The Trustees of the Panico Panayi Accumulation and Maintenance Settlements Numbers 1 to 4 & Anor v The Commissioners for HMRC

An exit tax on unrealised gains accrued during United Kingdom residence may be justified by fiscal territoriality. Its incompatibility with freedom of establishment lies not in the charge itself but in requiring immediate payment without a deferral option.

Before statutory amendment, sections 59B and 59D of the Taxes Management Act 1970 must, where necessary to protect that freedom, be construed as permitting payment in five equal annual instalments. The first is due on the ordinary due date and the others at yearly intervals. That construction goes with the grain of the legislation and does not require impermissible judicial legislation. It has retrospective effect. Interest remains governed by the ordinary statutory provisions.

The trustees of four settlements became resident in Cyprus in 2004. HMRC assessed capital gains tax on a deemed disposal under section 80 of the Taxation of Chargeable Gains Act 1992. Redevco moved its effective management to the Netherlands in 2008. HMRC assessed corporation tax on deemed disposals under section 185 and on loan relationships under paragraph 10A of Schedule 9 to the Finance Act 1996.

The First-tier Tribunal held in each appeal that the payment provisions should be given a conforming interpretation allowing five annual instalments without interest. The appellants contended that no conforming interpretation was possible and that the exit-tax charges had to be disapplied. HMRC contended that a conforming construction was available.

The common issue was whether domestic payment provisions could be interpreted compatibly with the EU freedom of establishment, and, if so, on what terms.

1. The appeals were allowed in part. The Tribunal set aside the First-tier Tribunal decisions, except for unappealed findings concerning capital allowances, because the FTT had wrongly excluded interest. It remade the decisions on the correct conforming construction.

2. The United Kingdom was entitled to quantify and charge tax on gains accrued while the taxpayer was resident here. The EU-law defect was not the deemed-disposal charge under sections 80 or 185 of the Taxation of Chargeable Gains Act 1992. It was the absence of a right to defer payment under sections 59B and 59D of the Taxes Management Act 1970 ([130]-[134]).

3. A conforming interpretation was both required and possible. Before the later statutory payment schemes took effect, sections 59B and 59D must be read, where immediate payment would infringe freedom of establishment, as giving an option to pay the exit tax in five equal annual instalments. The first instalment is payable on the normal statutory due date and subsequent instalments at yearly intervals ([141]; [168]).

4. That construction remedied only the identified defect. It fitted the domestic statutory scheme, including existing provision for instalment payments of capital gains tax, and did not require the Tribunal to devise a comprehensive statutory scheme. The availability of other lawful arrangements did not preclude the construction selected ([142]-[151]).

5. The construction operated retrospectively. It therefore did not defeat legal certainty or legitimate expectation: the appellants had always had the right to defer payment. Their motives for migration and subsequent intentions concerning the assets were immaterial to the United Kingdom's entitlement to tax gains accruing during residence ([157]-[161]).

6. The FTT went too far by providing that no interest was payable. Interest was outside its statutory appeal jurisdiction and did not itself infringe freedom of establishment. Liability to interest remained governed by the ordinary provisions, including sections 86 and 87A of the Taxes Management Act 1970 ([165]; [169]).

• Upper Tribunal (Tax and Chancery Chamber): allowed the appeals in part, set aside the FTT decisions for material error of law concerning interest, and remade them by adopting a conforming interpretation of sections 59B and 59D of the Taxes Management Act 1970.
• First-tier Tribunal: held in both appeals that a conforming interpretation allowed exit tax to be paid in five equal annual instalments without interest.
• Court of Justice of the European Union: in the trustees' reference, held that immediate payment without a deferral option was a disproportionate restriction on freedom of establishment.