In the recent case of Gallaher, the UK’s First-tier Tax Tribunal reached a surprising conclusion on the UK’s intra-group transfer regime.
Section 171 TCGA allows assets to be transferred within a tax group on a “no gain/no loss basis”, so long as the assets remain within the UK tax net. The tribunal held that the disapplication of s171 to a transfer to an EU group company was a restriction on the freedom of establishment that was not justified because it was a disproportionate response to the need to preserve an appropriate allocation of taxing rights.
The surprise followed when the Tribunal went on to try to conform the legislation to EU law.
The Judge clearly thought that, on the basis of significant EU case law, the conforming legislation should be some sort of instalment regime, similar to that which applies for exit taxes when a company ceases to be UK resident. But what should the terms of any such instalment regime be, given that there were a number of different regimes set out in UK legislation, in EU case law and in the EU Tax Avoidance Directive. Which regime should the Tribunal choose?
The answer was that the Tribunal could not choose, because, as a constitutional matter, a Court cannot legislate - that is for the UK Parliament.
For this reason, the Tribunal concluded that it must disapply the offending legislation which, in this case, was the UK tax net requirement. This meant that the gain on a transfer of an asset to an EU group company escaped UK tax entirely.
The Tribunal felt that EU case-law was sufficiently clear that it was not necessary to refer any part of its decision to the CJEU, but the decision will undoubtedly be appealed to the higher UK Courts, as it is inconceivable that the UK would leave its tax “back-door” wide open in this way.