Volkerrail Plant Ltd v Revenue and Customs: Court of Appeal Upholds s.403D(1)(c) ICTA Restrictions on Group Relief

Introduction

The case of Volkerrail Plant Ltd & Ors v Revenue and Customs ([2023] EWCA Civ 210) explores the compatibility of UK tax legislation with the European Union's principles of freedom of establishment as outlined in Articles 49 and 54 of the Treaty on the Functioning of the European Union (TFEU). The central issue revolves around whether section 403D(1)(c) of the Income and Corporation Taxes Act 1988 (ICTA), which imposes restrictions on the surrender of trading losses within corporate groups, aligns with EU law. The appellants, Volkerrail Plant Ltd and associated companies, challenge HMRC's denial of group relief for losses surrendered by their UK permanent establishment. This commentary delves into the background, judicial reasoning, precedents, and the broader legal implications of the Court of Appeal's decision.

Summary of the Judgment

The England and Wales Court of Appeal examined whether section 403D(1)(c) of ICTA infringed upon the EU's freedom of establishment by limiting the ability of non-resident companies to surrender losses within a corporate group. The Court considered prior judgments, notably the Philips Electronics UK Limited case, which had previously deemed similar UK provisions incompatible with EU law, necessitating their disapplication. However, subsequent cases like NN A/S v Skatteministeriet introduced nuanced interpretations that allowed certain restrictions if justified. In this case, the Court analyzed whether s.403D(1)(c) could be justified under the objectives of preventing double deductions of losses and preserving a balanced allocation of taxing powers among Member States. Ultimately, the Court concluded that the provision was proportionate and justified, thereby dismissing Volkerrail's appeal and permitting HMRC's stance to stand.

Analysis

Precedents Cited

The judgment extensively references several key EU Court of Justice (CJEU) cases that have shaped the interpretation of freedom of establishment in the context of corporate taxation:

Philips Electronics UK Limited (Case C-18/11 HMRC v Philips): Held that s.403D(1)(c) imposed unjustifiable restrictions on freedom of establishment, leading to its disapplication.
NN A/S v Skatteministeriet (Case C-28/17 NN): Offered a more flexible approach, allowing certain restrictions if they served objectives like preventing double deductions.
Marks & Spencer plc v Halsey (Case C-446/03 M&S): Established that restrictions must pursue legitimate objectives and be proportionate.
Bevola & Jens W Trock ApS v Skatteministeriet (Case C-650/16 Bevola): Confirmed that the prevention of double deductions can justify certain tax restrictions.
Lidl Belgium GmbH & Co KG v Finanzamt Heilbronn (Case C-414/06 Lidl): Reinforced the need to prevent double deductions as a valid justification.
Re K (Case C-322/11): Highlighted the importance of national legislation reflecting consistent objectives.
AURES Holdings a.s. v Odvolací Finanční Ředitelství (Case C-405/18 AURES): Distinguished between different factual circumstances, emphasizing consistency with prior rulings.

These precedents collectively underscore the CJEU's stance on balancing national tax policies with EU freedoms, particularly emphasizing consistency, justification, and proportionality in restricting corporate tax reliefs.

Legal Reasoning

The Court's reasoning hinged on several pivotal points:

Difference in Treatment: The Court affirmed that s.403D(1)(c) creates a difference in treatment between non-resident companies with UK permanent establishments and those with UK resident subsidiaries. This difference aligns with the findings in Philips and is further substantiated by NN.
Objective Comparability: The Court examined whether the differing treatments involved objectively comparable situations, concluding that they do. This comparability is essential to assess if the restriction unjustly hampers EU freedoms.
Justification: The primary justification for s.403D(1)(c) lies in preventing the double deduction of losses and maintaining a balanced allocation of taxing powers among Member States. The Court noted that these objectives are legitimate and consistent with EU law, as reinforced by cases like Bevola and M&S.
Proportionality: The provision was scrutinized for proportionality, ensuring that it does not exceed what is necessary to achieve its objectives. The Court concluded that s.403D(1)(c) is proportionate, especially given the mechanisms like recapture that mitigate potential negative impacts.
Consistency with EU Case Law: The Court emphasized the importance of adhering to established CJEU precedents, noting that NN represents an evolution rather than a departure from previous rulings like Philips.

The interplay between national tax provisions and EU freedoms was meticulously dissected, with the Court balancing the UK's legislative intent against the overarching principles of the EU treaty.

Impact

The Court of Appeal's decision reinforces the legitimacy of certain national tax restrictions under EU law, provided they are justified and proportionate. Specifically:

Affirmation of National Tax Sovereignty: The ruling upholds the UK's ability to design tax provisions like s.403D(1)(c) that address specific fiscal concerns, such as preventing double deductions.
Clarification on Justifications: By endorsing the justifications related to loss deductions and tax allocation, the decision provides clearer guidelines for future cases involving corporate tax reliefs.
Consistency with EU Law: This judgment aligns UK tax law with evolving EU jurisprudence, particularly following the NN case, thereby reducing ambiguity in cross-border tax matters.
Potential for Legislative Refinement: While the provision was upheld, the decision indicates areas where legislation might be further refined to enhance clarity and compliance with EU principles.

Overall, the judgment serves as a pivotal reference for both national tax authorities and corporations operating across EU Member States, emphasizing the need for balanced and justified tax measures.

Complex Concepts Simplified

Understanding the judgment requires familiarity with several legal and tax concepts. Here are simplified explanations:

Group Relief: A tax mechanism allowing one company in a corporate group to offset its taxable profits with losses incurred by another group member.
Freedom of Establishment: An EU principle allowing companies and individuals to set up and manage operations in any Member State under the same conditions as local entities.
Permanent Establishment: A fixed place of business through which the business of an enterprise is wholly or partly carried out, relevant for determining tax liabilities.
Double Deduction: The situation where the same loss is used to reduce taxable profits in two different tax jurisdictions, potentially leading to tax avoidance.
Proportionality: A principle ensuring that any restriction imposed by law must be necessary and not excessive in relation to the desired objective.
Conforming Interpretation: Adjusting the interpretation of a legal provision to align it with higher law or new precedents without changing its wording.

These concepts are foundational in assessing whether national tax laws align with broader EU freedoms and legal standards.

Conclusion

The Court of Appeal's decision in Volkerrail Plant Ltd v Revenue and Customs marks a significant affirmation of the UK's legislative framework concerning group relief for corporate losses. By upholding section 403D(1)(c) of ICTA, the Court reinforced the principle that national tax measures aiming to prevent double deductions and balance taxing powers are compatible with EU freedom of establishment, provided they are justified and proportionate. This judgment not only clarifies the application of existing tax provisions but also aligns UK practices with evolving EU jurisprudence, particularly in light of the NN judgment. Corporations operating within the UK and across EU borders must now navigate these clarified boundaries, ensuring their tax strategies comply with both national and EU legal standards. Moreover, the decision underscores the delicate balance between national tax sovereignty and adherence to supranational legal principles, setting a precedent for future tax-related litigations.