Corporation tax - Controlled foreign companies (CFCs) - Inquiry - Disclosure of documents - Whether CFC legislation compatible with Community law - Special commissioners required ruling on compatibility to enable them to decide whether Revenue should issue closure notice-reference to European Court of Justice for preliminary ruling - Income and Corporation Taxes Act 1988, s. 747, 756 - Finance Act 1998, Sch. 18, para. 27, 30, 33 - art. 43, 49, 56, 234 EC.

The High Court held that the special commissioners had correctly decided that, in order enable them to deal with the taxpayer's application for a closure notice under the Finance Act 1998, Sch. 18, para. 33, a reference had to be made to the European Court of Justice (‘ECJ’) for a ruling on the compatibility of the controlled foreign companies legislation with art. 43, 49 and 56 EC.

Facts

The taxpayer company appealed against a letter received from the Inland Revenue requiring it to provide certain information about the acquisition by it of a controlling interest in a foreign company (‘VIL’) and applied for a closure notice under Sch. 18, para. 33 on the ground that there was no reason why the Revenue should not inform the taxpayer that they had completed their inquiry.

The power, under FA 1998, Sch. 18, para. 27, to serve a notice to produce documents and provide information was part of the administrative provisions introduced by FA 1998, Pt. IV relating to an enquiry into a company tax return under the scheme of self-assessment for companies. A notice under that paragraph could only be made pursuant to a notice of enquiry. That was a notice under para. 24, and was the mechanism by which an enquiry by the Inland Revenue into a company tax return was initiated.

A notice of enquiry under para. 24 was sent by the Revenue to the taxpayer's company secretary dated 15 November 2002 and headed ‘Notice of intention to enquire into company tax return under para. 24(1), Sch. 18, Finance Act 1998’. It stated that the inspector intended to inquire into the taxpayer's company tax return for the accounting period ended 31 March 2001. On the same day, the letter appealed against was sent which referred to the enquiry notice sent to the company secretary and detailed the enquiries to be raised.

The taxpayer appealed to the special commissioners on grounds that since the imposition of UK tax in respect of profits of subsidiaries in other member states of the EU contravened art. 43 and 56 EC, there could be no valid requirement to produce documents or provide information in relation to any part of the enquiry that related to compliance with the CFC legislation in relation to VIL. The Revenue contended that the letter of 15 November was not a notice under para. 27 but was an informal request for information.

The taxpayer argued that, even if it was decided that the letter of 15 November 2002 was not a notice to produce, a reference should be made to the ECJ regarding the compatibility of the CFC legislation with Community law on the basis that the existence of an enquiry into the taxpayer's tax return was itself unreasonable if the legislation underlying it was incompatible with Community law and that objection was valid in respect of both formal and informal administrative action.

The special commissioners decided that, in order to determine whether the UK CFC legislation was compatible with Community law, they had to refer to the ECJ for a preliminary ruling ((2005) Sp C 479).

The Revenue appealed contending that the commissioners did not have power to make a reference since a decision on the substantive issue was not needed to enable the commissioners to decide the application for a closure notice. They further submitted that, because some of the underlying facts described in the reference had to be assumptions which might turn out to be wrong, and because further facts might emerge in the future, the commissioners had exercised their power or discretion to make a reference in a way which was not just questionable, but positively wrong.

Issue

Whether the special commissioners had power to make a reference to the ECJ; and, if they did, whether they ought to exercise it.

Decision

Park J (dismissing the appeal) said that the special commissioners had a discretionary power to whether to make a reference to the ECJ and it was entirely appropriate for them to take the view that they were unable to decide whether or not the Revenue had reasonable grounds for not issuing a closure notice until they had established whether or not the CFC provisions were compatible with Community law.

It was important not to be led astray by the special feature of this case that the question of the validity or otherwise of the CFC provisions could not be answered without a reference to the ECJ. If the reasonableness of the grounds for not issuing a closure notice depended on a question of law which the commissioners could decide, the right course was for them to decide it: or at the very least it has to be open to them to decide it. The fact that the point of law in this case could not be decided by the commissioners but had to be referred to the ECJ could not make any difference. Conceptually, the reference was the mechanism by which the commissioners cold decide the point of law.

Moreover, there was nothing unreasonable, unworkable or disruptive in the result of the special commissioners’ decision. It was true that, if the Revenue served an information notice under Sch. 18, para. 27, the taxpayer would almost certainly appeal under para. 28 and would advance in support of the appeal its argument that the CFC provisions could not apply by reason of being incompatible with the EC Treaty. However, that would have been the position if the Revenue had served a notice before the commissioners made the reference. In any event, the Revenue still had the power under para, 30 to amend the taxpayer's self assessment return which would remain exercisable unless and until the commissioners acceded to the taxpayer's adjourned para. 33 application and directed the Revenue to give a closure notice. The termination of an inquiry had the effect of starting a 60 day period running, after which the Revenue could not make an amendment to the taxpayer's self assessment return. That period was not running now and the reference did not cause it to commence.

Furthermore, the commissioners had sought advice from the ECJ and were advised that it would be sufficient if they were able to, if only as working hypothesis, to define the factual and legal context of the question they wished to refer. Consequently, the commissioners had taken care to distinguish between facts which they considered to be established and facts which they stated as hypotheses. In all the circumstances, their hypotheses were realistic and it was unlikely that the necessity for some assumptions to be made would undermine the value of any answers which the ECJ might give or that a second reference might be required. The latter possibility existed but the commissioners were aware of it and judged that they should nevertheless make the reference. The court could not possibly say that in doing so they were wrong in law.

The commissioners were aware that in the case of Cadbury Schweppes plc v IR Commrs (2004) Sp C 415 (Case C-196/04), a reference had already been made of the question whether the CFC provisions were compatible with Community law. In the event they decided that the present case involved issues of Community law which included but went beyond those already referred. Therefore they decided to make the reference immediately, before the revenue had the opportunity to appeal, to improve the chances of the ECJ being aware of the reference in this case before it dealt with the Cadbury Schweppes appeal.

Accordingly, in the absence of strong evidence that it had been exercised wrongfully, the court would not interfere with the exercise of the commissioners’ discretion.

Chancery Division, Judgment delivered 17 November 2005