Judgment summary
This case concerns a claim for judicial review by Glencore Energy UK Limited (GENUK) against a Charging Notice issued by HMRC under the Diverted Profits Tax (DPT) regime in Part 3 of the Finance Act 2015 (FA 2015). HMRC assessed that GENUK had diverted profits to its Swiss parent, Glencore International AG (GIAG), via a service charge of 80% of GENUK's net operating profits under a Risk and Services Agreement (RSA) (paras 3-4).
HMRC's Designated Officer, Ms Maura Parsons, issued a Preliminary Notice on 6 September 2016 and then a Charging Notice on 3 November 2016 for £21,347,570.14 (para 41). GENUK paid the tax and HMRC commenced the statutory review under section 101 FA 2015. In parallel, GENUK brought judicial review proceedings on four grounds (para 5).
Green J refused permission for judicial review at first instance, holding there was a suitable alternative remedy in the statutory review and appeal process (para 6). Permission to appeal was granted, and the Court of Appeal itself heard the substantive judicial review claim (para 7).
The Court of Appeal (Sales LJ, with Singh LJ and Gloster LJ agreeing) dismissed the application. It held that the statutory review under section 101 combined with the right of appeal under section 102 FA 2015 constituted a suitable alternative remedy, and that none of GENUK's four grounds were made out on the merits (paras 71-98).
Background
DPT was introduced by Part 3 of FA 2015 with effect from 1 April 2015 to counter aggressive tax planning by multinational groups diverting profits from the UK to low tax jurisdictions (para 8).
The statutory scheme requires a Designated Officer to issue a Preliminary Notice within 24 months of the end of the relevant accounting period if she has reason to believe DPT is due (section 93 FA 2015). The taxpayer has 30 days to make representations (section 94), after which HMRC has 30 days to decide whether to issue a Charging Notice (section 95). The taxpayer must pay any DPT charged within 30 days, without the ability to postpone payment during any review or appeal (section 98). HMRC must then conduct a review within a 12 month review period (section 101), after which the taxpayer has 30 days to appeal to the First-tier Tribunal (Tax Chamber) (section 102) (paras 2, 19-21).
For a considerable period before FA 2015 came into force, HMRC and GENUK had discussed the transfer pricing treatment of the RSA service charge; this expanded to cover DPT once Part 3 of FA 2015 took effect (para 22). GENUK initially accepted that the effective tax mismatch outcome (ETMO) condition was satisfied, confirming in a letter of 27 April 2016 that GIAG's Swiss tax rate on the service charge was around 11% (para 24). The main point of dispute was whether the 'insufficient economic substance condition' was met and what the relevant alternative provision would have been (para 23).
HMRC's assessment proposed replacing the RSA's loss insurance arrangement with a working capital funding arrangement, and valued GIAG's alleged non-routine contributions (priority access to storage and transportation facilities) at $0 for lack of evidence (para 27). On 5 October 2016, the final day for representations, GENUK withdrew its earlier concession on the ETMO condition and asserted a new Swiss tax rate of 16.92%, together with disputing the calculation of the working capital deduction and the nil valuation of non-routine services (para 34).
Core dispute
GENUK sought judicial review of the Charging Notice on four grounds: (1) that the Designated Officer wrongly applied the 'reason to believe' test applicable to a Preliminary Notice rather than the stricter 'considers' test applicable to a Charging Notice under section 95(5)(b) FA 2015; (2) that the Designated Officer failed to take account of GENUK's representations; (3) that the Designated Officer failed to give any or adequate reasons for the DPT calculation; and (4) that the calculation of DPT was irrational in two respects, namely the reduction of the working capital funding deduction (deduction (i)) and the nil valuation given to non-routine services (deduction (ii)) (para 5).
A threshold issue was whether judicial review should be refused because a suitable alternative remedy existed, namely the mandatory review under section 101 FA 2015 combined with a right of appeal to the FTT under section 102 (para 6).
A further point of statutory interpretation arose as to whether, on a review under section 101(3)(b), the Designated Officer could conclude that no DPT was due at all, or only adjust quantum (para 68).
Court findings
The Court held that the statutory review under section 101 FA 2015, combined with the right of appeal under section 102, constituted a suitable alternative remedy, such that judicial review should be refused (paras 52, 71). Judicial review is ordinarily a remedy of last resort, and in the tax context the appeal regime on the merits is the appropriate mechanism, save in exceptional cases involving abuse of power of a fundamental character, applying In re Preston [1985] 1 AC 835 (paras 55-63).
On section 101(3)(b), the Court held that the Designated Officer's powers on review are not limited to adjusting quantum but extend to concluding that no DPT is due at all, rejecting GENUK's narrower construction (paras 68, 70).
On Ground (1), the Court found that the Charging Notice stated in terms that the conditions of section 80(1) 'are considered to be met', consistent with the correct statutory test under section 95(5)(b), and that the evidence confirmed the correct test was applied (paras 74-79).
On Ground (2), GENUK accepted that the Designated Officer had in fact considered its representations and merged this ground with Ground (3) (para 80).
On Ground (3), the Court held there is no common law duty to give fuller reasons than required by section 95(5) FA 2015, and that even if such a duty existed, section 31(2A) of the Senior Courts Act 1981 would preclude relief because the outcome would not have been substantially different (paras 81-88).
On Ground (4), the Court found no irrationality in either deduction (i) or deduction (ii). As to deduction (i), it was not possible to establish irrationality without close attention to the PwC thin capitalisation report, which was not before the court (paras 94-96). As to deduction (ii), the nil valuation was rational given GENUK's failure to provide concrete evidence of the non-routine services provided or their value (para 97).
Outcome
The Court of Appeal dismissed GENUK's application for judicial review, holding that a suitable alternative remedy existed in the form of the review under section 101 FA 2015 in conjunction with the right of appeal to the FTT under section 102 FA 2015, and that GENUK's grounds for judicial review were in any event not made out on their merits (para 98). Lord Justice Singh and Lady Justice Gloster agreed with the judgment of Lord Justice Sales (paras 99-102).
Tp method highlighted
HMRC's proposed relevant alternative provision under section 82(5) FA 2015 replaced the RSA's insurance arrangement with a hypothetical arrangement whereby GENUK would have been appropriately capitalised to absorb its own operating losses, and would have paid GIAG for working capital funding and any identifiable support services. A deduction of US$6,317,000 was estimated for working capital funding costs, reduced proportionately from a 4:1 to a 1:1 debt:equity ratio based on the closest comparable identified in PwC's thin capitalisation benchmarking analysis of July 2015 (paras 30-31). A nil value was given for a service fee payable for GIAG's alleged non-routine support services (referable to Chapter VII of the OECD Transfer Pricing Guidelines), on the basis that GENUK had provided insufficient evidence of what services were rendered, how they were quantified, and how they were priced (paras 32, 46).
Major issues / areas of contention
- Whether judicial review should be refused because a suitable alternative remedy existed in the form of the section 101 FA 2015 review combined with a section 102 appeal to the FTT.
- Whether the Designated Officer applied the wrong statutory test (the Preliminary Notice 'reason to believe' test rather than the Charging Notice 'considers' test) when issuing the Charging Notice.
- Whether the Designated Officer failed to take account of GENUK's representations made on 5 October 2016.
- Whether there is a common law duty to give reasons for a Charging Notice beyond that required by section 95(5) FA 2015, and if so, whether relief should be refused under section 31(2A) of the Senior Courts Act 1981.
- Whether the calculation of DPT was irrational in respect of the working capital funding deduction (deduction (i)).
- Whether the calculation of DPT was irrational in giving a nil value to non-routine services allegedly provided by GIAG (deduction (ii)).
- The proper interpretation of section 101(3)(b) FA 2015, namely whether the Designated Officer's review powers extend to concluding that no DPT is due, or are limited to adjusting quantum.