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Procedure.Tax
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N2-8. EU law
Duty of consistent interpretation
"[72] In Marleasing the CJEU held at [8]:
“…in applying national law, whether the provisions in question were adopted before or after the directive, the national court called upon to interpret it is required to do so, as far as possible, in the light of the wording and the purpose of the directive in order to achieve the result pursued by the latter and thereby comply with the third paragraph of Article 189 of the Treaty.”
[73] In Test Claimants in the FII Group Litigation v HMRC [2012] UKSC 19, [2012] 2 AC 337, Lord Sumption said at [176]:
“Marleasing, at any rate as it has been applied in England, is authority for a highly muscular approach to the construction of national legislation so as to bring it into conformity with the directly effective Treaty obligations of the United Kingdom.”
[74] In Wilkinson v Churchill Insurance Co Ltd [2012] EWCA Civ 1166, [2013] 1 All ER 1146 at [50], Aikens LJ said that “the obligation on the English courts to construe domestic legislation consistently with Community law obligations is both broad and far-reaching” and went on to restate the principles which should be applied when considering a conforming construction of a legislative provision which infringes EU law. Those principles were then summarised by Sir Andrew Morritt C in Vodafone 2 v HMRC [2010] Ch 27 at [37]-[32], and that summary was in turn approved by the Supreme Court In Swift v Robertson [2014] UKSC 50; [2014] 1WLR at [21].
[75] The parties agreed that the principles were as set out in the list below; this excludes the citations of authorities within the original judgment, but includes certain linking and clarificatory phrases added by Henderson J (as he then was) in Prudential Assurance Co Ltd v HMRC [2013] EWHC 3249 (Ch) [2014] STC 1236 at [101]:
(1) the obligation is not constrained by conventional rules of construction;
(2) it does not require ambiguity in the legislative language;
(3) is not an exercise in semantics or linguistics;
(4) it permits departure from the strict and literal application of the words which the legislature has elected to use;
(5) it also permits the implication of words necessary to comply with Community law obligations;
(6) the precise form of the words to be implied does not matter;
(7) it is only constrained to the extent that the meaning should “go with the grain of the legislation” and be compatible with the underlying thrust of the legislation being construed;
(8) it must not lead to an interpretation being adopted which is inconsistent with a fundamental or cardinal feature of the national legislation, since this would cross the boundary between interpretation and amendment; and
(9) cannot require the courts to make decisions for which they are not equipped or give rise to important practical repercussions which the court is not equipped to evaluate.
[76] It follows from these principles that Para 4(1) must be read consistently with Articles 73 and 79 of the PVD, so far as that is possible without breaching principles (7) to (9) above." (Talktalk Telcom Limited v. HMRC [2023] UKFTT 12 (TC), Judge Redston)
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- Retrospectivity not a valid objection
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"[87] That introduces one of the Respondents’ objections to HMRC’s proposed conforming interpretation set out in paragraph 86, namely that it impermissibly brings forward the effect of changes made by s30 of the Finance Act 2013. In the Respondents’ submission, Parliament legislated for those amendments to have effect only for accounting periods commencing on or after 1 April 2013. The Tribunal should not, under the guise of conforming interpretation, give legislation retrospective effect.
[88] We reject that submission. The process by which courts and tribunals interpret statutes inevitably results in what can loosely be termed “retrospective” effect since that process results in the true meaning of the statute being revealed only some time after it was enacted. That effect would be no more pronounced in this case simply because, as events turned out, Parliament chose to legislate in s30 of Finance Act 2013." (HMRC v. Volkerrail Plant Ltd [2022] UKUT 78 (TCC), Roth J and Judge Jonathan Richards)
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- Difficulties ascertaining practical repercussions not to be overstated
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"[89] The Respondents’ next objection was that the conforming interpretation proposed would lead to far-reaching practical repercussions which this Tribunal is not equipped to evaluate, thereby crossing the boundary between interpretation and amendment in the way set out in paragraph 115 of the speech of Lord Rodger of Earlsferry in Ghaidan v Godin-Mendoza [2004] UKHL 30. They argue that the question whether a loss is “deducted” is not straightforward in many cases. For example, the losses at issue in this appeal are subject to a “recapture” mechanism in the Netherlands. If it is known that the losses are to be recaptured in one, two or five years, are those losses “deducted” or not? By contrast, the wording of s403D(1)(c) asks a question about legal possibilities which can be answered in a straightforward way by reference only to the relevant nonUK law.
[90] We reject the Respondents’ argument, that difficulties associated with ascertaining whether a loss has been “deducted” are so complicated as to require specific and expanded legislative provision. That there is no need for such specific and expanded legislative provision is demonstrated by the fact that, when legislating in s30 of Finance Act 2013, Parliament gave no guidance on the meaning of the word “deducted”. Having had the opportunity to consider the matter, Parliament evidently concluded that the interpretation and application of this concept can appropriately be left to the courts." (HMRC v. Volkerrail Plant Ltd [2022] UKUT 78 (TCC), Roth J and Judge Jonathan Richards)
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- No interpretation against the grain of the UK legislation
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"[94] The CJEU returned to the limits of Marleasing in case C-268/06 Impact v Minister for Agriculture and Food [2008] 2 CMLR 47 at [100]:
"However, the obligation on a national court to refer to the content of a directive when interpreting and applying the relevant rules of domestic law is limited by general principles of law, particularly those of legal certainty and non-retroactivity, and that obligation cannot serve as the basis for an interpretation of national law contra legem."
[95] The expression "contra legem" means "against the law". In the context of the Marleasing principle, the content of that phrase was explained by Advocate General Bot in Dansk Industri (DI) v Estate of Karsten Eigil Rasmussen (Case C-441/14), [2016] 3 CMLR 27 at [68]:
"The Latin expression 'contra legem' literally means 'against the law'. A contra legem interpretation must, to my mind, be understood as being an interpretation that contradicts the very wording of the national provision at issue. In other words, a national court is confronted by the obstacle of contra legem interpretation when the clear, unequivocal wording of a provision of national law appears to be irreconcilable with the wording of a directive. The Court has acknowledged that contra legem interpretation represents a limit on the obligation of consistent interpretation, since it cannot require national courts to exercise their interpretative competence to such a point that they substitute for the legislative authority."
[96] He distinguished, in this connection, between national law laid down by case law on the one hand, and law enacted by the legislature on the other. He seems to me to have taken the view that to contradict "the very wording" of national legislation would amount to an interpretation contra legem. The court drew that distinction at [34]:
"Accordingly, the national court cannot validly claim in the main proceedings that it is impossible for it to interpret the national provision at issue in a manner that is consistent with EU law by mere reason of the fact that it has consistently interpreted that provision in a manner that is incompatible with EU law."
[97] If a proposed interpretation of national law goes beyond that limit, then the national court may be required to disapply the offending provision: Dansk Industri at [37].
...
[106] HMRC's first suggestion is, in effect, to replace "any member state" with "the United Kingdom". I do not consider that the Marleasing principle entitles a court to adopt an interpretation which is in direct contradiction to the words that Parliament has used. Moreover, section 18 (7) specifically contemplates a "warehousing regime" as including movements between warehouses in different member states. In Advocate Elmer's words, this suggestion invites us to read "A" as "B". HMRC's first suggestion would, in my judgment, be contra legem. I note, however, that this amendment has in fact been made by Parliament (see Taxation (Cross Border Trade) Act 2018 Schedule 8 para 16 (6) (d); but only with effect from 31 December 2020). The suggested conforming construction would have retrospective effect, although Parliament has expressly decided that it should not.
...
[109] In my judgment, although the UK has incorrectly widened the permissible scope of the exemption, the Marleasing principle does not allow that error to be corrected. Any necessary change would have to have been made by legislation." (HMRC v. Ampleaward Limited [2021] EWCA Civ 1459)
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"[78] Mr Hitchmough said that it was a “fundamental” and “cardinal” feature of Para 4(1) that consideration was deemed to be reduced by the offered discount, irrespective of whether or not the customer made the payment promptly so as to secure that discount. In his submission, any construction of Para 4(1) that stripped it of that feature would “go entirely against the grain of the legislation”. He added that Judge Morgan had come to the same conclusion in Virgin Media FTT when she said at [230]:
“My view is that the thrust of the legislation in this case is (and indeed the intended meaning of Para 4(1) could hardly be clearer) that the consideration on which VAT is to be charged is to be reduced where supplies are made on terms allowing or providing for a discount for prompt payment by the amount of the discount whether or not the discount provided for is in fact paid. To adopt an interpretation (whether by reading in words or otherwise) that the effect of Para 4(1) is that the relevant consideration is reduced only where a discounted sum is in fact paid would, therefore, go against the grain or thrust of the provision Parliament decided to enact.”
[79] Again, we agree with Judge Morgan for the reasons she gave." (Talktalk Telcom Limited v. HMRC [2023] UKFTT 12 (TC), Judge Redston)
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Examples
- Right to pay tax in instalments in relation to exit charge tax read in
"[62] For the same reasons I consider a conforming construction to be appropriate in the present case and have no hesitation in following Panayi. I gratefully adopt Judge Mosedale’s reasoning in relation to s 49B TMA which is equally applicable to s 49D TMA in the present case. Accordingly, a conforming construction should be applied to s 49D TMA which is to be read as follows:
Corporation tax for an accounting period is due and payable on the day following the expiry of nine months from the end of that period or, in cases where the taxpayer’s right of freedom of establishment would otherwise be infringed, in five equal annual instalments following the end of that period.
[63] Given my conclusions and adoption of Judge Mosedale’s decision in Panayi in relation to conforming construction it is not necessary for me to consider the question of disapplication." (Redevco Properties UK 1 Limited v. HMRC [2023] UKFTT 655 (TC), Judge Brooks)
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Strict interpretation of VAT exemptions (particularly ones not provided for in EU law)
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"[17] The following points are of relevance (see the Court of Appeal judgment at paras 17, 19 and 20):
(1) The exemptions contained in the PVD (and formerly the Sixth Directive) are independent concepts of EU law.
(2) The terms used in the PVD to specify exemptions must be interpreted strictly because they constitute exceptions to the general rule that VAT is to be levied on all services supplied for consideration by a taxable person.
(3) Where there is a specific exemption (here for the management of credit but only by the grantor of that credit), a broader exemption (here, article 135(1)(d)) should not be interpreted so widely as to undermine the deliberate legislative choice made in restricting other exemptions.
(4) Conversely, the phrase “debt collection” in article 135(1)(d) must be construed broadly because it is an exception to the exemption.
[18] What is meant by a strict interpretation was explained by Chadwick LJ in Expert Witness Institute v Customs and Excise Comrs [2001] EWCA Civ 1882, [2002] 1 WLR 1674, [2002] STC 42 as follows:
“17. … A ‘strict’ construction is not to be equated, in this context, with a restricted construction. The court must recognise that it is for a supplier, whose supplies would otherwise be taxable, to establish that it comes within the exemption; so that, if the court is left in doubt whether a fair interpretation of the words of the exemption cover the supplies in question, the claim to the exemption must be rejected. But the court is not required to reject a claim which does come within a fair interpretation of the words of the exemption because there is another, more restricted, meaning of the words which would exclude the supplies in question.”
[19] The purpose of the financial services exemptions, including article 135(1)(b) and (d), has been stated to be to alleviate the difficulties of determining the consideration for such services and therefore the tax base for VAT liability and also to avoid an increase in the cost of consumer credit - see, for example, Velvet & Steel Immobilien und Handels GmbH v Finanzamt Hamburg-Eimsbüttel (Case C-455/05) [2008] STC 922 at para 24." (Target Group Ltd v. HMRC [2023] UKSC 35)
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"[38] It is well established that zero-rating provisions must be interpreted strictly because they constitute exemptions to the general principle that all supplies of goods and services for consideration by a taxable person should be subject to VAT. They should not, however, be interpreted so strictly as to deprive the exemption of its intended effect. As stated by Lord Kitchin in SAE Education at para 42:
"In accordance with well-established principles, the terms used in articles 131 to 133 to specify exemptions from VAT must be construed strictly. Nevertheless, they must also be construed in a manner which is consistent with the objectives which underpin them and not in such a way as to deprive them of their intended effects."
See also Werner Haderer v Finanzamt Wilmersdorf Case C-445/05, [2008] STC 2171, para 18.
[39] The need for strict interpretation is particularly marked where, as in this case, it does not involve mandated EU exemptions, but rather national law exceptions tolerated by EU law within the constraints of the EU standstill provision. As explained by the Advocate General in Talacre Beach, national exceptions must be “interpreted narrowly” (para 17) and, because they are not directed at the same objectives as EU mandated exemptions, “it is necessary to take particular care that the exceptions are not extended” (para 42). The need for a strict interpretation was endorsed by the CJEU (para 23)." (News Corp UK & Ireland Ltd v. HMRC [2023] UKSC 7)
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See above - this is not a domestic principle of interpretation.
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Fiscal neutrality
- Fiscal neutrality cannot extend the scope of an exemption
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"News Corp’s case was that in view of the FTT’s finding that the digital editions are "fundamentally the same or very similar" to the printed editions from the point of view of the consumer (para 153), it would distort the market and breach fiscal neutrality for the digital editions to be standard-rated whilst the printed editions are zero-rated. As HMRC pointed out, however, this assumes that News Corp has already established what is necessary for it to succeed on the interpretation issue. If so, News Corp does not need to rely on the principle of fiscal neutrality. If not, the principle does not assist them as it is well established that it cannot be relied upon to extend the scope of an exemption - see, for example, Finanzamt Frankfurt am Main v-Hochst v Deutsche Bank AG [2012] STC 1951 (at para 45)." (News Corp UK & Ireland Ltd v. HMRC [2023] UKSC 7)
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Principle of effectiveness​
- Effectiveness not breached because rule makes claim difficult in a particular case
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"[70]...But if a particular procedural rule does not, of itself, make all or most claims excessively difficult, the fact that it does so in a particular case because of the difficulties encountered by a particular claimant does not mean that the tribunal will infringe the principle by failing to waive an otherwise proper rule." (HMRC v. NHS Lothian Health Board [2022] UKSC 28)
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