Summary of Judgment — Court of Appeal (Civil Division)

Factual and Procedural Background

This judgment concerns two consolidated appeals from the Upper Tribunal (Tax and Chancery Chamber) ("the UT") arising from First-tier Tribunal (Tax Chamber) ("the F-tT") determinations. The two appeals were brought by (1) trustees of family settlements ("the Trustees") (appeal referred to as "Panayi") and (2) a United Kingdom incorporated company ("Company A") (appeal referred to as "Redevco"). The Respondent is the national tax authority ("the Respondent").

Both appeals arise from historical transactions under tax provisions in force at the time (notably sections 59B and 59D of the Taxes Management Act 1970 and related provisions in the Taxation of Chargeable Gains Act 1992, the Income and Corporation Taxes Act 1988 and the Finance Act 1996). In each case the taxpayer ceased to be resident in the UK and domestic law deemed disposal and re-acquisition events, producing an exit charge. It was common ground that those provisions, as enacted, interfered with freedom of establishment under the Treaty on the Functioning of the European Union ("Treaty Rights").

The F-tT adopted a "conforming interpretation" of the relevant domestic payment provisions to permit deferral of the exit tax in five annual instalments (and, in one determination, referred to interest). The UT held that a conforming interpretation was available but concluded the F-tT had erred in dealing with interest and therefore set aside and re-made the determinations, adopting a conforming interpretation that did not address interest. The Appellants challenged the UT's approach; Redevco also appealed on the ground that the UT lacked jurisdiction to set aside and re-make the F-tT determinations as to interest.

Legal Issues Presented

1. Whether the F-tT's conforming interpretation of the relevant domestic payment provisions (to permit payment of exit tax in five annual instalments) was lawful and available under domestic law as construed to give effect to Treaty Rights.
2. Whether the UT erred in law in its treatment of interest (including whether the F-tT had jurisdiction to decide on interest and whether the UT had power to set aside and re-make determinations on that point).
3. Whether the conforming interpretation adopted by the tribunals offended principles limiting conforming interpretation (including contra legem, legal certainty, legitimate expectation and impermissible judicial legislation).
4. Whether EU law requires the taxpayer to have a choice (a) at the time of migration to pay immediately or by instalments, or (b) to defer payment until realisation of the assets.
5. Whether partial disapplication (holding the incompatible provision in abeyance) was an available or preferable remedy.

Arguments of the Parties

Appellants' Arguments

• The conforming interpretation adopted by the UT unlawfully inserts a novel statutory scheme, involves impermissible policy choices for the court, and offends legal certainty and legitimate expectation.
• The conforming interpretation fails to vindicate the Trustees' EU rights because it deprives them of a real choice at the time of migration to pay immediately or by instalments; alternatively, payment should be deferred until realisation of assets.
• The UT erred in substituting its view on interest and thereby exceeded jurisdiction/usurped issues not properly before the F-tT.

Respondent's Arguments

• The breach of EU law is the exit charge combined with the absence of a deferred-payment mechanism; a conforming interpretation providing for staged payments is available and consistent with authorities.
• Conforming interpretation is necessarily retrospective in effect and does not offend legal certainty or legitimate expectation in the manner asserted by the Appellants.
• The courts' duty under section 2 of the European Communities Act 1972 (and the analogous approach under section 3 of the Human Rights Act 1998 as assumed) permits, in appropriate cases, the insertion of words to make domestic law conform with EU law so long as the construction "goes with the grain" or "thrust" of the legislation and does no more than necessary to remedy the incompatibility.

Table of Precedents Cited

Court's Reasoning and Analysis

The court (Judge Laing, with whom Judge Miles and Judge Asplin agreed) began by identifying the relevant domestic provisions and the UT's and F-tT's approaches. It treated the central incompatibility as the exit charge together with the absence of any deferred-payment mechanism. The court applied the established principles governing conforming interpretation (as developed in the authorities cited above):

• Where domestic legislation is open to an interpretation that would give effect to directly enforceable EU rights, national courts must adopt such a conforming interpretation "so far as possible" and consistent with domestic interpretative limits (Marleasing, Pickstone, Litster, Vodafone 2).
• A conforming interpretation is permissible only if it "goes with the grain" or "thrust" of the legislation and does no more than is necessary to remedy the incompatibility (Vodafone 2; Lock).
• The declaratory nature of judicial decisions means that conforming interpretations operate retrospectively to declare what the law always was (Prudential; FII Group).
• Conforming interpretation may entail implying words or limited provisions but must not amount to impermissible judicial legislation or contravene clear statutory language (Ghaidan; Re S; DansK-related authorities).

Applying those principles, the court concluded: (a) the UT and the F-tT correctly identified the relevant breach (exit charge plus absence of deferred-payment option); (b) a conforming interpretation that permitted payment of the exit tax in five equal annual instalments was available and within the grain of the legislation; (c) objections based on legal certainty and legitimate expectation do not defeat a conforming interpretation because its retrospective effect is inherent in judicial decision-making; (d) the tribunals did not exceed permissible interpretative boundaries or effect judicial legislation because their construction was the minimal alteration necessary to protect Treaty Rights and was consistent with the thrust of the statutory charging provisions (including the coercive context of the ECA while in force); and (e) the UT was wrong to conclude that the F-tT had provided for an absence of liability to interest as part of its conforming interpretation — properly understood, the F-tT did not determine interest and had no statutory jurisdiction to do so, so the UT lacked power to set aside and re-make that aspect.

Holding and Implications

Holding: The court would dismiss the appeals except to the limited extent concerning the UT's conclusions about interest. The conforming interpretation adopted by the F-tT in Panayi is lawful and stands. The conforming interpretation in Redevco (as made by the F-tT) is restored to the extent that the UT had substituted its own determination about interest; the UT erred in purporting to set aside and re-make the F-tT determinations on interest.

Implications:

• Direct effect between the parties: the conforming interpretation permitting payment of exit tax in five equal annual instalments (with the first instalment payable on the usual due date and yearly thereafter) is an available remedy in these cases; trustees and Company A are to be treated in law as having had the right to defer payment under that interpretation.
• The court emphasises that conforming interpretation is necessarily retrospective in effect and that retrospective effect does not, per se, render it unlawful; objections grounded in legitimate expectation or legal certainty are insufficient to invalidate a conforming interpretation that is otherwise permissible.
• The UT exceeded its powers to the extent it set aside and re-made F-tT determinations on interest; interest remains outside the F-tT's statutory jurisdiction in this context and requires separate procedural treatment.
• No wider new precedent beyond application of established conforming-interpretation principles is created; the decision applies established authorities to the facts and confirms the limits and operation of conforming interpretation in exit-tax cases under the law as it was then in force.

Decision delivered by Judge Laing; Judges Miles and Asplin agreed.