Volkerrail Plant Limited & Ors v The Commissioners for HMRC

Objective comparability in a freedom of establishment claim requires comparison of the actual situations producing the alleged difference in treatment. The objective of the tax regime informs that comparison but cannot replace it. Preventing the double deduction of losses is an independent public-interest justification for a restriction, whether the situation is viewed from the host or home state. Under the Income and Corporation Taxes Act 1988, s 403D(1)(c), denying group relief where losses were deductible elsewhere was proportionate. Foreign use had occurred, UK carry-back and carry-forward relief remained available, and EU law did not require provision for later recapture. No conforming interpretation was required.

The appellants, four UK tax-resident companies, sought group relief for trading losses incurred by the UK permanent establishment of a Dutch group company. The losses had been deducted against profits of a Dutch fiscal unity and were subject to a Dutch recapture mechanism.

The First-tier Tribunal allowed the taxpayers’ challenge to HMRC’s closure notices. The Upper Tribunal, in [2022] UKUT 78 (TCC), held that s 403D(1)(c) restricted freedom of establishment but could be justified and read down. Both sides appealed. The central issues were objective comparability, justification by prevention of double deduction, proportionality, and whether the statutory provision could be given a conforming interpretation.

Lady Justice Falk gave the leading judgment. Sir Launcelot Henderson and Lady Justice Elisabeth Laing agreed.

1. Disposition. VolkerRail’s appeal was dismissed. HMRC’s appeal on proportionality was allowed. The appeals against the closure notices denying group relief were dismissed in their entirety.
2. Objective comparability. The comparison had to be between the situations producing the identified difference in treatment: a UK permanent establishment of a non-resident company and a UK-resident subsidiary. Regard to the objective of the tax regime was required, but could not displace that comparison. NN did not depart from Philips Electronics on this issue. See paras [64]-[66].
3. Justification. Preventing the double deduction of losses was an independent overriding reason in the public interest. The reasoning in NN could be applied directly. It was not confined to cases involving a resident company establishing abroad, nor did it depend on a distinction between home-state and host-state taxation. The judgment treated Philips Electronics as an outlier on this issue and concluded that NN had departed from it in a critical respect. See paras [67]-[101].
4. Proportionality. The relevant question was whether there was any effective possibility of using the losses in the other Member State. Here, the losses were deductible and had in fact been deducted in the Netherlands. The later operation of the recapture mechanism did not make the UK restriction disproportionate. UK carry-back and carry-forward relief remained available. Tax legislation pursuing a justified objective also attracted a margin of discretion, and intervention was warranted only if the measure was manifestly inappropriate. See paras [102]-[114].
5. Conforming interpretation. Because s 403D(1)(c) was proportionate on the facts, no conforming interpretation was necessary. The court expressed reservations about the Upper Tribunal’s reading down of the provision, including whether it went with the grain of the legislation. HMRC’s alternative argument under s 6 of the European Union (Withdrawal) Act 2018 therefore did not require consideration. See paras [115]-[116].

• Court of Appeal (Civil Division): In [2023] EWCA Civ 210, VolkerRail’s appeal was dismissed and HMRC’s appeal on proportionality was allowed.
• Upper Tribunal (Tax and Chancery Chamber): In [2022] UKUT 78 (TCC), the taxpayers’ case largely failed. The tribunal held that s 403D(1)(c) restricted freedom of establishment, but could be justified and read down.
• First-tier Tribunal: Judge Brooks allowed the taxpayers’ challenge in a decision released on 16 November 2020.