Revenue and Customs v Vodafone 2

On an application under paragraph 33 of Schedule 18 to the Finance Act 1998, the Special Commissioners may decide incidental questions of law where that is necessary to determine whether the Revenue has reasonable grounds for keeping a corporation-tax enquiry open. Their jurisdiction is not confined to factual investigations or to asking whether the Revenue’s legal view is reasonable. It extends, in principle, to Community-law questions and to making an ECJ preliminary reference where necessary.

Jurisdiction and its exercise are distinct. The Commissioners must consider the facts, the need and practicability of deciding the point at that stage, and the risk of improper delay. The appeal was dismissed.

HM Revenue and Customs appealed from Park J’s dismissal of its appeal concerning an application by Vodafone 2 for a direction requiring closure of a corporation-tax enquiry. The Special Commissioners had decided that the compatibility of the controlled foreign company provisions with Community law had to be determined before the application could be resolved. They formulated a reference to the ECJ and adjourned the application. Their decision was reported at [2005] S.T.C. (S.C.D.) 549.

The central issue was whether paragraph 33 of Schedule 18 to the Finance Act 1998 authorised the Commissioners to determine disputed points of law, including by making a preliminary reference, when deciding whether the Revenue had reasonable grounds for continuing its investigation.

Appeal dismissed unanimously. Arden LJ gave the leading judgment. Moore-Bick LJ and Mummery LJ agreed.

1. Paragraph 33 of Schedule 18 to the Finance Act 1998 is a protection against an investigation being kept open indefinitely. Its wording contains no limitation confining the Commissioners to reviewing factual investigations. On its true interpretation, it permits them to do what is reasonably necessary to decide whether the Revenue has reasonable grounds for not giving a closure notice, including determining incidental questions of law. [19]–[24]
2. The Commissioners must be able to decide the legal issue for themselves. It would be constitutionally anomalous to require them to accept the Revenue’s view of the law merely because that view was objectively reasonable. Once jurisdiction over incidental legal questions is established, no distinction can be drawn between domestic law and Community law. The jurisdiction may therefore include a reference to the ECJ for a preliminary ruling. [21]–[24]
3. Jurisdiction and the exercise of jurisdiction are distinct. The Commissioners must assess, in the light of the facts of the particular application, whether the point of law needs to be determined and can properly be determined before deciding the closure application. The burden of investigating the facts is relevant. The Commissioners can prevent paragraph 33 being used improperly to delay the enquiry. [25]
4. Paragraphs 31A to 31D do not imply a narrower construction. Paragraph 31A concerns a different, consensual reference mechanism. Its requirement for a joint referral does not prevent a unilateral application under paragraph 33, since the two powers cover different ground. [26]
5. The analogy with Langham v Veltema [2004] STC 544 was of little assistance because that case involved no question of law. A reference in the present case did not prevent the Revenue from continuing its enquiries, and the existing appeal route against information requirements remained available. The Revenue did not challenge the merits of the reference. The appeal was accordingly dismissed. [27], [30]

1. Court of Appeal (Civil Division): dismissed HM Revenue and Customs’ appeal on 28 July 2006.
2. Chancery Division: Park J dismissed the Revenue’s appeal, holding that the Commissioners could determine the relevant question of law and make a preliminary reference.
3. Special Commissioners: determined that the Community-law compatibility issue had to be addressed, formulated an ECJ reference and adjourned the closure-direction application. The decision was reported at [2005] S.T.C. (S.C.D.) 549.