KPMG has reported on the Court of Appeal ruling in favour of HMRC in its dispute with Vodafone over the UK’s Controlled Foreign Company rules.
HMR’s win is important. As important is this note as to the reasoning used:
The Court of Appeal reversed the High Court decision and agreed with HMRC that the CFC rules could be construed as being compatible with the decision of the ECJ in Cadbury Schweppes as if the following extra exemption were read into the legislation at s748 (1) or (3):
‚Äòif it (i.e. the CFC) is, in that accounting period, actually established in another member state of the EEA and carried on genuine economic activities there’.
The Court recognised that there is a fine distinction between interpretation (reading into the legislation additional wording or meaning as has been done above) and the creation of totally new legislation. However the Court held that in this case it IS a matter of interpretation and reading in the above wording to the CFC legislation does not constitute new legislation because ‚Äòit go[es] with the grain of the legislation.
I have long argued for an equitable basis of interpretation of tax law i.e. a reading in of necessary words to ensure that the spirit of the law is upheld when it has been attacked by those seeking to use a literal, legal interpretation.
It seems to me we got an equitable interpretation here.
This is bound to go to the House of Lords. I hope they uphold this. Any thing else would be wrong, not least because as KPMG also note:
In particular the CoA suggested that allowing the total disapplication of the CFC rules would in fact allow some CFC’s that fall outside the ECJ decision inCadbury Schweppes (i.e., those without genuine economic activities) to benefit even though the ECJ has suggested such companies should still fall within the UK CFC rules.
Moves in this direction are important: when we recognise it’s the spirit and not the letter of the law that mattes then we have opportunity to create a General Anti-Avoidance Principle work.
There’s more on all of these issues here.