The Court of Appeal has dismissed an appeal that argued that a provision that denied group/consortium relief from a UK branch of a foreign parent to that parent’s UK subsidiaries was not compatible with the EU principle of freedom of establishment (now set out in the Treaty on the Functioning of the European Union, art. 49 and 54). As such, relief was denied (Volkerrail Plant Ltd and Anor v HMRC [2023] EWCA Civ 210).
The provision in force in the periods concerned was ICTA 1988, s. 403D(1)(c). If it was held to be incompatible the court would have to decide whether it could be read with a conforming interpretation, or must be disapplied. Alternatively, the court could exercise its powers under the European Union (Withdrawal) Act 2018 (EUWA 2018), s. 6 and the European Union (Withdrawal) Act 2018 (Relevant Court) (Retained EU Case Law) Regulations 2020 (EUWA Regulations 2020) to depart from EU law.
Section 403D(1) imposed a restriction on the surrender of losses made by UK permanent establishments where the relevant loss, or an amount brought into account in computing it, was “deductible from or otherwise allowable against” non-UK profits of any person, as defined in s. 403D(3).
The four appellant UK companies (collectively described as “VolkerRail”) had as their ultimate parent company Koninklijke VolkerWessels NV (“KVW”), a company incorporated and tax resident in the Netherlands. VolkerRail had claimed relief from the UK branch (“VSCE UK”) of Volker Stevin Construction Europe BV, another member of the KVW group, a company also incorporated and tax resident in the Netherlands. HMRC had applied s. 403D(1)(c) to deny this relief.
For VolkerRail to succeed in demonstrating an infringement of freedom of establishment for which a remedy must be provided, the following had to be established:
- Section 403D(1)(c) resulted in the difference in treatment between non-resident companies that exercise their freedom of establishment through a UK permanent establishment and non-resident companies that exercise their freedom of establishment through a UK resident subsidiary. The UT’s conclusion that there was such a difference was not under appeal.
- The difference in treatment must involve objectively comparable situations. The UT’s conclusion to that effect was challenged by HMRC.
- The restriction on freedom of establishment found to exist by virtue of the previous tests was not justified by the aim of preventing the double use of losses (neither of two other justifying factors being in point). VolkerRail challenged the UT’s conclusion that there was justification.
- If there was justification, whether s. 403D(1)(c) was disproportionate. The UT found that it was disproportionate in two respects.
In considering these matters, the Court of Appeal judged that the operation of s. 403D was not disproportionate in either respect. As such, it was not held to be incompatible with the principle of freedom of establishment. The questions as to whether it could be read with a conforming interpretation, or could be disapplied or of whether the court should exercise its powers under EUWA 2018, s. 6 and the EUWA Regulations 2020 to depart from EU law were irrelevant.
As a the result, VolkerRail’s appeals against the closure notices denying group/consortium relief for losses surrendered by VSCE UK were dismissed in their entirety.