Test Claimants In the Thin Cap Group Litigation v HM Revenue and Customs

Test Claimants In the Thin Cap Group Litigation v HM Revenue and Customs

The Court of Appeal held that the UK thin cap legislation, which applied the arm’s length test to determine deductibility of interest on intra-group loans, was compatible with Article 43 EC. The arm’s length test alone is a sufficient and proportionate anti-abuse measure under EU law, provided taxpayers have procedural safeguards to present their case. There is no requirement for a separate commercial justification defence beyond the arm’s length test. Accordingly, the UK legislation did not unlawfully interfere with the freedom of establishment. The claim for damages for sufficiently serious breach failed as the law was not clear and the government acted in good faith.

Parties
Claimants/appellants/respondents: Test Claimants in the Thin Cap Group Litigation; Defendants/appellants/respondents: Commissioners for Her Majesty’s Revenue and Customs
Jurisdiction
England and Wales
Judgment Date
18 February 2011
Procedural Posture
Civil Appeal / Court of Appeal Judgment on Appeal From High Court
Outcome
Appeal allowed; cross-appeal dismissed
Legal Topics
Thin Capitalisation, Freedom of Establishment (article 43 Ec), Proportionality of Anti Avoidance Tax Legislation, Double Taxation Conventions, Remedies for Breach of EU Law
Tax Law European Union Law Company Law Thin Capitalisation Freedom of Establishment (article 43 Ec) Proportionality of Anti Avoidance Tax Legislation Double Taxation Conventions Remedies for Breach of EU Law

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Parties

Test Claimants in the Thin Cap Group Litigation

Claimants/appellants/respondents

Commissioners for Her Majesty’s Revenue and Customs

Defendants/appellants/respondents

Procedural Posture

Civil Appeal / Court of Appeal Judgment on Appeal From High Court

Legal Issues

  1. 1 Whether UK thin cap legislation, which disallowed interest deductions for loans between related companies not on arm’s length terms, was incompatible with Article 43 EC (freedom of establishment) for failing to allow a separate commercial justification defence.
  2. 2 Whether the arm’s length test alone is a sufficient and proportionate anti-abuse measure under EU law, or whether taxpayers must be permitted to show commercial justification for non-arm’s length transactions.
  3. 3 Whether the UK’s breach of Article 43 EC was sufficiently serious to entitle claimants to damages.

Ratio Decidendi

The Court of Appeal held that the UK thin cap legislation, which applied the arm’s length test to determine deductibility of interest on intra-group loans, was compatible with Article 43 EC. The arm’s length test alone is a sufficient and proportionate anti-abuse measure under EU law, provided taxpayers have procedural safeguards to present their case. There is no requirement for a separate commercial justification defence beyond the arm’s length test. Accordingly, the UK legislation did not unlawfully interfere with the freedom of establishment. The claim for damages for sufficiently serious breach failed as the law was not clear and the government acted in good faith.

Court Disposition

Appeal allowed; cross-appeal dismissed

Orders

  • The Revenue’s appeal is allowed; the Test Claimants’ cross-appeal is dismissed.
  • The UK thin cap legislation is held compatible with Article 43 EC; no damages are payable for sufficiently serious breach.