In its opinion in the Autologic case, the House of Lords has addressed the issue of the competing jurisdictions of the Commissioners of Income Tax (usually the Special Commissioners) and the High Court to hear and determine claims by taxpayers for relief from the adverse effects of tax legislation found to be incompatible with European community law. When should such a claim be brought as an appeal against an assessment to tax through the Special Commissioners and when is it appropriate to seek compensation through the Court? The House of Lords’ judgment addresses the issue of who should hear the claim, but perhaps of more broader significance is the conclusions the majority appear to reach upon who can hear such claims.
Where the High Court’s jurisdiction ends in tax matters has been a contested issue for many years. The ancestor of many of the claims for compensation now being pursued through the courts by corporate taxpayers contending that they have suffered the ill effects of legislation incompatible with the UK’s international obligations, is the Woolwich Building Society case . In July 1986, believing (correctly) the 1986 regulations introducing composite rate tax upon building societies to be ultra vires, the Woolwich did not adopt the then conventional route of awaiting an imminent assessment to the tax and appealing that assessment through the available statutory procedure. Instead they paid the tax under protest and commenced proceedings in the High Court, first for a declaration that the underlying legislation was unlawful and then for compensation which ultimately became a claim to recover interest on the tax so paid.
In 1995 the Hoechst and Metallgesellschaft claimants adopted in effect the same approach in seeking compensation for the payment of ACT using High Court claims to seek compensation for the effect of having paid an unlawful tax . In the course of those proceedings, as in the Woolwich case, the Revenue accepted the High Court’s jurisdiction to hear such claims although they did argue before the European Court that the claims should be disallowed because the taxpayers had failed to mitigate their loss by challenging the tax imposts through the alternative statutory procedure. That argument was rejected by the European Court.
When the taxpayers won the Hoechst case in March 2001, others seeking like compensation also issued their claims as claims for compensation in the High Court. Indeed the Revenue’s standard response at the time to attempts by taxpayers to make claims direct to their Inspectors was to require all such claims to be made instead through the High Court.
A different response was received however when taxpayers sought to use the same route to challenge the UK’s group relief provisions in December 2002. In what subsequently became the Loss Relief Group Litigation, a large number of company groups issued High Court claims for compensation alleging that the exclusion from group relief of non resident losses had given rise to a variety of adverse tax effects. At its simplest the groups had paid tax in the UK earlier than they would have, had group relief been made available for non resident losses. The Revenue’s immediate response was that such claims should not have been brought as claims for compensation in the High Court but as claims for group relief using the statutory procedure which, when inevitably refused, could then be appealed to the Special Commissioners.
By the time this argument reach the House of Lords in May this year, the position of the Revenue (now of course HMRC) had been refined. HMRC accepted, it could hardly have denied it, that as matters stood in the main it was in fact impossible to make a group relief claim using the statutory procedure as many essential aspects of the procedure could not be complied with where the loss was non resident. With admirable candor HMRC even admitted that Inspectors had refused applications on that basis and intended to challenge the validity of such claims on procedural grounds. Their position was that if the taxpayers were right and the group relief system did not comply with community law then the Special Commissioners would be obliged to alter that procedure to accommodate such claims.
HMRC did accept however that this argument could only be made where the taxpayers sought the recovery of cash tax actually paid. In other words this adapted statutory route was required where the taxpayers alleged that a payment of cash tax in the UK could have been sheltered by a foreign loss. Claims of this nature became known as “category 1 claims”. Three other categories of claim were however identified in relation to which HMRC accepted that the only available avenue was a claim for compensation made to the High Court. These were claims where the UK taxpayers contended not that they could have sheltered cash tax with a foreign loss but that had they been able to surrender the foreign loss they would not have used other reliefs and capital allowances (category 2) to reduce their UK tax liability or taken surrenders from other UK members (category 3) which UK reliefs could then have been carried forward or put to alternative use. The 4th category were claims by the non resident loss maker who, had the UK system permitted the surrender of losses cross border, would have been able to monetize its loss by receiving a compensating payment from the recipient company.
So to HMRC to make a category 1 claim required an adaptation of the existing statutory procedure available for domestic group relief claims. The existence of such a procedure excluded the jurisdiction of the High Court. This prohibited the taxpayer from seeking compensation as the alternative. The other claims could however only be made in the High Court. If a category 1 claim was now beyond the time limit available for statutory claims, and the Special Commissioners did not in adapting their procedure extend that time limit, then it was statute barred even if the claim would have been within time if brought as a High Court claim.
This approach does accept some ambit to the High Court’s jurisdiction in tax matters. For, it was only in the context of the recovery of cash tax that HMRC maintained that the High Court claims replicated appeals against assessments to tax. Other adverse tax effects were compensable through High Court claims. Indeed in several of the other group litigation actions, HMRC construe the equivalent of category 2 and 3 claims as damages claims, beyond the ambit of the Special Commissioners powers to grant.
Within this context what the majority of the House of Lords consider should happen can be easily stated. Categories 2, 3 and 4 claims proceed through the High Court and should return there for a possible reference of questions to the European Court if the High Court believes it convenient, this much is agreed. Where a category 1 claim has been made or can be made within the time period available under the statutory procedure, then that is the procedure to be followed, with an invocation that HMRC should not use procedural objections and the difficulties in organizing and managing multiple claims before the Special Commissioners to hinder their progress. Where claimants have brought parallel claims in the High Court of such a nature, those claims should be stayed to enable the statutory component to progress and need only be resurrected if the adaptations of the statutory procedure required to accommodate the cross border elements of the claim become too onerous. Interestingly where category 1 claims cannot be made within the statutory time period, and HMRC or the Special Commissioners will not extend that period, then they can be brought in the High Court where claimants can benefit from the possibly longer time periods available for making such claims .
Implicit within this conclusion of the majority of the House of Lords is a more expansive approach to the High Court’s jurisdiction than is suggested on the surface. For the conclusion reached is not in any case that the High Court’s jurisdiction is “excluded” by the existence of a statutory procedure. If statute had excluded its jurisdiction it would not be possible to bring category 1 claims in the High Court where they were now beyond statutory time limits. It would not be possible for the Court to “stay” the High Court component of category 1 claims run in parallel with statutory group relief claims which were made in time. Rather the only permissible conclusion in those circumstances would be to strike out the High Court component leaving the taxpayer to their exclusive statutory remedy.
Rather the speeches of the majority of the House of Lords note not that the High Court’s powers are excluded but that the appropriate course is to rely first on the statutory tribunal where the relief sought replicates an appeal against an assessment. While Lord Nichols is of the view that it is a misuse of the court’s powers and a claim to the court is misconceived where the same result could be achieved by using the statutory tribunal to appeal an assessment, this seems to be because High Court claims will “not normally be appropriate” when “in the ordinary course the underlying primary remedy” can be given by the statutory tribunal . It seems to follows that the High Court is not excluded from giving relief, rather “in general the appropriate remedy” if time still permits is the statutory appeal mechanism . Otherwise how could the High court route remain open in any circumstances in category 1 claims?
This reading perhaps assists some of the difficult practical considerations now facing taxpayers. When in the group relief context (and perhaps others) do claims to redress the adverse consequences of corporate tax provisions incompatible with community law look like a category 1 claim in the Autologic context and when are they better seen as one of the other characterizations? If the Advocate General is followed in the Marks and Spencer case and such claims become claims for the timing difference created by the restricted jurisidictions in which the reliefs could be used, will anyone have a category 1 claim at all? In those cases will category 1 claims become damages actions not compensable in the Specials? How is the statutory procedure to be adapted? When are claims “within time” if claims for compensation but “out of time” as appeals against assessments and vice versa?
To these questions this approach to the judgment offers at least an interim solution but a safe one. If claims are brought both as statutory claims and High Court claims, then as the High Court can hear claims whether or not they fall within category 1, if procedural or timing difficulties restrict the ability to proceed using the statutory route, the claim still remains preserved.
Originally appeared in BNA Inc's Tax Planning International: European Union Focus November 2005 edition. Reprinted with Permission.