I’m quite interested in the Court of Appeal’s recent decision in this tax case, about Vodafone’s attempt to structure its takeover of Mannesman in the most tax-efficient way, using a Luxembourg-registered holding company to take advantage of lower rates in that country. The issue was whether the British tax legislation on “controlled foreign companies”, designed to enable the taxman to collect tax here in any event (minus the tax paid in Luxembourg) had to be disapplied as incompatible with EU law on freedom of establishment in the light of the ECJ’s ruling in C-196/04 Cadbury-Schweppes. The Court decided it should not be disapplied, as it can be read consistently with EU obligations so long as an exception from British taxation is read in for genuine, economically active European companies rather than merely artificial arrangements. Quite interesting from a tax point of view.
More interesting from a broader public law perspective is the way the Court approaches its task of interpretation. In deciding it could properly read an exception in to the tax legislation, applying the EU Marleasing principle of consistent interpretation, ultimately as a result of section 2(4) of the European communities Act 1972, the Court was guided by the law on interpretation under section 3 of the Human Rights Act, the Chancellor Sir Andrew Morritt explaining (para. 41) that
The terms of that section are in substance the same as the terms of s.2(4) ECA 1972 although the consequence of an inability to find a conforming interpretation is a declaration of incompatibility not disapplication in the manner I have explained.
He must be right: the similarity of the two provisions was pointed out by Lord Steyn in the leading human rights interpretation case, Ghaidan, which is referred to in the judgment. In the early days of the Human Rights Act, lawyers would look to EU law on consistent interpretation to construct arguments about what was possible under section 3 of the Human Rights Act; now the analogy seems to be the other way.
Interesting. What I don't understand, though, is why it mattered in this case whether the Marleasing principle applied.
As I understand it, the case was about a tax that was incompatible with a directly applicable provision in the Treaty. So Vodafone couldn't be made to pay that tax. Why does it matter whether you get to that result by reinterpreting the domestic legislation or by disapplying it?
The Court of Appeal was clearly right that you don't disapply the entire provision: you only disapply it to the extent that its application would breach Vodafone's rights under the Treaty.
But to the extent that you don't apply the provision to Vodafone, I don't see why it matters whether you call it reinterpretation or disapplication. The result is the same. (Of course, it would matter if the case was about a directive and the claim was against a private party.)
I think it matters a lot, either in this case or certainly in future cases.
The Chancellor explains in his intro how the issue gets to be one of interpretation vs. disapplication. But the way I'd explain it is this.
It's not right to say HMRC can't levy this tax. The question is whether it's completely precluded from doing so regardless of the truth about V, or whether it can still apply the provisions, but subject to an extra "Cadbury Schweppes" exception it has to give V the benefit of.
It may be that V isn't confident it can actually satisfy that extra exception. It may be that HMRC isn't sure V satisfies it. Or it may be simply that HMRC wants to preserve the possibility, for the future, of applying the tax to companies that fail to meet the CS exception.
V were arguing that the CS case entirely rules out the tax: there is no test for HMRC to apply. HMRC argued that they can assess V for the tax, as long as they first look at V and decide whether it meets the CS exception – being a genuinely economically active firm – and taxing if it's not, letting it off if it is.
The task for the court was to work out (1) exactly what the CS case requires – it said it was not an absolute ban on the tax in all circumstances and then (2) whether the UK legislation could be read as including the additional exception which the CS case did require – they decided it could be so read. Marleasing, and reading in, means the legislation is compliant with EU rules, so direct effect does not lead to its disapplication.
Helpful, I hope…
Yes, I think I see that (although I wouldn't pretend to understand all the intricacies). But I think my point is more about what 'disapplication' entails.
To the extent that, on the facts of the particular case before you, applying the national legislation would result in a breach of Community law, then you don't apply it. And in order to decide whether it's lawful to apply the rule in the particular case, you do the whole Cadbury-Schweppes thing: you ask whether it is justifiable to impose this tax on these people in these circumstances. If it is, you can tax them. If it's not, you can't. But why does it matter whether you call that disapplication or reinterpretation?
To put it another way, weren't Vodafone overbidding? They argued that if you can't reinterpret the national legislation, then you have to disapply it in its entirety, regardless of whether it would be justified to impose the tax on the facts of the particular case. My question is whether that's the right analysis. Doesn't the process of deciding whether the legislation should be disapplied involve doing precisely the same exercise as giving effect to the 'reinterpreted' legislation?
I can see that the limits of Marleasing sometimes matter a good deal. For instance, in Bodycraft the problem was that the national limitation rules for reclaiming overpaid tax breached EC law. In that sort of case, if the Marleasing principle is available, then you can rewrite the time limit in a way that makes it comply with EC law. If you can't, though, then you have to disapply the whole provision, which means there's no time limit at all (even though it would have been lawful for the state to impose a different time limit).
But is that case the same as this, where (as I understand it) you have a national rule that EC law sometimes allows you to apply and sometimes doesn't?