law to give the Appellants a right to defer payment of that tax. The conforming interpretation that we propose has the effect of improving the position of the Appellants.

We also consider that the references made by Mr Margolin to the decision of the Supreme Court in FII SC1 need to be understood in the context of the complex statutory regime that applied at that time to dividends, and paragraph [205] cited to us by Mr Margolin relates to the right to recover tax assessed under Schedule D Case V that had been overpaid, which represented a very small part of the taxes in issue. The question Lord Sumption was addressing was the interaction of the statutory right to make a claim (section 33) with rights to make claims under EU law. The Court of Appeal had decided (following previous cases on the application of section 33) that the section impliedly excluded the availability of other causes of action at common law (including rights arising under EU law), even though there was no express exclusion in the provision. Having made that implication, the Court of Appeal found that there was then an inconsistency between domestic and EU law. The Court of Appeal resolved this inconsistency by reinterpreting section 33 to remove the restriction (and the discretion conferred on the Inland Revenue (as was) by the legislation). Lord Sumption’s reference to torture is to the approach taken by the Court of Appeal to interpret section 33 as ousting EU law rights as a matter of UK domestic law – and then giving a conforming interpretation to section 33 to allow EU law claims. The approach taken by Lord Sumption was that section 33 did not impliedly exclude claims under EU law in the first place (as there was nothing in the provision that expressly excluded such claims). We find that there is no analogy between the highly technical issues that arose in the FII litigation and the issues before us.

A similar analysis can be applied to the decision of the Supreme Court in Routier. Although there was nothing on the face of the legislation to exclude non-UK charities from the right to relief from IHT, previous cases had decided that references to “charities” meant charities established under laws in the UK. All the courts needed to do to give effect to the EU law rights of the parties was to give effect to the plain meaning of the statute, and allow relief to charities governed by laws other than those of the UK. It was not necessary to interpret section 989 in accordance with Dreyfus, and then apply a conforming interpretation to make the legislation EU law compliant. All that was required was to give effect to the plain language of the legislation. The approach that has to be taken is to analyse the mischief in the legislation – which in the case of Routier was the application of the Dreyfus gloss. Once that gloss is excluded, the legislation becomes EU law compliant, and no further conforming interpretation is required. Where we agree with Mr Margolin is that the Court of Appeal went too far when it imposed a requirement for there to be a mutual assistance agreement between the UK and the relevant other jurisdiction. This was not necessary to make the legislation compliant with the appellant’s EU law rights, and could therefore not be imposed through a conforming interpretation.

The exercise undertaken by the Supreme Court in both FII SC1 and Routier was carefully to examine the UK legislation to identify the provisions that were incompatible with EU law – and then to adopt a conforming interpretation (if one was necessary) that addresses that mischief. In these appeals the mischief is not the imposition of the exit tax, rather it is the absence of any right to defer payment. And it is the absence of any right to defer payment that this Tribunal has addressed by the conforming interpretation we have given.

Mr Margolin also referred us to paragraph [176] of Lord Sumption’s judgment in FII SC1, and in particular the statement made in his judgment that it does not follow from the retrospective nature of a conforming interpretation that tax was not unlawfully levied. As with paragraph [205], Lord Sumption is dealing here with a highly technical issue. The unlawfulness to which Lord Sumption refers, is to the Inland Revenue exacting taxes contrary to the conforming interpretation given to the statute in order to give effect to the EU law rights of the taxpayers. It is the fact that the taxes were levied unlawfully that allows the taxpayers to make a repayment claim in restitution. Lord Sumption’s judgment confirms that a conforming interpretation has retrospective effect, in the same way as any other judicial decision on the interpretation of statutes.

We find that the EU law principles of legal certainty or legitimate expectation are not engaged in these Appeals. Because a conforming interpretation has retrospective effect, the Appellants always had a right to defer payment of the exit tax. Mr Margolin submits that Redevco was entitled to certainty as to the liabilities it was assuming by migrating from the UK, and could not be expected to anticipate what a tribunal might decide some 15 years later. He submits that the adoption of a conforming construction cannot take precedence over legal certainty, otherwise legal certainty could never be possible as a taxpayer would be taken to know that a provision could always be altered by way of a conforming construction and retrospectively by the court. So, in terms of legitimate expectations, Redevco's expectation was that any subsequent interpretation of the law by way of a conforming construction would respect the overriding requirement of legal certainty to which the obligation to give a conforming construction is subject, rather than the other way round. We find that this submission is based on a misunderstanding of the nature of a conforming interpretation. If the domestic law of a member state is incompatible with the EU law rights of a taxpayer, one of the potential mechanisms of giving effect to those rights is a conforming interpretation. A conforming interpretation gives effect to EU law general principles of effectiveness and the supremacy of EU law over domestic law. We find that Mr Margolin’s submission is made on a false premise – namely certainty on the part of Redevco that the courts would disapply the UK’s exit tax provisions as being incompatible with their EU law rights. There could never be certainty that the courts would disapply the exit tax provisions in full – and there is nothing we have seen in the evidence before the FTT that would justify Redevco having such a belief. The finding of the FTT was that they would have left the UK even if they had been advised of the risk that an exit tax liability would arise. The conforming interpretation we have given to s59D TMA has retrospective effect, and so Redevco always had a right to defer payment of tax. We acknowledge that Redevco had to make a decision in circumstances where there was uncertainty as to their tax position under UK law, but the same thing could be said of Vodafone in deciding to structure its acquisition of Mannesmann through a Luxembourg intermediate holding company.

The retrospective nature of a conforming interpretation is also an answer to Mr Johnston’s submission that a conforming interpretation does not vindicate the Trustees’ EU law rights, as it is now too late for them to be able to exercise any option that the conforming interpretation may have given them. This is not a case where a conforming interpretation gives rise to a retrospective imposition of a tax liability. The conforming interpretation gives retrospective effect to a relief from taxation – namely a right to pay the tax in instalments. Mr Johnston is, in a sense, looking down the wrong end of the telescope. When analysed, his argument starts at the wrong place, which is that it is the imposition of an exit tax which is incompatible with EU law rights, and the effect of imposing a conforming interpretation is to retrospectively resurrect a liability which would otherwise be incompatible with EU law. But this is incorrect – it is the failure of UK law to provide for deferral of payment of the tax which gives rise to the breach – and by providing a conforming interpretation which allows for a deferral, we are vindicating those EU law rights. As that interpretation has retrospective effect, the right to elect to defer payment was always available to the Trustees. The fact that the Trustees might not have been aware at the relevant time that they had the right to elect to defer payment is irrelevant. This can be seen from the many cases where the courts and tribunals have had to address the failure of UK domestic VAT law to give effect to the Principle VAT Directive, and taxpayers find that they are out of time to make claims to which they were entitled under the Directive, but of which they were unaware as UK law made no provisions for the claims (VAT bad debt relief comes to mind as an example). It is also irrelevant that HMRC would have rejected any attempt by the Trustees to make a deferral election – in the event of such a rejection, the remedy of the Trustees would be to challenge HMRC’s decision.

We find that Mr Margolin's submissions that the FTT in Redevco FTT erred in law by failing to distinguish Redevco's case from that of Panayi FTT are misplaced. Mr Margolin submitted that the FTT erred because (i) there were commercial reasons for the migration, and (ii) the group intended to hold the assets for the long term. But these are irrelevant considerations. The growth in value of Redevco's assets that are subject to tax arose whilst Redevco was UK resident. Its motivations for leaving the UK or its future intentions have no bearing on the basis for taxation. Exit taxes are justified under EU law in order to preserve the rights of member states to tax activities carried on within their borders. In the circumstances of these cases, EU law allows the UK to tax any chargeable gain which arose during the Appellants' period of UK residence – irrespective of their reasons for migration or their future intentions.

In his skeleton Mr Margolin referred to s4(1) of the Bill of Rights 1689 which forbids the levying of money for the use of the Crown without grant of Parliament. This submission is grounded on the basis that it was unlawful of the UK to impose an exit tax, and that charge was therefore a nullity. In essence Mr Margolin submits that it is impermissible for the courts and tribunals to retrospectively impose a tax charge on Redevco which was not lawful (as it was incompatible with Redevco’s EU law rights) when Redevco filed its tax return. This argument was not earnestly pursued in the course of oral argument, and it can be addressed very briefly. We have found that the exit tax is lawful – the incompatibility with EU law rights arises out of the failure of the payment provisions to allow for deferral of payment. There is therefore no question of the FTT (or this Tribunal) imposing a tax charge that has not been enacted by Parliament.

Redevco also challenges findings of fact made in Redevco FTT. Many of the challenges raised in its Notice of Appeal were not pursued at the hearing. Indeed, Mr Margolin stated in the course of his submissions that he did not challenge the FTT’s finding that Redevco would have migrated to the Netherlands irrespective of counsel’s advice. But for the avoidance of any doubt, we find (as regards the disputed factual findings that were not pursued in the hearing) that there was sufficient evidence available to the FTT to reach the findings that it made, and that the high threshold required by Edwards v Bairstow was not met. The only challenge pursued at the hearing related to the FTT’s finding that Redevco did not have a legitimate expectation that it would not have to pay exit taxes by reference to the advice received from leading counsel. This relates to the references in the note of consultation which Mr Margolin submits were potential amendments to legislation that might be adopted by Parliament in order to correct the breach of EU law, and not to any conforming construction. Even if Mr Margolin is right (and we are by no means convinced that he is), this is of no assistance to his case. The advice received by Redevco from their professional advisors cannot improve their remedy for any breach of EU law, or give rise to any justiciable legitimate expectation.

Mr Johnston raised a challenge to the jurisdiction of the FTT to apply a conforming interpretation to s59B TMA. We find that this submission is misconceived. We find that it is clear that s59B can be addressed by the FTT. First, s59B can clearly come within the scope of the FTT’s jurisdiction – take for example an appeal regarding penalties for late payment of tax. In such a case, the FTT would have to consider s59B in order to determine the due date for payment of the tax. But, in any event, in these appeals, the FTT must consider s59B – amongst a range of other statutory provisions – in order to determine whether a conforming interpretation exists and what its terms are. The Trustees' appeals are challenging the validity of HMRC’s closure notices. The Trustees’ appeals relate to the validity of a tax liability under s80 TCGA – and the FTT clearly has jurisdiction to consider those appeals. In so doing, and in considering a conforming interpretation, the national court is obliged to examine all relevant domestic laws (including, in this case, s59B) in order to assess how they may be applied so as to conform to enforceable EU law rights.

It follows from our discussion that we find that the FTT in Gallaher was wrong in its decision that a conforming interpretation was not available.

As we have found that a conforming interpretation of the UK law exists, we do not need to consider whether any provisions of UK law need to be disapplied.

The conforming interpretation adopted in Panayi FTT and Redevco FTT provided that there would be no liability to interest (otherwise than interest on late payments). We find that this aspect of the FTT’s decisions goes beyond what is required to give effect to the EU law rights of the Appellants – and in doing so the FTT made errors of law. We note that there are no statutory appeal rights to the FTT in respect of interest, and therefore the liability of the Appellants to interest was not before the FTT. In any event, the CJEU has held that the payment of interest does not interfere with the freedom of establishment, and therefore adopting a conforming interpretation that addresses interest goes beyond what is permissible. We find that the FTT in Panayi FTT and Redevco FTT made an error of law in making provision for interest not to be paid in the conforming interpretations that they adopted.

We therefore must set aside the decisions of the FTT, as regards the issues within the scope of this appeal, on the grounds that they made a material error of law. Redevco's liability to capital allowances under Part 2, Capital Allowances Act 2001 is not within the scope of this appeal. The FTT in Redevco FTT had found at [21(11)] and [64] that the balancing charges under Part 2, Capital Allowance Act 2001 assessed by the final closure notice of 2 August 2021 were unlawful. These findings were not appealed, and we do not set these findings aside.

Since we have set aside the FTT’s decisions (other than in relation to Part 2, Capital Allowances Act 2001), we must decide whether to remake them or remit them.

We have found that there exists a conforming interpretation of ss59B and 59D TMA which gives effect to the EU law rights of the Appellants. We therefore remake the decisions of the FTT in both Panayi FTT and Redevco FTT by finding that there exists a conforming interpretation by reading words into ss 59B and 59D TMA to provide that, at a time before the legislation was actually amended to comply with EU law, those provisions should be read in cases where the taxpayer’s right of freedom of establishment would otherwise be infringed, as including an option to defer payment of the exit tax in five equal annual instalments, with the first instalment payable on the normal due date for payment, and at yearly intervals thereafter.

The conforming interpretation given does not address the liability of the Appellants to interest. Interest payment is therefore governed by the usual statutory provisions. Whilst interest is strictly outside the scope of our decision, we consider that it may be of assistance to the parties to provide them with our view on how any liability to interest would arise in respect of the exit taxes. The liability to interest as regards the Trustees is governed by s86 TMA, and would run on the outstanding amount from the “relevant date” (Footnote: ⁶), which is 31 January next following the tax year in which the migration occurred. As regards Redevco, interest is governed by s87A TMA. This provides that interest runs from the date on which tax becomes “due and payable” (Footnote: ⁷) under s59D, which is normally the day following the expiry of nine months from the end of the relevant accounting period. We note that this is consistent with the liability to interest which arises when tax is deferred under s281 TCGA (see s281(5)).