In Trustees of Panico Panayi A&M Settlements and Redevco Properties UK Limited HMRC [2024] UT319, the Upper Tribunal (UT) held that under a 'conforming interpretation' of UK law, the FTT was able to retrospectively insert a new five-year payment deferral rule on a dry exit charge applied when a trust or company moved their tax residence abroad.
- The Panayi Trust lost its UK residence in 2004 when it appointed new trustees, the majority of whom were resident in Cyprus.
- UK-incorporated company Redevco Moved its place of effective control and management to the Netherlands in 2010.
- In each case, HMRC applied an exit charge under Capital Gains Tax (CGT) rules.
- For Redevco there was additionally a liability under the Loan relationship rules.
- An exit charge arose because, under UK law, the entities' applicable assets were treated as being disposed of on migration and then immediately reacquired at market value.
Over many years in litigation before the Court of Justice of the European Union (CJEU) it has been argued that such charges are contrary to EU law and its principle of ‘freedom of establishment':
- The CJEU has established that payment in instalments over five or ten years is compatible with taxpayers’ EU law rights.
- The result is that CJEU has established that an exit charge is only unlawful where a state does not allow for deferral in payment of the tax charged.
Conforming interpretation can be a judicial necessity as it allows a court to remake legislation, with retrospective effect, when external laws conflict with domestic laws. Such has been the case when UK legislation conflicts with EU laws.
When applied to the circumstances of each appellant, the First Tier Tribunal (FTT) could effectively re-write UK tax law by confirming that the UK’s exit charge applied, but adding that the tax payments could be deferred over five years.
The taxpayers appealed the FTT’s decisions to the UT.
The UT found that the imposition of an exit tax under s.80 TCGA is not the aspect of UK domestic law that infringes the EU law rights of the Trustees, rather it is the failure of UK domestic law to provide for a deferral of the payment of that liability. The breach (in the case of the Trustees) is in s.59B TMA.
It noted:
- In adopting a conforming interpretation, we cannot go beyond what is necessary to remedy the breach. The precise form of words does not matter and we do not need to engage in legislative drafting.
- This treatment went "with the grain of the legislation" and was “compatible with the underlying thrust of the legislation being construed”.
- Whether a conforming interpretation is possible is a matter for domestic law and not a matter for the CJEU.
- A similar analysis in respect of the corresponding Corporation Tax provisions applied to Redevco.
In previous appeals the FTT had also determined that no interest applied to the deferred payment. The UT found that the FTT did not have the power to make this adjustment to the law and reversed it.
The co-joined appeals were dismissed.
Useful guides on this topic
Non-Resident Trusts
When is a trust non-resident? What are the UK tax implications of a non-resident trust? What are the UK tax implications for any beneficiaries? What are the UK administrative requirements for a non-resident trust?
Company residence: Start here
How is company residence established? What tests are applied by the courts?
UK trusts
What is a trust? What types of trust are there? How are UK trusts taxed?
Transfer of Assets Abroad (ToAA)
Anti-avoidance legislation can create a different form of 'exit charge' to the one in this case. What are the TOAA rules? When do they apply? How is the tax charge calculated? Is there any defence against the rules?
External links
Trustees of Panico Panayi A&M Settlements and Redevco Properties UK Limited v HMRC [2024] UT319
