Volkerrail Plant Limited & Ors v The Commissioners for HMRC

The Court of Appeal considered whether s.403D(1)(c) of the Income and Corporation Taxes Act 1988, which prevents group relief for losses of a UK permanent establishment where those losses (or amounts used to compute them) are deductible or allowable against non-UK profits, is compatible with the freedom of establishment under Articles 49 and 54 TFEU.

The court held that the objective of preventing the double deduction of losses is a legitimate and independent justification for a restriction on freedom of establishment and that, in light of later CJEU authority (notably NN A/S v Skatteministeriet and the line of cases from Marks & Spencer onwards), Philips should be regarded as an outlier on the justification point. Applying that approach, s.403D(1)(c) fell within the Member State’s margin of discretion and was not disproportionate in the circumstances of this case.

Accordingly the appellant companies’ challenge to the closure notices disallowing their group relief claims failed; the Upper Tribunal’s read‑down was not required and the appeals against the closure notices were dismissed.

Background and parties: VolkerRail (four UK incorporated members of a group ultimately owned by a Netherlands resident parent) sought group relief in respect of trading losses incurred by the UK branch of a Netherlands resident group company (VSCE UK) for accounting periods 2004–2009. HMRC disallowed the claims relying on s.403D(1)(c) ICTA. The issue engaged EU law: whether that provision was compatible with Articles 49 and 54 TFEU (freedom of establishment).

Procedural history: VolkerRail succeeded before the First‑tier Tribunal (Judge Brooks, 16 November 2020). The Upper Tribunal (Roth J and Judge Richards) largely rejected that result ([2022] UKUT 78 (TCC)). Both parties appealed to the Court of Appeal.

Nature of the claim and relief sought: The appellants sought to overturn HMRC’s closure notices and to establish that s.403D(1)(c) must be disapplied (or given a conforming interpretation) because it unjustifiably restricted freedom of establishment, thereby entitling them to the surrendered losses.

Issues framed: (i) whether s.403D(1)(c) produced a difference in treatment between permanent establishments and resident subsidiaries that involved objectively comparable situations; (ii) if so, whether the restriction could be justified (in particular by preventing double deduction of losses or preserving allocation of taxing powers); (iii) whether the restriction was proportionate; and (iv) if incompatible, whether the provision should be disapplied or given a conforming interpretation. The parties also raised whether retained EU case law could be departed from under the European Union (Withdrawal) Act 2018.

Court’s reasoning: The court accepted that s.403D(1)(c) produced the difference in treatment identified in Philips and that the situations were objectively comparable. It reviewed relevant CJEU case law, in particular Philips, NN, Marks & Spencer and Bevola. The Court concluded that the prevention of double deduction is a recognised, independent justification under the CJEU case law and that NN represents a development from Philips on that point; Philips is therefore an outlier on the justification issue. Applying the tests of justification and proportionality developed in the CJEU cases (including the “no possibility” / ‘‘definitive losses’’ material), the court held that s.403D(1)(c) pursued the legitimate aim of preventing double deductions and did so within the State’s margin of discretion. The Upper Tribunal’s conforming interpretation was unnecessary; the provision was not disproportionate as applied in these facts. The alternative argument to depart from retained EU case law under s.6 EUWA was not decided because it was unnecessary to do so.

Subsidiary findings and implications: The court noted that where foreign law made actual use of losses impossible (the M&S ‘‘no possibility’’ concept) relief might be permissible, but on these facts the losses had in fact been used abroad (and some recapture had occurred) so the statutory restriction applied. The judgment emphasised the Member State margin of discretion in tax measures pursuing legitimate aims.

This was an appeal from the Upper Tribunal. The Court of Appeal dismissed VolkerRail’s appeal and allowed HMRC’s appeal on the issue of proportionality. The court held that s.403D(1)(c) is capable of being justified by the legitimate objective of preventing the double deduction of losses, that this justification is recognised in the CJEU’s later case law and that the provision was not disproportionate on the facts; accordingly the taxpayers’ claims to group relief were dismissed.

Appeal from the Upper Tribunal (Tax and Chancery Chamber) (Roth J and Judge Jonathan Richards) [2022] UKUT 78 (TCC); prior First‑tier Tribunal decision (Judge Brooks) 16 November 2020 (FTT decision noted in the judgment). Both parties appealed the Upper Tribunal’s decision to the Court of Appeal.