The Upper Tribunal has decided in the Gallaher case that a number of questions should be referred to the CJEU prior to the end of the transition period on 31 December 2020, although Judge Beare in the First-tier Tribunal (FTT) had decided such a reference was not necessary or appropriate.  The response of the CJEU will be relevant beyond the facts of this case, for example, to other multinationals who have moved assets out of the UK to an EU country as part of Brexit planning.  It may also inform the interpretation of the new instalment regime brought in as a result of the Gallaher case.

The Gallaher case involves the application of the UK’s legislation referred to in the case as the “Group Transfer Rules” to two intra-group transfers from a UK company.  In the 2011 disposal, intellectual property rights and related assets were transferred to a sister company resident in Switzerland.  In the 2014 disposal, shares in a subsidiary were transferred to a Dutch company which was the indirect parent of the UK transferor.  As both transfers were made to transferees outside the scope of UK corporation tax, they were prevented from having no gain/no loss treatment applied to them under TCGA 1992 s171 or the equivalent for intangible fixed assets in CTA 2009 sections 775 and 776.  The key issue is whether the imposition of an immediate tax charge on these intra-group transfers when the assets left the UK tax net, is contrary to EU law.  And if contrary to EU law, what is the appropriate remedy and how should it be effected?

This case calls into question the application and interrelationship of two EU treaty freedoms:  the free movement of capital and the freedom of establishment.  The FTT had concluded that because the Group Transfer Rules relate to the treatment of groups of companies, the only relevant freedom, based on the case law, is the freedom of establishment.  According to the FTT, only the 2014 disposal involved a restriction of the freedom of establishment, and this resulted in the gain of around £1.5m escaping the UK tax net altogether.  The more significant gain on the 2011 disposal, however, was taxable in full because on the facts of that disposal the FTT determined that the Group Transfer Rules were not contrary to EU law.

The appeals

Gallaher appealed in relation to the 2011 disposal (the big money side), arguing that free movement of capital and/or freedom of establishment were restricted.  HMRC, on the other hand, appealed in relation to the 2014 disposal, on various grounds including that the FTT was wrong to simply disapply the legislation so there was no tax charge at all but rather should have provided for a deferral of the charge to tax for 5 years.

The Upper Tribunal could not “without complete confidence” resolve the issues itself and so, in accordance with case law, concluded a reference to the CJEU is required.  The questions referred can be summarised as follows:

• Can free movement of capital be relied upon generally in relation to domestic legislation such as the Group Transfer Rules?
• If free movement of capital cannot more generally be relied upon, can it be relied upon specifically in relation to the facts of the 2011 disposal and if so, which parts of the transaction constitute movements of capital?
• Is freedom of establishment of the Dutch parent restricted in the case of the 2011 disposal between sister companies?
• If free movement of capital and/or freedom of establishment are restricted, does EU law require the domestic legislation be interpreted or disapplied in a manner which provides Gallaher with an option to defer the payment of tax, and if so, should the deferral should be on a realisation basis or an instalment basis?
• If deferral should be on an instalment basis, the CJEU is asked to confirm the terms of such deferral which would be required to show the remedy is proportionate.

As the Upper Tribunal notes, the decisions in these appeals are likely to have application beyond the facts of this case.  This appears particularly relevant to anyone who has moved assets to an EU27 country as part of Brexit planning.  Furthermore, the UK legislation was amended by Finance Act 2020, for accounting periods ending on or after October 2018 to permit UK resident companies to enter into payment plans and pay tax by instalments in relation to intragroup transfers of assets to companies resident in EEA member states.  The response by the CJEU to the questions referred may well inform the interpretation of the new instalment regime.