(back to preceding text)

    Thus the reach of article 56 extends beyond transfers between states which are members of the EU. It can also apply to a transfer between the United Kingdom and (say) the United States (though it is, in both applications, subject to a number of qualifications which it is unnecessary to explore here). Article 56 also has direct effect (Criminal proceedings against Sanz de Lera and Others [1995] (Joined Cases C-163/94, 165/94 and 250/94) [1995] ECR I-4821, 4841-3, paras 40 to 48, a case concerned with exporting bank notes from Spain to Switzerland).

Community law: the principle of effectiveness

    91.  In their written and oral submissions the respondents have relied on three general principles of EU law: the principle of effectiveness, the principle of equivalence and the principle of certainty. It is on the principle of effectiveness that the argument has centred. This principle is derived from article 5 (formerly 10) of the Treaty, which imposes on national courts the duty of ensuring the legal protection which individuals derive from EU law. There is a measure of agreement about the general principle, but sharp disagreement as to its practical implications and its application in this case.

    92.  The general principle has been stated many times by the ECJ. One of the most recent statements is in Kobler v Republik Osterreich [2004] QB 848, 903, paras 46 and 47:

"According to settled case law, in the absence of Community legislation, it is for the internal legal order of each member state to designate the competent courts and lay down the detailed procedural rules for legal proceedings intended fully to safeguard the rights which individuals derive from Community law: see Rewe-Zentralfinanz eG v Landwirtschaftskammer fur das Saarland (Case 33/76) [1976] ECR 1989, 1997-1998, para 5; Comet BV v Produktschaap voor Siergewassen (Case 45/76) [1976] ECR 2043, 2053, para 13; Hans Just I/S v Danish Ministry for Fiscal Affairs (Case 68/79) [1980] ECR 501, 522-523, para 25; Francovich v Italian Republic (Joined Cases C-6/90 and C-9/90) [1995] ICR 722, 772, para 42, and Peterbroeck, Van Campenhout & Cie SCS v Belgian State (Case C-312/93) [1995] ECR I- 4599, 4620-4621, para 12.

Subject to the reservation that it is for the member states to ensure in each case that those rights are effectively protected, it is not for the Court of Justice to become involved in resolving questions of jurisdiction to which the classification of certain legal situations based on Community law may give rise in the national judicial system: judgments in SEIM-Sociedade de Exportacao e Importacao de Materiais, Lda v Subdirector-Geral das Alfandegas (Case C-446/93) [1996] ECR I-73, 110, para 32 and Dorsch Consult Ingenieurgesellschaft mbH v Bundesbaugesellschaft Berlin mbH (Case C-54/96) [1997] ECRI-4961, 4996, para 40."

    In the same case Advocate-General Leger referred (in passages strongly relied on by Mr Aaronson, QC for the respondents) to the utmost importance of "the direct, immediate and effective protection of the rights which individuals derive from Community law" (p 994, para 52; see also pp 990 and 996, paras 39 and 57-8).

    93.  The ECJ has, no doubt for good reasons, been reluctant to interfere more than necessary in domestic rules as to the jurisdiction and procedure of national courts, and the remedies which they can grant. In an early case, Rewe-Handelsgesellschaft Nord mbH and Rewe-Markt Steffen v Hauptzollamt Kiel (Case 158/80) [1981] ECR 1805, para 44, the ECJ stated that,

"it was not intended to create new remedies in the national courts to ensure the observance of Community law other than those already laid down by national law."

    Since then it has become apparent that national courts may have to alter their procedure and remedies, and even their jurisdiction, in order to meet the demands of the principle of effectiveness. The process has been described by Takis Tridimas, The General Principles of EC Law (1999), pp 278-279:

"More recent cases, however, show that the case law has made significant inroads in the area of remedies so much so that the statement that the Treaty was not intended to provide new remedies is no longer valid. Gradually, the case law has transformed the principle of primacy from a general principle of constitutional law to a specific obligation on national courts to provide full and effective protection of Community rights. The seminal judgment in Simmenthal marked the first step in that direction. The question arose whether a national court could disregard a national law which had been held by the court to be incompatible with Community law or whether it should follow the procedure provided for by the Italian Constitution and refer that law to the Italian Constitutional Court which under the Constitution was the only competent body to rule on the validity of national law. . . Procedural protection was further extended in Factortame. The culmination of this trend in the case law has been the establishment of member state liability in damages."

    94.  The areas in which national courts may have to adapt their rules include limitation periods and other time limits, monetary limits to awards of compensation, interest and costs, and rules of evidence. Time limits have been a controversial area in which some difficult distinctions have been drawn: contrast Emmott v Minister for Social Welfare (Case C-208/90) [1993] ICR 8 and Steenhorst-Neerings v Bestuur van de Bedrijfsvereniging [1993] ECR I-5475. National restrictions on monetary compensation may have to be disregarded even by a tribunal which has limited statutory powers: see the judgment of the ECJ in Marshall v Southampton and South West Hampshire Health Authority (Teaching) (No 2) [1994] QB 126 (the final order by this House is reported at [1994] AC 530). In Amministrazione delle Finanze dello Stato SpA v San Giorgio (Case No 199/82) [1983] ECR 3595, a rule of Italian law creating a presumption as to the defence of passing-on was held unlawful on the ground that, though not discriminatory, it made it practically impossible for the claimant to obtain restitution.

    95.  The correct general approach to these issues has been described by the ECJ in Peterbroeck van Campenhout & Cie v Belgium (Case C-312/93) [1994] ECR I-4599, 4621, para 14:

"For the purposes of applying those principles, each case which raises the question whether a national procedural provision renders application of Community law impossible or excessively difficult must be analysed by reference to the role of that provision in the procedure, its progress and its special features, viewed as a whole, before the various national instances. In the light of that analysis the basic principles of the domestic judicial system, such as protection of the rights of the defence, the principle of legal certainty and the proper conduct of procedure, must, where appropriate, be taken into consideration."

    That guidance is expressed in such general terms as to give only meagre assistance. There is further guidance on the principles in the opinion of Advocate-General Jacobs in that case (pp 4610-2, paras 40 and 43). The Advocate-General observed:

"The case-law of the court in this area establishes a balance between, on the one hand, the need to respect that autonomy [of national courts] and, on the other hand, the need to ensure the effective protection of Community rights in the national courts. That is true both of the case-law on the subject of time-limits which I have set out above and of the decisions in Simmenthal and Factortame which are mentioned in the order for reference and are relied on by Peterbroeck, and which illustrate the court's concern for the effective protection of Community rights."

    He considered Simmenthal and Factortame, and continued, at p 4611, para 43:

"The decisions in Simmenthal and Factortame were necessary to ensure that the court seised was not precluded from giving effect to the Community rights claimed in the respective national proceedings. The decisions demonstrate the way in which Community law can have an impact—indeed a remarkable impact—on national procedures. But it will be noted that in both cases the effect of Community law was to exclude a national rule which would have made the judicial protection of Community rights by the court seised wholly impossible."

    96.  These issues were also raised in Hoechst (Metallgesellschaft Ltd and Others and Hoechst AG and Hoechst (UK) Ltd v Inland Revenue Commissioners and HM Attorney General [2001] Ch 620 but since the significance of that case is controversial, and has been the subject of extended argument in this appeal, it is better to defer discussion of Hoechst until a later stage.

    97.  Some but not all of the test cases selected under the GLO include claims founded on an alleged breach of the general non-discrimination article (based on the OECD model) which is included in many double taxation treaties. This appears as article 24 of the United Kingdom—United States of America Double Taxation Convention of 1975 (relevant to the Perkins and Heinz cases) and as article 25 of the United Kingdom-France Double Taxation Convention of 1968 (relevant to the BNP Paribas case).

    98.  The standard form of the article is as follows:

"Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State are or may be subjected."

    Its effect in connection with another type of group relief has recently been considered by Park J in NEC Semi-Conductors Ltd v Inland Revenue Commissioners [2004] STC 489. Your Lordships were told that an appeal from that decision is to be heard by the Court of Appeal [next July/this month]. The main area of controversy in as to the appropriate comparator for the purpose of the comparison called for by the non-discrimination article.

    99.  Double taxation treaties do not have direct effect. They need to be imported into domestic tax law by express enactment. In relation to income tax and corporation tax this is achieved by section 788 (3) of ICTA 1988, which provides as follows:

"Subject to the provisions of this Part, the arrangements [specified in an Order in Council relating to double taxation] shall, notwithstanding anything in any enactment, have effect in relation to income tax and corporation tax insofar as they provide—

(a)  for relief from income tax, or from corporation tax in respect of income or chargeable gains . . ."

    100.  The alternative claims based on the non-discrimination article are a peripheral issue in this appeal (indeed they were not mentioned at all in the judgments in the Court of Appeal). That is because, as is stated in para 101 of the respondents' printed case, in every case the claim in respect of a breach of the non-discrimination article is coupled with a parallel claim under the provisions of article 56. However, during the Revenue's oral submissions your Lordships were told that of 306 appeals about group loss relief now pending before the special commissioners, there are six in which the non-discrimination article is the sole issue. Dr Plender (for the revenue) realistically acknowledged the convenience of having the double taxation treaty claims heard at the same time, and in the same forum, as the claims based on articles 43 and 56. Mr Aaronson appeared to accept that when the issue of substance finally comes to be decided none of his clients is likely to win on the double taxation treaty point if it loses on the EU points.

The companies' claims

    101.  The claims of the claimants in the six test cases are set out in similar form in their respective Part 8 claim forms. The claims are not however identical. I have already mentioned that some but not all include claims based on non-discrimination articles in double taxation treaties. Another and much more important difference is in the type of loss which is said to have been occasioned by the alleged breaches of articles 43 and 56 (and other articles which are put into the pleading for good measure).

    102.  There are four different types of loss said to have been sustained as a result of the alleged breaches. Park J quoted ([2004] STC 594, 600, para 14) the description in the skeleton argument for the companies (the claimants before him). It is convenient to repeat this, especially as much of the oral argument before your Lordships referred to claims in categories (i), (ii), (iii) and (iv):

"The claims by each of the test claimant groups are for at least two, and in some cases for all four, of the following:

(i)  For the profits of the UK profit-making company to be relieved by the losses of a non-UK resident company. It may be helpful to refer to this as 'basic group relief.'

(ii)  Because of the clear legislative requirement for all the relevant companies to be resident in the UK basic group relief was regarded in every case as not available. In many cases the profit-making companies used other reliefs (eg capital allowances or surplus ACT) which they would not have used had basic group relief been available. In these cases the profit-making companies claim restitution of the other reliefs, or, in the alternative, compensation for their use. It will be convenient to refer to this as 'the reclaim of utilised reliefs.'

(iii)  In many cases other UK members of the group surrendered their own reliefs to the UK profit-making company; and those companies are reclaiming the reliefs. It will be convenient to refer to this as 'the recovery of surrendered reliefs.'

(iv)  In all of the cases the companies which would have surrendered losses, if the group relief rules were not confined to UK resident companies, may have been paid for allowing their losses to be set-off against the profit-making companies' profits, and they seek compensation for the loss of these payments. It will be convenient to refer to this as 'the claim for payments.'"

    103.  The way these claims have been pleaded can be illustrated by the pleading in the Autologic case. Paragraph 8A of the statement in the claim form is a long and very elaborately subdivided paragraph particularising the claims for restitution and damages. Para 8A.1.4 claims damages under three heads as follows:

(1)  Para 8A.1.4.1 "Amounts of corporation tax overpaid by [a UK subsidiary] 'the paying company'"—a category (i) or "basic group relief" claim;

(2)  Para 8A.1.4.2 "The value of reliefs surrendered to the paying company by [other UK group companies] and which would not have been used or surrendered and which may otherwise have been available for use elsewhere in the company group or for other accounting periods had the paying company been able to claim loss relief from [loss-making French subsidiaries] and thereby offset its chargeable profits"—a category (ii) or "reclaim of utilised reliefs" claim; and

(3)  Para 8A.1.4.3 "The sums [the loss-making French subsidiaries] would have received from the paying company had they been able to surrender their losses and other eligible amounts to the paying company which they were precluded from doing in the manner set out in this claim"—a category (iv) or "claim for payments" claim.

    Paragraphs 8A.2.1 and 8A.2.2 then follow the same sort of pattern in respect of the restitutionary claims, omitting the category (iv) claim but including express claims for the time value of money.

    104.  It is over the category (i) claims that battle has been joined. The revenue regard the category (i) claims as being of central importance, and as being a plain breach of the principle that group loss relief claims are to be determined (in the first instance) by the special commissioners, to whose exclusive jurisdiction Parliament has assigned them. The revenue regard categories (ii), (iii) and (iv) as "satellite" claims which cannot be considered until after the essential issue of category (i) claims has been decided. It was the category (i) claims that Park J struck out (see for instance para 1.3 of his order drawn up on 31 March 2004, in the Autologic case, striking out paras 8A.1.4.1 and 8A.2.2.1).

    105.  In his judgment Park J, having covered all the matters to which I have already referred, with the important exception of the EU principle of effectiveness, turned to the issue of tax appellate jurisdiction. He referred to the changes during the 1990s in the administration of corporation tax, but observed (p601, para 18):

"It has always remained the case that a corporate taxpayer which wishes to dispute some point of tax law with the Revenue has a statutory right of appeal to the Commissioners."

    He mentioned the line of tax cases which had considered and applied the principle in Barraclough v Brown, the most recent being R v Inland Revenue Commissioners Ex p Bishopp [1999] STC 531. He then crisply summarised his own view (p 603, para 25):

"I am not going to go through the judgments in the cases which were cited to me. They are all consistent in the result: the courts did not decide questions of principle which went to liability. Such questions (as opposed to questions of machinery) were properly the subject of appeals to the General or Special Commissioners. I would accept that the precise reasoning which led the courts to that result has varied between some of the judgments. Some observations are to the effect that there is a simple rule of law that the court has no jurisdiction at all in such matters, an approach which appears to me to be consistent with the second strand in the speech of Lord Watson in Barraclough v Brown [[1897] AC 615,622]. Other observations are to the effect that there might in theory be a jurisdiction to decide questions of tax principle in cases begun in the High Court, but that, given the existence of the statutory jurisdiction of the Commissioners, it would be wrong for the High Court to exercise any such original jurisdiction as it might possess."

    106.  Park J then referred to Marks & Spencer Plc v Halsey (Inspector of Taxes), summarising the decision of the special commissioners ([2003] STC (SCD) 70) and his own decision to make a reference to the ECJ). He noted that the revenue said that in that case the taxpayer company followed the correct procedure in order to get the critical question of tax principle decided. Mr Aaronson, who appeared for the taxpayer company in Marks & Spencer, told your Lordships that it was a much more straightforward case on the facts, and that in any case there might have been second thoughts about the wisdom of going to the special commissioners. He could also point out that the revenue had not objected to the High Court assuming jurisdiction in Hoechst. But this important appeal cannot be decided by weighing and striking a balance between the alleged procedural inconsistencies of the revenue, on the one hand, and taxpayer companies and their advisers, on the other hand.

    107.  In discussing the competing arguments Park J started from the basic principle as he had formulated it ([2004] STC 594, 603, para 25). That basic principle could not be evaded by a company stealing a march, and starting High Court proceedings before an assessment (or some other formal trigger for an appeal to the Commissioners) was in place. Nor would the principle cease to apply because there was a large number of companies which could band together for a GLO. Nor would it cease to apply because another company in a group claimed to have suffered financial loss in consequence of a refusal of group relief. He concluded (p 606, para 31 (iv)):

"Finally, I combine the foregoing examples. Suppose that several companies are having the same argument of tax law with the Revenue. They all have associated companies which wish to make consequential claims for damages against the Revenue. In my opinion they cannot cause the High Court to have or to exercise a jurisdiction to determine the disputed question of tax law—a jurisdiction which otherwise it would either not have or not exercise—by uniting to create a GLO in which all of the companies with the tax disputes and all of the associated companies with consequential damages claims combine to bring High Court proceedings against the Revenue. The example in this sub-paragraph is in principle the same as the case before me."

    108.  Only towards the end of his judgment did Park J refer to the EU principle of effectiveness and the decision of the ECJ in Hoechst [2001] Ch 620, paras 98-107 (the paragraphs dealing with the fifth question). He dealt with the point in the following passage (p 608, para 38):

"Points of the nature which I have described in the foregoing paragraph [the procedural difficulties on which Mr Aaronson relied] are important and potentially difficult, but I cannot see what they have to do with the jurisdictional issue which is the subject matter of this judgment. If a claimant company argues on an appeal to the Special Commissioners that it is entitled to group relief for losses of a group company resident outside the United Kingdom, the Inland Revenue's arguments against the company might include submissions that the appeal fails anyway for procedural reasons such as the lack of a notice from the surrendering company to its Inspector or the omission by the companies to make formal claims for group relief within the prescribed time limits. If the Revenue's arguments do include such submissions, the claimants can respond before the Commissioners, just as they could if the case had commenced in the High Court, by arguing that, in reliance in the passages in the Metallgesellschaft/Hoechst judgment, Community law overrides the procedural and formal requirements. The Special Commissioners are just as capable of adjudicating on these arguments as is the High Court."

    109.  In the Court of Appeal (which heard the case in a single day, as an on-notice application for permission to appeal, with the appeal to follow on permission being granted) the outcome was very different. Peter Gibson LJ ([2005] 1 WLR 52, 53, para 1) placed Hoechst in the forefront of his judgment. He recorded (p 57, para 13) the appellant companies' main criticisms of the judgment below:

"(1)  By reason of the Hoechst case the judge should have found that the High Court not only had jurisdiction but was required to hear the category (i) claims. (2) The judge erred in not deciding whether he had jurisdiction; he should have found on the authorities that he had jurisdiction and should have exercised it. (3) The judge erred in failing to appreciate or give adequate consideration to the practical difficulties in requiring the category (i) claims to be severed from all the other claims and consigned to the commissioners; those difficulties should have led the judge to exercise jurisdiction by hearing all the claims in the High Court."

    110.  Peter Gibson LJ quoted at some length (pp58 to 60, paras 17 and 18) from the opinion of Advocate-General Fennelly and the judgment of the ECJ in Hoechst. He also referred to Simmenthal, Kobler and Roquette Freres SA v Direction des Services Fiscaux du Pas-de-Calais (Case C-88/99) [2000] ECR I-10465. He observed (p 62, para 25) that the importance of the principle of effectiveness in Community law cannot be overstated, and that in the present case there is a very serious difficulty, if not an impossibility, for companies resident outside the United Kingdom to comply with the formal statutory requirements for group loss relief.

    111.  Peter Gibson LJ's essential conclusion was as follows (p 63, para 28):

"With due respect to the judge, I do not think that thereby he gave effect to the full import of the ECJ's decision on question (5) in the Hoechst case. Given that the United Kingdom tax law has denied groups of resident and non-resident companies the benefit of group loss relief, it is no answer to the claimants' claims in the High Court, by which they seek to invoke the primary and direct effect of Community law, to require the claimants to apply for a tax benefit denied to them by national law with a view to challenging the inevitable refusal of that application through the statutory procedure for tax appeals. In my judgment, consistently with the Hoechst case, the High Court was obliged to entertain the claims and, if made out, give effect to them, and the judge was wrong to strike out part of the claims."

    112.  Peter Gibson LJ did not find it necessary to say anything about the other grounds of appeal (including the issue of jurisdiction of the High Court apart from the EU context). Longmore LJ gave a short judgment agreeing with Peter Gibson LJ.

    113.  Before your Lordships the revenue contended that the Court of Appeal gravely misunderstood the significance of the Hoechst case [2001] Ch 620. It is therefore necessary to examine it in a little detail. It was in fact two linked cases on essentially the same factual situation, a German parent company was a trading subsidiary resident in the United Kingdom. It was concerned with a different form of group relief (which ceased to exist on 6 April 1999), that is a group income election under section 247 of ICTA 1988 enabling an intra-group dividend to be paid without a simultaneous payment of advance corporation tax ("ACT") if (and only if) both companies were resident in the United Kingdom (see section 247 (4), now repealed together with all the other provisions relating to ACT). This resulted in a financial detriment to a group where the receiving company was resident in another member state of the EU, although the detriment was transitory (and equivalent to a loss of interest) because mainstream corporation tax would (absent another form of group relief) be payable in due course.

    114.  The relevant companies in each of the two groups commenced proceedings against the revenue in the High Court. They relied on articles 43 and 56 (then articles 52 and 73b) of the Treaty and claimed "damages or compensation for the loss of the use of the money in respect of the periods between the payments of advance corporation tax made and the time when their mainstream corporation tax, against which those payments were set off, was due." The periods concerned were 1974 to 1995 in the case of one group, and 1989 to 1994 in the case of the other (see the Advocate-General's opinion, pp 626-627, paras 9-11). On 2 October 1998 Neuberger J made an order for the reference to the ECJ of five questions.