HM Revenue and Customs v FCE Bank Plc

Article 24(5) requires the court to identify the ground of admitted discriminatory tax treatment. Where group relief concerns losses surrendered between two UK-resident sibling companies, the parent’s liability to UK corporation tax is irrelevant. If the disadvantage results from the parent’s foreign residence, the Convention may prohibit it.

The reasoning in the earlier group-income-election case was confined to that statutory scheme. It did not establish a general rule that restructuring through an intermediate UK holding company defeats discrimination. The appeal was dismissed.

FCE and FMCL were UK-resident companies owned by FMC, a US-resident parent. FMCL surrendered trading losses to FCE, which claimed group relief. HMRC refused the claim because the non-UK residence of FMC prevented the companies from forming a statutory group under the Income and Corporation Taxes Act 1988.

The First-tier Tribunal allowed FCE’s appeal. The Upper Tribunal dismissed HMRC’s appeal. The issue on this second appeal was whether the denial of group relief was contrary to article 24(5) of the UK-US double taxation convention.

1. Appeal dismissed. Rimer LJ gave the leading judgment, with Pill and Black LJJ agreeing. It was common ground that FCE and FMCL were protected UK enterprises, that the domestic provisions imposed other and more burdensome taxation than the agreed comparator, and that the treatment was discriminatory for article 24(5) purposes.
2. The relevant inquiry was to identify the ground of the discrimination. The earlier decision in Boake Allen Ltd v Revenue and Customs Commissioners [2007] UKHL 25; [2007] 1 WLR 1386 was distinguishable. A section 247 election was a joint election by the dividend-paying subsidiary and its parent. Both had to be companies liable to corporation tax. Its fiscal consequences could not be separated between the two participants.
3. The intermediate holding-company example in Boake Allen was confined to that section 247 context. It did not establish a general proposition that discrimination disappears whenever a corporate group could restructure to remove the disadvantage. The individual-shareholder example likewise explained why a section 247 election was unavailable, rather than identifying a general principle governing group relief.
4. The present claim concerned a surrender of losses solely between FMCL and FCE. It had no effect on FMC’s tax position. FMC was relevant only to establish the group relationship. The observation in Imperial Chemicals Industries plc v Colmer (Inspector of Taxes) [1996] STC 352 that group relief may treat a parent and subsidiaries as a single entity did not make FMC relevant to the particular surrender. The parent’s liability to UK corporation tax was therefore conceptually irrelevant.
5. Under section 788(3) of the Income and Corporation Taxes Act 1988, the Convention arrangements operated notwithstanding domestic enactment. The only reason for the difference in treatment was that FMC was US-resident rather than UK-resident. Article 24(5) therefore required the discriminatory restriction to yield to FCE’s claim. If the surrender had instead been from FMC to FCE, the position would probably have been different and Boake Allen would have been directly relevant. That was a qualified hypothetical observation.

1. Court of Appeal (Civil Division): HMRC’s second appeal was dismissed: [2012] EWCA Civ 1290.
2. Upper Tribunal (Tax and Chancery Chamber): HMRC’s appeal from the First-tier Tribunal was dismissed on 13 October 2011. No citation is stated in the judgment.
3. First-tier Tribunal (Tax): FCE’s appeal against HMRC’s refusal of group relief was allowed on 1 April 2010.