The Court of Appeal upheld a decision of the High Court ([2006] BTC 406) 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 within art. 43, 49 and 56 EC.

Facts

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 letter required the taxpayer to provide certain information about the acquisition by it of a controlling interest in a foreign company (‘VIL’). 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.

Some two years after the enquiry was opened the taxpayer 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 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 within 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.

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.

The High Court dismissed the appeal ([2006] BTC 406) and the Revenue appealed to the Court of Appeal contending that they had reasonable grounds for not issuing a closure notice based upon their objectively reasonable view that the CFC provisions were valid and enforceable against the taxpayer.

Issue

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

Decision

Arden LJ (Mummery and Moore-Bick LJJ agreeing) (dismissing the appeal) said that there were no words of limitation in para. 33 which would serve to restrict the commissioners’ role to that of scrutinising the factual investigation being performed by the Revenue. There was nothing in the wording of para. 33 to suggest that it did not confer jurisdiction to decide incidental points of law that needed to be resolved in order to decide whether there were reasonable grounds for not giving a closure notice. It was difficult to see why parliament should wish to limit the protection given to taxpayers by para. 33 to situations where the Revenue was pursuing enquiries into the facts which it could be shown were unfounded as a matter of fact, and not wish to extend the same protection to cases where the Revenue were proceeding on the basis of a particular view of the law, to which the taxpayer raised a serious challenge which the commissioners could conveniently deal with at that stage. There would need to be clear language to indicate that Parliament intended the court to proceed on the basis that it was sufficient if the Revenue held a view of the law that was reasonable. It would be constitutionally anomalous if the commissioners could not come to their own decision on a point of law and had to abide by the view of the Revenue as part of the executive, even if the Revenue had to establish that the view was a reasonable one for them to hold.

Accordingly, on its true interpretation, para. 33 conferred jurisdiction on the commissioners to decide incidental questions of law arising on an application under that paragraph and conferred the power to make the reference in the present case.

Court of Appeal (Civil Division). Judgment delivered
28 July 2006.