The First-tier Tribunal (“FTT”) released its decision in The Felixstowe Dock and Railway Company & Others v Commissioners for HMRC  UKFTT 838 on 19 December 2011. The Applicants were UK resident companies in the Hutchison Whampoa group, whose ultimate parent was resident in Hong Kong. They had claimed consortium relief for losses in the joint venture Hutchison 3G UK Limited (“3G”), which was part owned by the Hutchison group through a Luxembourg resident link company.
Three questions were put to the FTT: (1) Is the fact that the UK requires a link company to be to be UK resident a breach of the freedom of establishment where the ultimate parent of the group is resident outside the EU? (2) To what extent does the non-discrimination article (“NDA”) in the UK/Luxembourg Double Taxation Convention (“DTC”) impact on the claims? (3) What is the impact of section 410 ICTA (which precludes group relief where certain specified “arrangements” exist)?
The first question has been referred to the ECJ and overlaps with the questions referred in the Philips Electronics case (C-18/11), which was heard by the ECJ on 16 February 2012.
As to the second question, the wording of the NDA prohibits a company in one contracting state owned by a resident of the other from being subjected to “taxation or any requirement connected therewith which is other or more burdensome” than other similar enterprises in the first state. In the Upper Tribunal’s decision last October in the FCE Bank case, the UK’s pre-Finance Act 2000 group relief rules were found to be in breach of the NDA in the UK/US Double Taxation Convention. In the Felixstowe case, the relevant non-UK company was the link company, which owned the interest in the surrendering company (3G), rather than in any of the companies claiming the consortium relief. The FTT found that the inability of 3G to make use of its losses by way of surrender did breach the NDA, even though the surrendering entity was not the company required to pay the tax.
On the third question, the taxpayers argued that because s410 was an anti-avoidance provision, the “arrangements” referred to in the legislation must be “avoidance arrangements”. The FTT looked at the ordinary meaning of the words and concluded that arrangements of any kind were caught. As things now stand, therefore, taxpayers should exercise caution in respect of buy out rights in joint ventures where group or consortium relief may be an issue.