Imperial Chemical Industries v. Colmer

The claimant sought consortium tax relief and the key issue was whether Coopers Animal Health (Holdings) Ltd. qualified as a "holding company" within the meaning of section 258(5)(b) of the Income and Corporation Taxes Act 1970 (now s.413(3)(b) ITA 1998), read with the residence limitation in section 258(7). The House held that the opening words of section 258(7) applied to the words "company" and "companies" in section 258(5)(b) so that the subsidiaries counted for the purpose of the "wholly or mainly" test had to be resident in the United Kingdom.

The respondents argued that Community law (articles 52 and 58 of the Treaty) required a different construction or disapplication of the statute; the matter was referred to the Court of Justice which held that article 52 precluded a national rule that required holding companies to hold shares only in subsidiaries resident in the member state where the holding company was established, but the Court also held that legislation which distinguished subsidiaries in non-member countries lies outside Community law. Applying the Court of Justice's decision together with section 2(1) and (4) of the European Communities Act 1972, the House concluded that Community law did not prevent the United Kingdom construction applying in the circumstances of this case and that Holdings did not qualify as a holding company. The appeal was allowed.

Background and nature of claim: The respondents (Imperial Chemical Industries) claimed consortium tax relief. The critical factual point was that Holdings, a company in which the respondent held 49% of the shares, had 23 wholly owned trading subsidiaries, 19 of which were resident outside the United Kingdom and six of which were resident in other member states of the European Union.

Procedural history: The issue had been considered at first instance by the Special Commissioner (Mr D. C. Potter Q.C.), with a contrary view taken by Millett J. and the Court of Appeal. The House of Lords had previously considered the matter (speech delivered 14 March 1996). Because the respondents raised for the first time a point under Community law in this House, the questions were referred to the Court of Justice of the European Communities on 24 July 1996. The Court of Justice delivered its decision on 16 July 1998. The House thereafter re-determined the appeal on 18 November 1999.

Issues framed by the court:

• Whether the words "company" and "companies" in section 258(5)(b) must be read as limited to bodies corporate resident in the United Kingdom by virtue of the opening words of section 258(7).
• Whether the construction adopted by national courts was incompatible with the freedom of establishment under articles 52 and 58 of the Treaty and thus required reinterpretation or disapplication under section 2 of the European Communities Act 1972.
• Whether the doctrine of severance could be used to preserve parts of section 258 while excising discriminatory elements.

Reasoning and disposition: The House rejected the respondents' contention that section 258 was ambiguous and should be reinterpreted to include non-United Kingdom subsidiaries established in other member states. The court found the language indivisible and not fairly open to the divergent meanings necessary for that interpretative approach. The Court of Justice's ruling was accepted as binding on points within Community law: it precluded a domestic rule that discriminated against subsidiaries established in other member states. But the Court of Justice also made clear that the difference of treatment which depended on whether subsidiaries were resident in non-member countries lay outside Community law. Applying section 2(1) and (4) of the European Communities Act 1972, the House recognised that directly enforceable Community rights prevail where applicable, but that did not affect situations outside Community law. Severance was not available to read into the statute the distinction the respondents sought. On the facts, Holdings failed the "wholly or mainly" test because a majority of its subsidiaries were not resident in the United Kingdom; consortium relief was therefore not available and the appeal was allowed.

Appeal allowed. The House held that, properly construed, the words "company" and "companies" in section 258(5)(b) must be read subject to the residence limitation in section 258(7) so that only United Kingdom resident subsidiaries count for the "wholly or mainly" test. The Court of Justice's decision did not require a different domestic construction or disapplication in the facts of this case; severance could not achieve the result sought by the respondents. Consequently Holdings did not qualify as a holding company and the claim for consortium relief failed.

First considered by the Special Commissioner (Mr D. C. Potter Q.C.); Millett J. reached a contrary view at first instance and the Court of Appeal agreed with Millett J. The House of Lords considered the matter earlier (speech of 14 March 1996); because a Community law point was raised the questions were referred to the Court of Justice on 24 July 1996, which gave judgment on 16 July 1998. The House of Lords re-determined the appeal on 18 November 1999 ([1999] UKHL 48).