Judgment summary
This appeal concerned diverted profits tax (DPT) charging notices issued by HMRC to three UK-resident companies in the Thomson Reuters group on 20 August 2021, totalling more than £167 million, for the accounting period 1 January to 31 December 2018 (1). The largest charge, £167,400,683.57, was levied on Refinitiv Limited, with £51,137.31 on Refinitiv UK Eastern Europe Limited and £7,073.20 on Lipper Limited (1).
The lawfulness of the notices turned on whether they were inconsistent with an advance pricing agreement (APA) made between TR UK and HMRC in January 2013 under Part 5 of the Taxation (International and Other Provisions) Act 2010 (TIOPA) (2).
The Court of Appeal upheld the Upper Tribunal's decision dismissing the claim, finding that the 2018 accounting period fell outside the temporal scope of the APA and that there was accordingly no public law objection to the DPT assessments (75).
Background
TR UK (Refinitiv Limited, Refinitiv UK Eastern Europe Limited and Lipper Limited) supplied IP-related services from 2008 to 2018 to Thomson Reuters Global Resources (TRGR), a Swiss-resident group company holding the group's main IP assets (4). HMRC's case was that TR UK did not receive arm's length compensation for these services, giving TR UK a potential UK tax advantage (4).
In January 2013, TR UK and HMRC concluded an APA covering the period 1 October 2008 to 31 December 2014, using the Transactional Net Margin Method (TNMM), described for convenience as a cost-plus method, with mark-ups of between 6% and 15% (6, 7).
The APA expired on 31 December 2014 and was not renewed; TR UK's application for a new APA was withdrawn on 13 September 2018 (8). In 2018, TRGR sold the IP for a substantial gain as part of the disposal of the Financial & Risk business unit to Refinitiv Holdings Limited (4).
HMRC subsequently formed the view that a profit-split methodology, rather than cost-plus, should apply to the IP-related services from 2015 onwards, and issued DPT charging notices to TR UK for 2015 to 2018 (15). Only the 2018 notices were challenged by judicial review (15).
Core dispute
The claimants argued that HMRC's inclusion in the 2018 DPT charging notices of amounts calculated on a profit-split basis, in addition to the earlier cost-plus calculation under the APA, was inconsistent with the binding terms of the APA and with TIOPA section 220, and therefore unlawful in public law as unfair, irrational or an abuse of power (19).
The central legal question was whether the 2018 accounting period was a chargeable period 'to which the APA relates' within the meaning of section 220(1) of TIOPA, given that the APA's specified five-year term ran only from 1 October 2008 (with roll back) to 31 December 2014 (49, 68).
TR UK contended that because the services supplied during 2008-2014 contributed to TRGR's profits and the 2018 IP sale gain, the APA's cost-plus pricing of those services was exhaustive and continued to bind HMRC when calculating TR UK's 2018 profits (54).
Court findings
The Court of Appeal agreed with the Upper Tribunal that the question whether an accounting period is one to which an APA 'relates' must be answered by examining the terms of the APA itself, given that corporation tax is an annual tax (69).
The court held that the various temporal expressions in clause 3 of the APA, namely 'duration', 'currency' and 'years covered by this agreement', were different but natural ways of referring to the five-year term specified in clause 9, and did not extend the APA's effect beyond that term (72, 73).
The court rejected TR UK's submission that clause 3 gave TR UK vested or accrued contractual rights to have the 2008-2014 transactions priced on a cost-plus basis irrespective of when the question of pricing arose, describing these submissions as 'bare assertions' (74).
The court found that reliance on R (Veolia ES Nottinghamshire Ltd) v Nottinghamshire County Council [2010] EWCA Civ 1214 was of no assistance, as that case concerned a different statutory context of document inspection rights (71).
The court noted the established principle that res judicata and issue estoppel do not apply from one year to the next for income tax or corporation tax, citing Caffoor v Income Tax Commissioner [1961] AC 584 (64).
The court concluded that the 2018 accounting period fell outside the temporal limits and effective scope of the APA, so it was not a period to which the APA related under section 220(1), and there was no public law objection to the DPT assessments (75).
Outcome
The Court of Appeal dismissed the appeal, upholding the Upper Tribunal's decision of 23 October 2023 which had dismissed TR UK's claim for judicial review (78).
Lady Justice Whipple and Lord Justice Underhill agreed with the judgment of Sir Launcelot Henderson (79, 80).
The court noted that TR UK had lodged appeals against the DPT charging notices to be pursued in the First-tier Tribunal on multiple grounds if the judicial review failed (37).
Tp method highlighted
The APA used the Transactional Net Margin Method (TNMM) to determine TR UK's compensation for Non-UK Distribution activities and for seven of eight specified categories of services provided to TRGR, with mark-up percentages of between 6% and 15% 'for the period of the agreement' (7). Although technically yielding a net rather than gross profit, this was described by the parties and the Upper Tribunal as a cost-plus method (7). For Synergy and Integration Services, a cost-allocation approach was specified (42), and a profit-split method was used for certain royalties under clause 5.1 (43).
Following expiry of the APA, HMRC considered that a profit-split methodology, rather than cost-plus, was appropriate for later accounting periods, on the basis that TR UK's services made a significant contribution to the value of TRGR's intangibles and should be rewarded by reference to a share of profits generated from use of the intangibles and from the IP value crystallised on the 2018 sale (15, 17).
The relevant alternative provision (RAP) for DPT purposes was identified by HMRC in the charging notice as assuming centralised legal ownership of non-trademark IP rights with arm's length pricing applied to all related transactions, entitling Refinitiv to additional arm's length compensation for DEMPE functions carried out mainly in the UK and US (16).
Major issues / areas of contention
- Whether the 2018 accounting period was a chargeable period 'to which the advance pricing agreement relates' within the meaning of section 220(1) of TIOPA.
- Whether the DPT charging notices for 2018, calculated partly on a profit-split basis, were inconsistent with the cost-plus methodology agreed in the APA for 2008-2014.
- The proper construction of clause 3 of the APA, including whether 'duration', 'currency' and 'years covered by this agreement' referred to the same five-year term.
- Whether the reasoning in R (Veolia ES Nottinghamshire Ltd) v Nottinghamshire County Council on the meaning of 'relating to' assisted the interpretation of section 220 TIOPA.
- Whether the referability of 2008-2014 services to TRGR's 2018 profits was sufficient to establish that the APA related to the 2018 chargeable period.
- Whether HMRC's issue of DPT notices for 2018 amounted to an unlawful abuse of power, error of law or irrationality in public law terms.