Factual and Procedural Background
The judicial review proceedings concern the lawfulness in public law of charging notices to diverted profits tax ("DPT") issued by HM Revenue and Customs ("HMRC") to three UK-resident companies within the Thomson Reuters group ("TR UK") on 20 August 2021. The total amount charged exceeded £167 million, with the largest charge levied on the first claimant and appellant, Refinitiv Limited, amounting to approximately £167.4 million. The notices related to the accounting period from 1 January to 31 December 2018. The lawfulness of these notices depends on whether they were inconsistent with the terms of an advance pricing agreement ("APA") made between TR UK and HMRC in January 2013, covering the period 1 October 2008 to 31 December 2014.
The APA, a statutory contract under Part 5 of the Taxation (International and Other Provisions) Act 2010 ("TIOPA"), established a transfer pricing methodology for intra-group transactions. The transfer pricing legislation in Part 4 of TIOPA applies to corporation tax and income tax, requiring profits to be calculated on an arm's length basis where certain conditions are met.
Between 2008 and 2018, TR UK supplied intellectual property ("IP") related services to a Swiss group company holding the main IP assets. HMRC contended that TR UK was undercompensated for these services under an arm's length standard, resulting in lower UK taxable profits. The APA used a cost-plus methodology to determine compensation, whereas HMRC later sought to apply a profit-split method for the post-APA period starting in 2015.
The APA terminated on 31 December 2014 and was not renewed. Subsequently, HMRC issued DPT notices for accounting periods from 2015 to 2018, with TR UK only challenging the 2018 notices by judicial review. The claimants sought to quash the 2018 notices on grounds that they conflicted with the APA and were unlawful in public law.
Permission to proceed with the judicial review was granted by Foster J in June 2022. The claim was transferred to the Upper Tribunal, which dismissed the claim in its decision released in October 2023. The claimants appealed with permission granted by the Upper Tribunal in November 2023.
Legal Issues Presented
- Whether the 2018 accounting period is a "chargeable period to which an advance pricing agreement relates" within the meaning of section 220 of TIOPA.
- Whether the issue of the DPT charging notices for 2018 was inconsistent with the terms of the APA and thus unlawful in public law.
- The proper construction of the APA, particularly its temporal scope and effect beyond its stated term.
- The correct interpretation and application of section 220 of TIOPA regarding the effect of an APA on chargeable periods.
Arguments of the Parties
Appellants' Arguments
- The APA's terms bind HMRC to the agreed transfer pricing methodology, including for transactions that relate to the 2018 accounting period, as the services provided during 2008-2014 contributed to profits realized in 2018.
- The phrase "chargeable period to which an APA relates" in section 220 should be interpreted broadly to include periods connected to the APA's covered transactions, not limited strictly to the APA's stated term.
- The DPT notices issued for 2018 were fundamentally inconsistent with the binding contractual provisions of the APA and section 220 of TIOPA, rendering them unlawful.
- The power to issue charging notices under section 95 of the Finance Act 2015 must be exercised in accordance with public law principles, and HMRC's actions constituted an abuse of power, irrationality, and unfairness.
- HMRC's attempt to apply a profit-split method in 2018, replacing the cost-plus method agreed in the APA, unlawfully undermined the statutory regime for APAs.
Respondent's Arguments (HMRC)
- The APA only relates to the accounting periods expressly specified within its term, namely from 1 October 2008 to 31 December 2014, and does not extend to the 2018 accounting period.
- The phrase "chargeable period to which an APA relates" in section 220 of TIOPA should be construed narrowly and contextually, respecting the statutory scheme that gives effect to agreements only for specified periods.
- The temporal expressions in the APA ("duration", "currency", "years covered") all refer to the five-year term and the roll back period, and there is no language supporting an indefinite extension of the APA's effect.
- HMRC's change in transfer pricing methodology for post-APA periods, including 2018, was lawful and consistent with the statutory framework.
- The reference to the services provided during 2008-2014 being relevant to 2018 profits does not mean the APA extends to 2018; the APA had no effect on the 2018 accounting period.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| R (Glencore Energy UK Ltd) v Revenue and Customs Commissioners [2017] EWCA Civ 1716 |
Description and purpose of Diverted Profits Tax (DPT) |
Used to explain the nature of DPT as a tax to counter aggressive profit diversion and its assessment process. |
| In re Preston [1985] 1 AC 835 |
Principles of public law abuse of power |
Referenced in appellants' argument about abuse of power in issuing DPT notices inconsistent with the APA. |
| R v IRC, ex parte Unilever plc [1996] STC 681 |
Public law principles governing exercise of statutory powers |
Used to support the appellants' contention that HMRC's actions were unfair and irrational. |
| R (Veolia ES Nottinghamshire Ltd) v Nottinghamshire County Council [2010] EWCA Civ 1214 |
Interpretation of "relating to" in statutory context |
The court considered but rejected the appellant's reliance on this case due to its different statutory context. |
| Caffoor v Income Tax Commissioner [1961] AC 584 (PC) |
Principle that res judicata and issue estoppel do not apply year to year in annual taxes |
Applied to affirm that corporation tax assessments can vary year by year without estoppel. |
| Al Fayed v Advocate General for Scotland [2004] STC 1703 |
Limits on HMRC's powers to make binding forward tax agreements |
Referenced to reject the notion that HMRC could be bound indefinitely by the APA beyond its term. |
| Gresham Life Assurance Society v Attorney-General [1916] 1 Ch 228 |
Legal principle on invalidity of forward tax agreements |
Supported the limitation on HMRC's powers to enter binding agreements beyond specified periods. |
| Littlewoods Retail and Others v Revenue and Customs Commissioners [2014] EWHC 868 (Ch) |
Detailed discussion on annual tax assessments and estoppel |
Referred to for elaboration of the principle that tax disputes are limited to the year in question. |
Court's Reasoning and Analysis
The court's analysis centered on the statutory interpretation of section 220(1) of TIOPA and the construction of the APA. The key question was whether the 2018 accounting period is a chargeable period to which the APA "relates". The court found that the APA explicitly covers accounting periods from 1 October 2008 to 31 December 2014, including a roll back period, but does not extend beyond this term.
The court rejected the appellants' argument that the APA should be construed broadly to include periods connected to the APA's covered transactions, such as 2018, simply because the 2018 profits were referable to services provided during 2008-2014. The court emphasized that the APA's temporal scope is defined by its terms and the statutory framework, which contemplates annual taxation periods treated separately.
The court considered the language of clause 3 of the APA, concluding that temporal expressions such as "duration", "currency", and "years covered" all refer to the APA's five-year term. There was no indication that the APA's agreed transfer pricing methodology was intended to bind HMRC or TR UK beyond the APA's term.
Statutory and case law principles were applied, including the well-established rule that tax assessments and disputes are confined to the relevant tax year and that doctrines like estoppel do not apply across different accounting periods. The court also noted that HMRC's powers do not extend to making binding forward tax agreements beyond the APA's term.
The court further distinguished the present case from the precedent cited by the appellants (Veolia), finding the statutory contexts materially different and the broader interpretation of "relating to" inapplicable here.
Accordingly, the court concluded that the APA did not relate to the 2018 accounting period and thus did not prevent HMRC from issuing the DPT notices on a profit-split basis for that period. The notices were lawful in public law.
Holding and Implications
The court DISMISSED the appeal. It held that the 2018 accounting period falls outside the temporal limits and effective scope of the APA, which only related to accounting periods up to 31 December 2014. Consequently, the DPT charging notices issued by HMRC for 2018 were lawful and not inconsistent with the APA.
The direct effect of this decision is that the appellants' challenge to the 2018 DPT notices fails, and the notices remain valid. The court did not establish any new precedent beyond confirming the proper construction of APAs in the context of annual taxation periods and the limits on their temporal effect. The ruling underscores that APAs bind parties only for the specified periods and do not constrain HMRC's approach to transfer pricing or DPT assessments in subsequent years absent renewal or further agreement.