Background
These two conjoined appeals arose from exit charges imposed by UK tax legislation when taxpayers relocated from the United Kingdom to other EU member states. In Panayi, Cypriot-born Mr Panayi established four family trusts in 1992. In 2004, a majority of the trustees became resident in Cyprus, triggering a deemed disposal under section 80 of the Taxation of Chargeable Gains Act 1992 and an exit charge of approximately £333,000. In Redevco, a UK-incorporated real estate company migrated to the Netherlands in January 2008, triggering exit charges under section 185 TCGA and paragraph 10A of Schedule 9 to the Finance Act 1996 on a chargeable gain of approximately £139.7 million.
It was common ground in both cases that the relevant payment provisions — section 59B of the Taxes Management Act 1970 (for the Trustees) and section 59D TMA (for Redevco) — as enacted were incompatible with the EU Treaty right of freedom of establishment under the TFEU, because they required immediate lump-sum payment of exit tax with no option to defer. The Court of Justice of the European Union had confirmed, following a reference in Panayi, that the absence of any deferral option rendered the charges disproportionate.
The First-tier Tribunal adopted a “conforming interpretation” in each case, reading words into the relevant payment provisions to allow payment of the exit charge in five equal annual instalments. The Upper Tribunal upheld that conforming interpretation but set aside the F-tT’s treatment of interest, concluding it had exceeded its jurisdiction on that issue. Both appellants challenged the conforming interpretation approach and various aspects of the UT’s decision; Redevco additionally challenged the UT’s ruling on interest.
The Court’s Holding
Lady Justice Elisabeth Laing, with whom Lady Justice Asplin and Lord Justice Miles agreed, dismissed both appeals. The Court held that the F-tT had committed no error of law in adopting a conforming interpretation of the legislation. Drawing on the established line of authority from Pickstone v Freemans Plc [1989] 1 AC 66, Litster v Forth Dry Dock [1990] 1 AC 546, and Vodafone 2 v Revenue and Customs Commissioners [2009] EWCA Civ 446, the Court confirmed that, under section 2(4) of the European Communities Act 1972, domestic courts were required and entitled to read UK legislation purposively so as to give effect to directly enforceable EU rights. The conforming interpretation — reading sections 59B and 59D TMA as permitting five annual instalments in cases where the taxpayer’s right of freedom of establishment would otherwise be infringed — achieved the minimum necessary modification to cure the EU law incompatibility without going further than required.
The Court further held that many of the adverse consequences about which the appellants complained arose not from the conforming interpretation itself but from the inherent retrospectivity of declaratory court judgments in English law: the law, once declared, was always taken to have been the law. This was not a defect in the conforming interpretation but an intrinsic feature of the declaratory nature of judicial decisions. On interest, the Court agreed that the F-tT had no jurisdiction to make any determination about interest — but found, on careful examination of the F-tT decisions, that neither tribunal had in fact purported to do so. The UT had therefore lacked jurisdiction to set aside and re-make determinations on interest, meaning Redevco’s ground of appeal on this point succeeded in principle, albeit without altering the outcome.
Key Takeaways
- UK courts may use “conforming interpretation” under the European Communities Act 1972 to read additional words into tax legislation in order to cure an incompatibility with EU fundamental freedoms, provided the modification goes no further than the minimum necessary to remedy the breach — here, permitting payment of exit tax by five annual instalments.
- Taxpayers cannot successfully object to the retrospective effect of a conforming interpretation simply because that retrospectivity creates hardship: retrospectivity is an intrinsic feature of the declaratory nature of court decisions, not an independent wrong introduced by the interpretation itself.
- Jurisdiction over interest on tax liabilities is conferred by specific statutory provisions and falls outside the scope of a tribunal’s appeal jurisdiction unless Parliament has expressly granted it; neither the F-tT nor the UT could determine interest entitlements in these proceedings.
- The EU law analysis applies to the law as it stood at the time of the transactions; subsequent legislative amendments or repeal of the ECA are irrelevant to the liability that crystallised before those changes.
Why It Matters
This decision provides authoritative Court of Appeal guidance on the scope and limits of “conforming interpretation” as a remedy for EU law incompatibility in the tax context, confirming it as a viable alternative to outright disapplication even where it requires implying new words into unambiguous statutory text. For advisers dealing with pre-Brexit exit charges that were never definitively resolved, the ruling establishes that a five-instalment payment structure is the correct legal reading of the relevant TMA provisions — and that no further remedy in respect of the timing of payment is available by way of conforming interpretation.
The case also clarifies the jurisdictional boundaries for tax tribunals on ancillary matters such as interest: parties who believe interest has been improperly charged or withheld must pursue that issue through the specific statutory channels provided for it, and cannot obtain a ruling on interest as a by-product of an appeal against a closure notice. Given the large sums at stake in corporate migration cases — Redevco’s exit charge alone ran to well over £100 million — the ruling will be closely studied by multinationals and their advisers who have similar legacy EU-era exit-charge disputes still working through the tribunals.