Court of Appeal judgment on cross border consortium and group relief

VolkerRail Plant Ltd & Ors v HMRC [2023] EWCA Civ 210

VolkerRail Plant Ltd & Ors v HMRC

The Court of Appeal (CA) handed down judgment in VolkerRail Plant Ltd & Ors v HMRC [2023] EWCA Civ 210 (VolkerRail) on 1 March 2023. VolkerRail’s appeal was dismissed. The CA confirmed, in contrast to the decision in Case C-18/11 HMRC v Philips Electronics UK Limited [2013] 1 CMLR 6 (Philips), that s403D(1)(c) of the Income and Corporation Taxes Act 1988 (ICTA), which was in force in the periods in question, was compatible with the freedom of establishment. S403D(1)(c) denied group relief where the relevant loss, or an amount brought into account in computing it, was “deductible from or otherwise allowable against” non-UK profits of any person. The case is also interesting for the approach it takes to determining issues of EU law post Brexit.

In VolkerRail, losses were incurred by a UK permanent establishment (UK PE) of a company resident in the Netherlands. The UK appellant entities sought to use those losses through consortium and group relief. Such claims were denied by HMRC on the basis the losses were “deductible from or otherwise allowable against non-UK profits”. The UK PE was part of a ‘fiscal unity’ in the Netherlands and its losses were set off against profits in that fiscal unity. A recapture mechanism operated where overseas profits were generated in the same jurisdiction as the losses; some losses were recaptured by the UK PE.

No reference was made to the Court of Justice of the European Union (CJEU) by the First-tier Tribunal who considered the matter acte clair in the taxpayers’ favour (i.e. the finding was clear). By the time the case reached the CA, it was no longer possible to make a reference to the CJEU (due to Brexit) and so the CA (and Upper Tribunal) considered whether the CJEU had departed from its earlier decision in Philips, without the benefit of EU input.

The CA considered whether s403D(1)(c) was compatible with the freedom of establishment (Articles 49 and 54 of the Treaty on the Functioning of the European Union), and if not, whether s403D(1)(c) could be subject to a conforming interpretation or required disapplication.

The issues in VolkerRail are closely aligned with those determined in Philips. If Philips was followed, there would be a breach of EU law requiring disapplication of the relevant legislation. Following Philips, the UK had amended the legislation in respect of its application within the EU/EEA with effect from 1 April 2013 (although this is not in force post-Brexit).

Despite Philips, HMRC submitted that s403D(1)(c) was compatible with the principle of freedom of establishment as the CJEU had departed from Philips in Case C-28/17 NN A/S v Skatteministeriet EU:C:2018:526 (NN). This required the CA to consider the CJEU’s approach to departing from earlier authority.

In NN, broadly, the CJEU held that the freedom of establishment did not prevent, in principle, legislation with the aim of preventing double deduction of losses in two jurisdictions when combined with a convention preventing double taxation. Such an aim could provide an independent justification for any restriction.

The CA outlined that whilst the CJEU is not subject to the doctrine of precedent, it aims to be consistent and tends to adhere to earlier authority. The CA appears to consider that Philips is no longer good law and NN departs from Philips regarding the issue of justification. Further, the CA states that “NN was a development of a line of cases starting with M&S. It is Philips that stands out as taking a different approach”. On that basis NN was followed and s403(D)(1)(c) compatible with EU law. The CA’s discussion of the CJEU’s approach is interesting due to Brexit and the need for the CA to determine issues of EU law at a point in time where the reference mechanism is no longer available.

HMRC raised the alternative argument that the CA should exercise its powers under s6 European Union (Withdrawal) Act 2018 to depart from EU law. The CA did not consider this point, but HMRC raising this argument may be of interest to taxpayers relying on EU law for continuing cases.