Imperial Chemical Industries Plc v Colmer (No 2)

A domestic tax provision must be disapplied to the extent necessary to protect directly enforceable Community rights. It remains applicable to situations outside Community law, including holdings in subsidiaries established in non-member countries.

The duty to construe domestic legislation consistently with Community law does not permit the court to adopt a meaning which the statutory language cannot bear. Nor may an indivisible residence criterion be severed so as to create a distinction between subsidiaries established inside and outside the Community. A statutory definition may therefore continue to govern a case outside Community law, despite producing anomalies in other cases.

The taxpayer claimed consortium tax relief through a company in which it held 49 per cent of the shares. That company had 23 wholly owned trading subsidiaries. Only four were resident in the United Kingdom, six were resident in other Community member states, and the remainder were established outside the Community.

The Special Commissioner held that the company was not a holding company within Section 258(5)(b) of the Income and Corporation Taxes Act 1970. Millett J and the Court of Appeal reached the contrary conclusion. On the appeal's first consideration, the House held that Section 258(7) restricted the relevant references to companies resident in the United Kingdom. It then referred questions concerning freedom of establishment to the Court of Justice.

After the Court of Justice ruled that Community law protected subsidiaries established in member states but did not govern subsidiaries in non-member countries, the central issue was whether the domestic definition should nevertheless be construed differently, severed or disapplied in the taxpayer's case.

1. Appeal allowed unanimously. Lord Nolan delivered the leading speech. Lord Nicholls of Birkenhead, Lord Keith of Kinkel and Lord Mustill agreed with his reasons. The company did not qualify as a holding company, and the taxpayer's claim for consortium tax relief therefore failed.

2. Per Lord Nolan, the Court of Justice had established that Article 52 of the European Community Treaty precluded a member state from making the relief dependent on a holding company mainly holding shares in subsidiaries established in that state where Community freedom of establishment was engaged. The different treatment of holdings in subsidiaries established in non-member countries nevertheless fell outside Community law. Community law therefore neither required conforming interpretation nor authorised disapplication in the circumstances of this case.

3. Per Lord Nolan, Section 258 was difficult to construe but was not ambiguous in the relevant sense. The competing constructions were mutually exclusive meanings rather than meanings which the words could bear simultaneously. The courts below had adopted a construction which ignored residence altogether. That construction could not be described as conforming to Article 52 because it drew no distinction between subsidiaries established within and outside the Community.

4. Per Lord Nolan, the statutory language could not be construed as including subsidiaries established in other member states while excluding subsidiaries established outside the Community. The residence provisions were indivisible, so the doctrine of severance could not produce that result.

5. Applying Reg v Secretary of State for Transport, Ex parte Factortame Ltd [1990] 2 AC 85, Lord Nolan held that Section 2(1) and (4) of the European Communities Act 1972 operated as though Section 258 contained an express saving for directly enforceable Community rights. That saving did not affect the statutory definition when applied to subsidiaries established outside the Community.

6. The Court of Justice's ruling weakened the domestic residence dichotomy previously used to support the House's construction. It did not justify changing that construction. Parliament could have enacted the provision without anticipating the later effect of Community rights. The resulting anomalies were matters for the legislature. The Crown was ordered to pay the costs in accordance with the order granting leave to appeal.

1. House of Lords: In [1999] UKHL 48, reported at [1999] 1 WLR 2035, unanimously allowed the Crown's appeal. It held that the holding company did not satisfy the statutory definition and that the claim for consortium tax relief failed.

2. Court of Justice: Following the House's reference of 24 July 1996, ruled on 16 July 1998 that the residence requirement was incompatible with freedom of establishment where subsidiaries were established in member states. It also ruled that holdings in subsidiaries established in non-member countries lay outside Community law.

3. House of Lords, first consideration: On 14 March 1996, held that Section 258(7) of the Income and Corporation Taxes Act 1970 restricted the relevant references in Section 258(5)(b) to United Kingdom-resident companies. It referred the Community-law questions to the Court of Justice.

4. Court of Appeal: Upheld the construction favourable to the taxpayer, under which the residence restriction did not govern the subsidiaries counted for the holding-company definition.

5. High Court: Millett J adopted the same construction as the Court of Appeal.

6. Special Commissioner: Mr D C Potter QC held that the statutory references were restricted to United Kingdom-resident companies and that the company did not qualify as a holding company.