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Press Release

21 December 2009

 

Supreme Court refuses to hear largest tax claim against the UK Government this year in Vodafone tax appeal

 

• Vodafone tax appeal rejected
• English courts reject argument that ECJ decision can fatally infect legislation

 

In an unreported decision the Supreme Court last week (Wednesday 16 December) refused to hear a claim launched by the Vodafone Group that could have seen the telecoms giant immediately eliminate billions from its UK tax bill, says McGrigors LLP the leading tax litigation law firm.

 

The size of the dispute (estimated at £2.2billion of corporation tax) is believed to be one of the biggest single claims by value to have been in the UK court system this year and certainly the single biggest claim against HMRC in 2009.

 

In its decision the Supreme Court ruled that Vodafone could not pursue their case which argued that a previous ECJ ruling should allow it to ignore rules which HMRC use to stop groups paying tax on overseas profits at lower rates than the UK corporate tax rate.

 

Vodafone had argued that the 2006 European Court of Justice ruling means that a whole tranche of the UK tax legislation is no longer valid.

 

According to McGrigors, the decision to refuse to hear the case confounds widely-held expectations. Most tax specialists had confidently expected that the Supreme Court - which replaced the House of Lords earlier this year - would see this as a matter of serious importance, requiring review from the UK’s most senior court.

 

McGrigors says Vodafone had a convincing ruling in its favour from a High Court judge. It then lost in the Court of Appeal but had hoped that the Supreme Court would hear its case and reverse that decision.

 

Rupert Shiers, Partner of McGrigors said: “This shows that the Supreme Court will not hear cases simply because of the amounts at stake. Vodafone had won a convincing victory in the Chancery Division of the High Court. Vodafone are entitled to be surprised and very disappointed not to be allowed their day in court.”

 

Details about the case
UK tax legislation contains rules under which a UK tax-resident company must itself pay UK tax on the profits of subsidiaries in low-tax jurisdictions. These rules are known as the “controlled foreign companies” rules. Their effect is to ensure that the group pays tax at no less than the UK tax rate, even if the subsidiary is tax-resident in a jurisdiction with a very low tax rate. In HMRC's view, these rules serve an important function in preventing UK profits from being diverted offshore.

 

In a test case taken by the Cadbury Schweppes group, the European Court of Justice (ECJ) ruled in 2006 that those "controlled foreign companies" rules were in principle contrary to EC law. This was because the rules made it less attractive for UK companies to establish subsidiaries in other EU member states, taking advantage of lower corporation tax rates. The ECJ held that the rules could only be valid if they were specifically targeted at letter-box companies, or “related only to wholly artificial arrangements intended to escape the national tax normally payable”.

 

The Vodafone group then took their own case. HMRC argued that the legislation should be re-interpreted to build in the ECJ's test. Vodafone argued that as the controlled foreign companies rules were not drafted to include the test that the ECJ required, HMRC could not rely on the rules at all. They said that to incorporate the ECJ's test would be prohibited as “judicial legislation”.

 

On 22 May this year, the Court of Appeal rejected Vodafone's argument. Sir Andrew Morritt, Chancellor said “The choice of a conforming interpretation which faithfully follows a conclusion of the ECJ … does not in my view trespass on the forbidden ground of legislation”. It was open to Vodafone to appeal, but they required the permission of the Supreme Court to do so. This has now been rejected. Vodafone now have to go back to the UK Tax Tribunal to try to prove that the facts of their case satisfy the ECJ’s test.

 

Rupert Shiers adds: “HMRC will see this as a major victory. They were shocked to hear people arguing that once the ECJ intervenes to say that a piece of legislation is not quite right, the whole legislation is poisoned and it simply falls away. The courts have now said very clearly that you should just cut out the infection and leave the healthy parts intact.”

 

“In some ways, the Vodafone case is a decision on its own facts. The courts have ruled in other cases that - in narrow situations - an ECJ decision undermining a tax charge can eat away the whole provision. But if Vodafone had succeeded this would have been seen as major turning point. The downside is that HMRC may now go back to making every effort to ignore decisions from the ECJ.”

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