SPC00479
CORPORATION TAX – notice to produce documents – whether letter sent by Inspector was notice within paragraph 27, Schedule 18, Finance Act 1998 and thus amenable to appeal under paragraph 28 of same Schedule – held it was not – appeal struck out

CORPORATION TAX – closure notice – application for closure notice under paragraph 33, Schedule 18, Finance Act 1998 – the relevant Revenue inquiry undertaken in investigation as to whether  Applicant liable under controlled foreign companies (“CFC”) legislation (Chapter IV of Part XVII of Income and Corporation Taxes Act 1988 as amended) – Applicant claiming that CFC legislation  incompatible with Articles 43, 49 and 56EC of Treaty of Rome – Applicant requesting Special Commissioners to make reference under Article 234EC to  European Court of Justice for preliminary ruling on incompatibility issue –  Revenue requesting  Special Commissioners to make no reference to European Court on ground that application under paragraph 33, Schedule 18, Finance Act 1998 raised no issue of Community law capable of being referred – held that  application did raise issue of Community law capable of being referred and that  Special Commissioners had jurisdiction to make reference and that they would exercise discretion to make  reference – Direction to make  reference under Article 234EC together with Schedule setting out terms of reference – application stayed generally pending  response of the Court of Justice to the reference

THE SPECIAL COMMISSIONERS

                                             VODAFONE 2                               Applicant

- and –

                           HM REVENUE AND CUSTOMS                   Respondents

		SPECIAL COMMISSIONERS:  	JOHN WALTERS QC
							THEODORE WALLACE

Sitting in public in London on 7 and 8 March and 27 April 2005

Peter Whiteman QC, instructed by Linklaters, for the Applicant

Richard Plender QC and David Ewart, instructed by the Acting Solicitor for HM  Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	These proceedings consisted of  (1) an appeal by Vodafone 2 (“the Applicant”) (formerly called Rapidwave Ltd.) – made by a letter dated 13 December 2002 – against a letter dated 25 November 2002, which the Applicant claimed was a notice within paragraph 27, Schedule 18, Finance Act 1998 (“FA 1998”), and (2) the Applicant’s application dated 1 October 2004 for a closure notice under paragraph 33, Schedule 18, FA 1998.  Both matters concern the accounting period of the Applicant from 13 December 2000 to 31 March 2001 (inclusive).  
2.	In this Decision references to “paragraph 27”, “paragraph 33” and so on, are references to the respectively numbered paragraphs within Schedule 18, FA 1998. We also use the abbreviation “the CFC legislation” to refer to Chapter IV of Part XVII of the Income and Corporation Taxes Act 1988 (“ICTA”) – sections 747 to 756 of and Schedules 24 to 26 ICTA – as amended by subsequent Finance Acts, including the Finance Act 2000.
The appeal against the letter dated 25 November 2002
3.	Paragraph 27 is in the following terms (so far as relevant):
“27– (1) If the Inland Revenue give a notice of enquiry to a company, they may by notice require the company-
(a)	to produce to them such documents in the company’s possession or power, and
(b)	to provide them with such information, in such form,
as they may reasonably require for the purposes of the enquiry.
(2) A notice under this paragraph (which may be given at the same time as the notice of enquiry) must specify the time (which must not be less than 30 days) within which the company is to comply with it.
(3)	…
(4)	…
(5)	…”
4.	Paragraph 28 provides that an appeal may be made against a requirement imposed by a notice under paragraph 27 to produce documents or provide information.  Paragraph 29 provides monetary penalties for failure to comply with a notice under paragraph 27.
5.	The letter appealed against was sent by Mr Baird a Principal Inspector at the Inland Revenue’s Glasgow Large Business Office (Corporation Tax). It was in the following terms: 
“RAPIDWAVE LTD
APE 31MARCH 2001
I refer to the enquiry notice issued to the Company Secretary today, copy attached.
Please let me have the following information within 90 days from the date on [sic] this letter.
1.	The computations show that the company disposed of its shares in Mannesmann AG in a share exchange with Vodafone Investments Luxembourg Sarl (VIL Sarl).  Can you please let me know when the Mannesmann AG shares were obtained, how many shares were involved and when the exchange with VIL Sarl took place.  Can I see a copy of the agreement between the two companies?
2.	a) I note the claim made in the CFC supplementary page of the return that VIL Sarl is entitled to the motive test exemption.  I wish to test this and as a preliminary I would be grateful if you could provide the following information in respect of VIL Sarl.  (I am aware that during the year to 31 March 2001 the company was also owned by Vodaphone Ltd and you will be aware that I have raised an enquiry on that company, although I assume you will be content to answer any questions from this company.)
i.	When was VIL Sarl incorporated, who were the shareholders and what changes of ownership were there between incorporation and the 31 march 2001?  Can I see a copy of the Articles of Association?
ii.	Can I see copies of any accounts of VIL Sarl for periods from incorporation through to the end of this accounting period?
iii.	Can I see copies of Minutes of Board and Members meetings for VIL Sarl for the periods from incorporation through to the end of this accounting period?
iv.	Can I see any statements of VIL Sarl bearing on its intended role?
v.	Can you let me have details of the composition of the Board of VIL Sarl throughout the period, with details of the place of residence of each of the directors?
vi.	Can I see copies of any agreements entered into by VIL Sarl with any other company during the accounting period or extant in the period, to include all loan agreements?
vii.	Can I see copies of any tax rulings obtained by VIL Sarl from other tax authorities?
b) More widely, I will need to see material bearing on the intention in setting up the company and the structure in which it operates.  Can you therefore provide:-
i.	Copies of any Minutes, internal memoranda, Board papers and other documents from any Vodafone company in which the role of VIL Sarl was discussed or mentioned?
ii.	I am aware that various clearances were sought and some obtained in respect of proposed transactions involving the Mannesmann acquisition, of which the VIL Sarl acquisition was just a part.  Can you please set out exactly how VIL Sarl came to hold the shares it did, setting out where the interests originated and to the extent that other intra-group transfers were involved, how and why they were made?
iii.	I am aware of the suggestion that VIL Sarl was set up for German tax reasons.  Can I see any minutes or other material from any Vodafone company bearing on the tax position of the Mannesmann group and how VIL Sarl or any other Vodafone company might affect that position?
3.	The CFC supplementary page of the return shows Vodafone Deutschland GmbH as meeting the exempt activities test.  Could I see a copy of the accounts of the company please and could you let me know which particular aspect of the exempt activities test is met?  To the extent that it isn’t apparent from the accounts could you please let me know what the company’s main business is; how many employees it has; the source and nature of it’s [sic] gross income; and the nature of any investments held.
I appreciate that there may be a substantial amount of material generated by the enquiries above, and, if you wish, I am happy to discuss how it might best be produced.
Yours sincerely
R Baird
Principal Inspector”
6.	Thus the letter asked that the Inspector be supplied within 90 days with certain information about the acquisition by the Applicant of a controlling interest in Mannesman AG.
7.	The power, under paragraph 27, to serve a notice to produce documents and provide information is part of the administrative provisions introduced by Part IV of FA 98 relating to an enquiry into a company tax return under the then-introduced scheme of self-assessment for companies.  As the opening words of paragraph 27 indicate, a notice under that paragraph can only be made pursuant to a notice of enquiry.  This is a notice under paragraph 24, and is the mechanism by which an enquiry by the Inland Revenue into a company tax return is initiated.
8.	A notice of enquiry under paragraph 24 was sent by the Revenue to the Company Secretary of the Applicant. It was dated 15 November 2002 (and sent that day) and was headed “Notice of intention to enquire into company tax return under paragraph 24(1), Schedule 18, Finance Act 1998”.  It stated that the Inspector intended to enquire into the Applicant’s company tax return for the accounting period ended 31 March 2001.
9.	On the same day the letter appealed against was sent to Des Webb, UK MEA tax manager for the Vodafone group.  That letter (as will have been seen from the text recited above) referred to the enquiry notice sent to the company secretary of the Applicant and detailed the enquiries to be raised.
10.	By a letter dated 13 December 2002 a director of the Applicant responded to the two letters of 15 November 2002, stating that he was uncertain whether the request to produce documents was intended to, or in fact did, constitute a notice under paragraph 27.  He stated however that he had treated the letter as such and accordingly appealed to the Special Commissioners. The grounds of appeal, shortly stated, were that since the imposition of UK tax in respect of profits of subsidiaries in other Member States of the EU contravened Articles 43 and 56 EC, there could be no valid requirement to produce documents or provide information in relation to any part of the enquiry that relates to compliance with the CFC legislation in relation to Vodafone Investments Luxembourg Sarl (“VIL”).
11.	On 23 December 2002, Mr Baird replied that the letter of 15 November was not a notice under paragraph 27. It was an informal request for information. Noting the arguments on EC law, he wrote, 
“Whatever the merits of that I think we do have to, in the first instance, determine whether VIL is a CFC or not.  If it is not within the regime then your contentions about the EU Treaty will not be in point.  My enquiries were only intended to obtain sufficient factual information to determine whether or not VIL is a CFC”.
12.	In contending that the letter appealed against is a notice under paragraph 27, Mr. Whiteman QC for the Applicant noted that paragraph 27(2) provides that such a notice must specify the time (which must not be less than 30 days) within which a company is to comply with that notice, and that such a notice may be given at the same time as a notice of enquiry. He said that case law supplements these provisions by requiring that a notice to produce documents must be “in reasonably clear terms”. He cited Gallic Leasing v Coburn [1991] STC 699; House (trading as P & J Autos) v Commissioners of Customs and Excise [1996] STC 154, and Nidderdale Building Ltd v Commissioners of Customs and Excise [1997] STC 800.
13.	He argued that other than these requirements there is no specified form for a notice to produce documents. 
14.	On the basis that the letter which has been appealed against requested that specific information (set out in very clear terms) be provided to the Revenue by the Applicant within 90 days of the date of the letter, he submitted that it was therefore a notice within paragraph 27, Schedule 18 of the Finance Act 1998.
15.	Dr Plender QC, leading Mr Ewart, for the Revenue submitted that neither of the letters sent on 15 November 2002 was a notice given pursuant to paragraph 27. He said that neither letter purported to be such a notice. The first gave notice of the Revenue’s intention to enquire into company’s tax return under paragraph 24(1).  The letter to Des Webb requested certain information; but the terms of the letter made it clear that the information was at that stage requested rather than required. Moreover by separating the two communications of 15 November into two documents, the Revenue emphasised that the request conveyed to Des Webb was not a requirement imposed on the Applicant.
16.	We indicated at the start of the hearing that, on the basis of the arguments as they had been presented in the Skeleton Arguments filed before the hearing by each side, we had formed a provisional view that the letter appealed against was not a notice under paragraph 27.  On the basis of that indication, while not abandoning the point, Mr Whiteman did not spend time at the hearing trying to change our minds on this issue.  
17.	Although we accept Mr Whiteman’s points that there is no statutory requirement as to the form of a notice under paragraph 27, and that the letter appealed against asked for such documents and information to be provided in such manner and within such a time limit as could very appropriately have been adopted in such a notice, we consider that a notice under paragraph 27 must clearly indicate that it is such, so that the recipient is in no doubt as to the legal obligations (including a liability to penalties for non-compliance) which it imposes.  The absence of any such indication in the letter appealed against, together with its phraseology in terms of being a “request” rather than a “requirement” to provide documents and information are in our judgment conclusive indications that the letter was not a notice under paragraph 27, but instead an informal request.  
18.	If, as was at one stage suggested by Dr Plender, it was a “precursor letter” – an informal request, non-compliance with which would ordinarily lead to the issue of a notice under paragraph 27 requiring production of documents and provision of information under compulsion – we consider that good administrative practice requires that that fact should have been made clear in the letter and  that the Revenue can be criticised for its omission. 
19.	Our decision on this issue is that the letter was not a notice under paragraph 27 and that therefore, as Dr Plender contended, there can be no appeal under paragraph 28.  The purported appeal under that paragraph is therefore a nullity and we strike it out.  
20.	Mr Whiteman made the further submission that even if we concluded that the letter of 15 November 2002 was not a notice to produce, a reference should be made to the Court of Justice regarding the compatibility of the CFC legislation with Community law on the basis that “the existence of an enquiry into the Applicant’s tax return is itself unreasonable if the legislation underlying that enquiry is incompatible with Community law and this objection is valid in respect of both formal and informal administrative action”.  We deal with the substance of this submission in the context of the Applicant’s application for a closure notice below, but note that we have no jurisdiction to consider it in the context simply of a complaint against “the existence of an enquiry into the Applicant’s tax return”.
The application for a closure notice
21.	This application was made under paragraph 33, which reads as follows:
“(1) 	The company may apply to the Commissioners for a direction that the Inland Revenue give a closure notice within a specified period. 

(2)	Any such application shall be heard and determined in the same way as an appeal. 

(3)	The Commissioners hearing the application shall give a direction unless they are satisfied that the Inland Revenue have reasonable grounds for not giving a closure notice within a specified period.”

22.	On this application we are obliged to direct the Revenue to give a closure notice unless we are satisfied, pursuant to paragraph 33(3), that they have reasonable grounds for not giving a closure notice within a specified period.  The Applicant in its application specifies the period for the purposes of paragraph 33(1) as “immediately”.  Although noting that “immediately” is not a period, Dr Plender takes no point on this.
23.	A closure notice is the notice by which the Revenue must inform a company that they have completed their enquiry (see: paragraph 32(1)).  A closure notice takes effect when it is issued and its issue completes the enquiry.  A closure notice must state the Revenue’s conclusions. There is a right of appeal against the conclusions or the actions following therefrom.
24.	Thus by applying to us for a direction that the Revenue give a closure notice immediately, the Applicant claims that the Revenue have no reasonable grounds for not completing the enquiry immediately.
25.	Following a direction by the Tribunal, released on 1 December 2004, the Revenue provided particulars of the grounds for contending that a closure notice should not be given.  All of these apart from the residence of VIL arise solely out of the CFC legislation.  Except in relation to the CFC legislation the residence of VIL is not relevant to the tax liability of the Applicant.
26.	At the directions hearing on 25 November 2004, the Applicant sought a reference to the Court of Justice on the compatibility issue.  The Special Commissioner directed the hearing of a preliminary issue as to whether, in respect of the application for a closure notice, the Special Commissioners should refer to the Court of Justice questions as to the compatibility with community law of the CFC legislation in the circumstances of the Applicant.  Direction (4) released on 1 December 2004 provided,
“(4) that both parties use their best endeavours to agree a statement of facts which are agreed and a statement of facts which are in dispute together with the questions which it would be appropriate to refer if (contrary to the submissions of the Respondents) the Special Commissioners decide to make a reference.” 
The application for a closure notice: The submissions for Applicant in favour of a reference to the Court of Justice
27.	The factual background to the application for a closure notice are set out in the Schedule to the Direction for a reference, which is annexed to this Decision.  The Special Commissioners have already made a reference raising the possible incompatibility of the CFC legislation with Community law in the appeal of Cadbury Schweppes (Case C-196/04).
28.	Mr Whiteman contended that, in this case, the Revenue’s enquiry cannot be found to be reasonable. He submitted that the purpose of the enquiry is only the testing of the claim in the Applicant’s company tax return that VIL is entitled to the “motive test” exemption from the CFC legislation, and that the CFC legislation is incompatible with Community law.  He accepted that the incompatibility of Articles 43, 49 and 56 EC on their correct interpretation with the CFC legislation is not acte claire, and therefore urged us to make a reference in this case to the Court of Justice under Article 234 EC.
29.	He advanced as grounds for his submission on incompatibility that in particular:
(a)	the imposition of UK tax on a company resident in the UK in respect of the profits of subsidiaries resident in other Member States amounts to an unlawful restriction of the fundamental freedoms;
(b)	the exemptions from the CFC legislation (such as the motive exemption): (i) are narrow in their scope; (ii) are uncertain in their application; (iii) entail a substantial compliance burden in order to prove that they apply; and (iv) require the non-UK resident company to restrict the nature and extent of its activities;
(c)	the general compliance burden imposed by the CFC legislation (whether in respect of the various exemptions or otherwise) entails an unlawful restriction on the fundamental freedoms;
(d)	a loss incurred by the non-UK resident company may not be set-off against the profits of its UK resident parent, whereas such set-off is available in respect of the losses of a UK resident subsidiary; and 
(e)	certain exemptions from the CFC legislation (such as the exempt activities exemption and the excluded countries list) contain specific restrictions that are incompatible with Community law. The Applicant ought to be treated as if it had been free to take advantage of those exemptions without such restrictions.
30.	He submitted that the purpose for which the Revenue is granted its right of enquiry and information gathering powers under Schedule 18 of FA 1998 is to enable it to discharge its duty to assess and collect the tax due under the law.  The “law” for this purpose embraces both domestic legislation and Community law.  The reasonableness of an enquiry and any act in pursuit of it can only be determined by reference to this purpose: where, as in these circumstances, there is (at the least) a genuine and serious doubt as to the validity of the domestic taxing legislation which is the subject of the enquiry, it is not possible to conclude that the enquiry is “reasonable” (which the Respondent must establish on an objective basis) without first resolving the legal uncertainty on which that conclusion must rest. Furthermore, the question of the reasonableness or otherwise of the enquiry cannot be determined without having regard to the potential application of Community law to the domestic legislation.
31.	Mr Whiteman relied on “the duty of national courts to give direct, immediate and effective protection of the rights which individuals derive from the community legal order,” see Peter Gibson LJ in Re Claimants under Loss Relief Group Litigation Order [2004] STC 1054 at [23], citing Kobler v Austria (Case C-224/01) [2004] 2 WLR 976, para 52 of the Advocate General’s Opinion.  He said that the Revenue’s enquiries involved a very significant burden which should not have to be borne by the Applicant before the issue of compatibility is decided.
32.	He argued that a reference to the Court of Justice is required in this case, notwithstanding the fact that the fundamental issue in these proceedings has already been referred in the Cadbury Schweppes case (namely, whether the imposition of a tax charge on the basis of the CFC legislation comprises a restriction on the fundamental freedoms).  He submitted that the facts and the relevant legal circumstances of the Applicant’s case and the Cadbury Schweppes case are materially different in key respects, in particular with regard to the relevance and application of the exemptions from the CFC legislation. These differences give rise to specific additional questions (in particular in relation to the exemptions to the CFC legislation) which would need to be addressed if the answer to the Cadbury Schweppes question were negative or qualified. He submitted that the present case should be referred to ensure that any decision of the Court of Justice on the fundamental issue will determine these proceedings.
33.	He further submitted that a reference in the present case needs to be made expeditiously as the fundamental issue in dispute has already been referred to the Court of Justice, and there is a serious risk that any significant delay in making a reference in this case will result in the Court of Justice being deprived of the opportunity to determine the issues raised in both this case and the Cadbury Schweppes case at the same time.
The application for a closure notice: The submissions for Revenue against our making a reference to the Court of Justice
34.	Dr Plender argued that determination of the issues before us involves no point of EC law. The continued enquiries by the Revenue might produce the result that the Applicant has no liability under the CFC legislation.  In those circumstances, there would be no issue between the parties which would require a reference to the ECJ. 
35.	More fundamentally, he submitted that, even assuming Revenue will seek to apply the CFC legislation to the Applicant, it is still not be necessary for us to determine on this application whether that legislation is compatible with EC law.  The question whether the Revenue have “reasonable grounds” for not giving a closure notice, in the belief that the CFC legislation is compatible with EC law, is, he said, entirely separate from the question whether that legislation is in law incompatible with Articles 43, 49 and 56 EC. 
36.	Dr Plender said that the word “immediate” in the Advocate General’s opinion in Kobler did not appear in the judgment of the court and was in reference to Simmenthal Spa (Case 106/77) [1978] ECR 629 which concerned an obligation in Italy to refer to the Constitutional Court.  The decision of the Court of Appeal in Loss Relief is under appeal to the House of Lords.
37.	Dr Plender argued that the only issue for determination at this stage is whether the we are satisfied, pursuant to paragraph 33(3), that the Revenue have reasonable grounds for not giving a closure notice.  Determination of that question raised no issue capable of reference under Article 234 EC.  He submitted that no decision on the interpretation of Articles 43, 49 and 56 EC is necessary in order to determine whether the Revenue have reasonable grounds to continue their enquiry into the Applicant’s tax return for the period ended 31 March 2001.  
38.	He submitted that under Article 234 EC, it is the duty of the referring court or tribunal to consider whether a decision on the referred question of EC law is necessary to enable it to give judgment in the proceedings before that referring court or tribunal. The Court of Justice has no jurisdiction to answer a question referred to it unless a decision on such question is in fact objectively necessary to enable the referring court or tribunal to dispose of the issue before it. 
39.	Dr Plender said that the Court of Justice has consistently held that it does not have jurisdiction where “the questions referred to the Court for preliminary ruling do not involve an interpretation of Community law objectively required for the decision to be taken by” the referring tribunal. He cited inter alia Case C-428/93, Monin Automobiles, [1994] ECR I-1707 para 15; Case C-286/88, Falciola, [1990] ECR I-191, paras 9 and 10; Joined cases C-279/96, C-280/96 and C-281/96,  Ansaldo Energia SpA v Amministrazione delle Finanze dello Stato, Amministrazione delle Finanze dello Stato v Marine Insurance Consultants Srl and GMB Srl and Others v Amministrazione delle Finanze dello Stato, [1998] ECR I-5025, para 33; Case C-291/96, Martino Grado and Shahid Bashir, [1997] ECR I-5531, para 16; Opinion of Mr Advocate General Léger in Case C-153/00, Paul der Weduwe, [2002] ECR I-11319, para 29. 
40.	Dr Plender said that it is entirely possible that the Revenue’s enquiries may lead to the conclusion that the Applicant has no relevant rights under Articles 43, 49 and 56 EC at all. That might be the case if it were to be found that VIL was at all material times resident in the United Kingdom. Until facts are discovered establishing that the Applicant has the rights that it claims, it cannot assert those rights for the very purpose of preventing the discovery of the facts. In other words, it is not objectively necessary to interpret Articles 43, 49 and 56 EC in order to decide whether it is unreasonable for Revenue to pursue enquiries designed to determine whether VIL is a controlled foreign company or not.
41.	He argued that, likewise, if the Applicant were to succeed in its contention that it benefits from the motive test, the questions that it now raises as to Articles 43, 49 and 53 EC would be without relevance. In deciding that it is not unreasonable to pursue enquiries designed to determine whether the Applicant does indeed qualify for the motive test, the Special Commissioners need express no view as to the proper interpretation of Articles 43, 49 and 56 EC, or the compatibility with those provisions of the CFC legislation.
42.	He submitted that even if it were to be assumed (hypothetically) that the pursuit of the Revenue’s enquiries would inevitably lead to the conclusion that the Applicant has a liability under the CFC legislation, it would remain the case that no decision on the interpretation of Articles 43, 49 and 56 EC is objectively required to enable us to give judgment on the issue before us.  We have to decide whether the Revenue have reasonable grounds for not giving a closure notice. The question whether the Revenue have reasonable grounds for giving no such notice, in the reasonable belief that the CFC legislation is compatible with EC law, is entirely separate from the question whether, on the proper interpretation of Articles 43, 49 and 56 EC, that legislation is incompatible with EC law.  
43.	He submitted that the Inland Revenue does not have to be correct in its grounds for those grounds to be “reasonable”.  He said that, as matters presently stand, the Revenue’s view (that the CFC legislation is compatible with EC law) is a reasonable view to hold.  If that view were not reasonable then it is difficult to see why the Special Commissioners (in Cadbury Schweppes) and Park J (in the CFC GLO proceedings) have thought it necessary to refer the question to the Court of Justice.
44.	He said that we should therefore conclude that a decision on the proper interpretation of Articles 43, 49 and 56 EC is not objectively necessary to enable us to give judgment on the issues of which we are seised; and we should not refer to the Court of Justice questions on the interpretation of those articles.
45.	He went on to submit that the proposal to refer questions for preliminary ruling is open to a further objection. Even if (which the Revenue deny) it were necessary for us to interpret Articles 43, 49 and 56 of the EC Treaty in order to give judgment, we ought in principle to determine the facts first. In the words of the Court of Justice, it is convenient “for the facts of the case to be established and for questions of purely national law to be settled at the time the reference is made to the Court”: Joined Cases 36 and 71/80, Irish Creamery and Martin Doyle v Ireland, [1981] ECR 735 para 6; Case C-236/98, Jämställdhetsombudsmannen v Orebro läns landsting, [2000] ECR I-2189, para 31. In the words of Lord Denning MR “It is desirable to find the facts and state them clearly before referring the question”: Bulmer v Bollinger, [1974] 2 All ER 1226 at 1236c-d.
46.	He submitted that a reference for preliminary ruling will be held inadmissible in any case in which the referring tribunal has failed to define the factual and legal context of the case or, at the very least, to explain the factual circumstances on which those questions are based. See, inter alia, Joined Cases C-320/90 to C-322/90, Telemarsicabruzzo and Others, [1993] ECR I-393, para 6, Case C-157/92, Banchero, [1993] ECR I1085, para 4, Joined Cases C-128/97 and C-137/97 Testa and Modesti, [1998] ECR I-2181, para 5, Case C-9/98, Agostini, [1998] ECR I-4261, para 4, Case C-422/98, Colonia Versicherung and Others, [1999] ECR I1279, para 4, Case C-176/96, Lehtonen and Castors Braine, [2000] ECR I2681, para 22, and Case C-116/00, Laguillaumie, [2000] ECR I-4979, para 15; Joined cases C-438/03, C-439/03, C-509/03 and C-2/04, Antonio Cannito v La Fondiaria Assicurazioni SpA, Pasqualina Murgolo v Assitalia Assicurazioni SpA, Vincenzo Manfredi v Lloyd Adriatico Assicurazioni SpA and Nicolo Tricarico v Assitalia Assicurazioni SpA, 11th February 2004, not yet reported in ECR, para 6. 
47.	He said that since at the present stage, we have not found the facts, we are not in a position to define the factual and legal context so as to show why we consider that a decision on the interpretation of Articles 43, 49 and 56 of the EC Treaty is necessary to enable us to give judgment. 
48.	He acknowledged that the Applicant has produced a draft statement of facts. He said, however, that the Revenue is in no position to agree the statement of facts precisely because it has not completed its enquiries. Indeed, he submitted, the present proceedings before us are designed to prevent the completion of the enquiries that would be necessary for the Revenue to express agreement with the Applicant’s asserted facts. 
49.	He submitted that if the Special Commissioners were to refer to the Court of Justice for preliminary ruling questions based upon hypothetical or assumed facts, the answers given on the basis of assumed facts might prove inappropriate to resolve the case once the true facts were ascertained.
50.	He further submitted that the compatibility of national legislation with EC law is a matter for determination by the national courts. The Court of Justice has itself frequently reiterated the point. In its words it has “no jurisdiction either to apply the Treaty to a specific case or to decide upon the validity of a provision of domestic law in relation to the Treaty”: Case 6/64, Costa v ENEL, [1964] ECR 585 at 592; or in other words “no jurisdiction to pronounce on a provision of national law with regard to a Community rule”: Case 63/76, Inzirillo v Caisse d’Allocations Familiales, [1976] ECR 2057, para 1. The jurisdiction of the Court of Justice is confined, so far as relevant, to “the interpretation of the treaty”.
51.	For these reasons, he submitted, no question of EC law capable of reference to the Court of Justice arises in the present proceedings.  Accordingly no issue of discretion arises.
52.	But he went on to submit that if hypothetically there were a referable question, it would be wrong to exercise our discretion in favour of a reference.  
53.	He noted that by way of prologue to the questions that it asks the Special Commissioners to refer to the Court of Justice for preliminary ruling, the Applicant submits that the Court of Justice should be asked to hear the present case at or around the same time as Case C-196/04, Cadbury Schweppes v Commissioners of Inland Revenue, which is currently seised of the questions that the Applicant seeks to refer to it. But he submitted that it is not realistic to expect the Court of Justice to agree to such a request.
54.	The reference in Cadbury Schweppes v Commissioners of Inland Revenue was registered by the Court of Justice, following its receipt there, on 3 May 2004: see Official Journal, 26 June 2004 C168/3. He said that the oral hearing is likely to be listed shortly. Even if we were to decide in March or April 2005 to refer questions to the Court of Justice in this case, and if the written stage of this case were to take no longer than in Cadbury Schweppes, it would require a delay of some ten months in the oral hearing of that case to ensure that the two cases could be heard at around the same time.
55.	He said that a proposal to delay the hearing of Cadbury Schweppes for so long is likely to meet with vigorous objections from the parties and intervening States. The Court of Justice itself has recently voiced its concern to avoid delays in the preliminary ruling procedure. See Advocate General Jacobs, Possibilities for Further Reforming the Preliminary Ruling Procedure, Colloquium, November 2004.  The Court of Justice is therefore unlikely to accede to a request entailing a substantial delay in disposing of a case ready for oral hearing.
56.	He concluded his submissions by contending that the sensible course is for Revenue to pursue their enquiries while the parties await the outcome of the Cadbury Schweppes case, which ought to resolve the issues of law to which the Inland Revenue’s current enquiries may (or may not) lead.
Our decision on the question of whether or not to make a reference
57.	We approached the question of whether or not to make a reference to the Court of Justice in this case in two stages.  First we considered whether or not a reference is objectively “necessary” in terms of Article 234 EC, and whether we have jurisdiction to make a reference.  We decided in favour of the Applicant that a reference is objectively necessary and that we do have jurisdiction to make one.  We then considered whether, on that basis, we ought to exercise our discretion to make a reference. In considering this question of discretion we took into account the terms of any reference we could properly make, having regard in particular to the submissions made to us by both parties as to the referable issues (the Revenue, of course, (as their main submission) contending that there were none) and to the content of any such reference so far as it related to matters of fact.  At the further hearing on 27 April 2005 we heard submissions on the terms of a draft reference with schedule which we had provided to the parties.
Our decision as to whether or not a reference is objectively “necessary” and whether or not we have jurisdiction to make one

58.	A reference to the Court of Justice for a preliminary ruling is made under Article 234 EC of the Treaty of Rome, which reads as follows:
“The Court of Justice shall have jurisdiction to give preliminary rulings concerning:
(a)	the interpretation of this Treaty;
(b)	the validity and interpretation of acts of the institutions of the Community and of the ECB;
(c)	the interpretation of the statutes of bodies established by an act of the Council, where those statutes so provide.
Where such a question is raised before any court or tribunal of a Member State, that court or tribunal may, if it considers that a decision on the question is necessary to enable it to give judgment, request the Court of Justice to give a ruling thereon.

Where any such question is raised in a case pending before a court or tribunal of a Member State against whose decisions there is no judicial remedy under national law, that court or tribunal shall bring the matter before the Court of Justice.”
59.	Two issues are raised by the wording of Article 234 EC.  First, does a question of interpretation of the Treaty arise?  Secondly, if it does, is a decision on that question necessary to enable us to give judgment?
60.	As we have noted above, the Applicant’s case on this issue is that the purpose of the enquiry is only the testing of the claim in its company tax return that VIL is entitled to the “motive test” exemption from the CFC legislation and the CFC legislation is incompatible with Community law. This purpose of the enquiry is not in dispute, as is shown by the Revenue’s response to the direction for particulars given on 1 December 2004 (see: paragraph 25 above).
61.	From the case law of the Court of Justice on which the Revenue relies, it appears that a request from a national court may be rejected (by the Court) “only if it is quite obvious that the interpretation of Community law or the examination of the validity of a rule of Community law sought by that court bears no relation to the actual nature of the case or to the subject matter of the main action” (Falciola Angelo SpA v Comune di Pavia Case C-286/88 para. 8).  Whereas it is insufficient that a legal connection exists between the questions referred and the proceedings before the national court if the national court does not have to apply the rules of Community law in relation to which the questions are referred in disposing of the proceedings before it (Monin Automobiles v Maison du Deux-Roues Case C-439/93 para. 13), the position appears to us to be otherwise if the national court does (as we conceive we do) have to apply those rules in the proceedings before it. This conclusion is consistent with the reasoning of Advocate-General Lèger in paragraph 29 of his Opinion in Paul der Weduwe Case X-153/00, referred to in argument by Dr Plender as “a useful summary of all the cases”.
62.	We have no doubt that the issue of compatibility of the CFC legislation does need to be determined to enable us to give judgment on the application for a closure notice.  If the CFC legislation is not compatible with Community law there are no reasonable  grounds for not giving a closure notice.  The enquiry in relation to VIL’s residence has no relevance to the Applicant’s tax liability apart from in relation to a possible liability under the CFC legislation.
63.	The issue of the location of the residence of VIL for UK tax purposes is not prominent among the issues that we have to decide in the proceedings before us, namely whether we are satisfied that the Revenue have reasonable grounds for not giving a closure notice.  It is an issue which primarily arises in the context of any liability to UK tax of VIL, rather than in the context of the enquiry into the Applicant’s tax return.  If the Applicant had claimed that the CFC legislation did not apply to it in relation to VIL on account of VIL’s residence in the UK for UK tax purposes, the issue of the location of the residence of VIL might have been an issue which we would have considered as a preliminary point, before going on to consider the wider issue of the compatibility of the CFC legislation with Community law.  But that has never been the Applicant’s case.  In these circumstances we are satisfied that the enquiry into the Applicant’s tax return is not to any significant extent directed to determining whether or not VIL was at all material times resident in the United Kingdom.  Instead it is directed to determining whether or not the CFC legislation applies to the Applicant in relation to VIL, and in particular to determining whether or not the Applicant is entitled to the “motive test” exemption in relation to VIL.
64.	The issue of whether or not the Applicant is entitled to the “motive test” exemption from the CFC legislation is, of course, one on which no issue of Community law arises, apart from the compatibility of the CFC legislation.  However the burden of the Applicant’s case on this point is that it should not be put to the trouble and expense of proving its entitlement to the “motive test” exemption on the basis that, as it submits, the CFC legislation itself is incompatible with Community law. We accept that the proof of such entitlement would be a troublesome and expensive matter (compare the decision of the Special Commissioners in ABTA v Inland Revenue Commissioners [2003] STC (SCD) 194, in particular [114]).
65.	We observe that Dr Plender’s suggestion that the pursuit of the Revenue’s enquiries should continue while the parties await the outcome of the Cadbury Schweppes case is, in the circumstances of the case, unrealistic. We know that the Applicant refuses to answer informal enquiries on its entitlement to the “motive test” exemption, on the basis that the underlying CFC legislation is incompatible with the Treaty.  It is clear to us that if the Revenue were to issue to the Applicant a notice which was clearly in exercise of its powers under paragraph 27, that notice would be appealed against on the same basis.  That appeal would itself give rise to the very same questions of possible incompatibility and of the objective necessity of a reference, but would not be resolved by reference to whether the Commissioners’ belief is reasonable.
66.	A reference to the Court of Justice is an interlocutory stage in the proceedings before the national court.  It is a means by which the national court may resolve uncertainties of Community law raised in the proceedings.  Our decision on the application for a closure notice requires us to consider whether the Revenue have reasonable grounds for not giving a closure notice.  The Revenue do not dispute that the CFC legislation underlies the enquiry; they say that they reasonably hold the view that the CFC legislation is compatible with the Treaty and that their belief is a reasonable ground for not giving a closure notice.  But by making a reference to the Court of Justice, we would have a means of determining whether or not the Revenue’s view is correct.  If it is incorrect, and the CFC legislation is incompatible with the Treaty, the Revenue would have no reasonable grounds for not giving a closure notice.  For the Revenue to act reasonably in the enquiry it is necessary that the domestic legislation, in relation to which they are exploring whether or not the Applicant has a tax liability, should be compatible with the Treaty.
67.	We put to Dr Plender a hypothetical case where the Revenue had reasonable grounds for not giving a closure notice, because of some view they reasonably held on a relevant fact.  The taxpayer concerned applied to the Special Commissioners for a direction under paragraph 33, and at the hearing of the application, evidence was led which established that the view the Revenue held on the fact was incorrect and that their grounds for not giving a closure notice were unsustainable. 
68.	Dr Plender accepted that in such circumstances the Special Commissioners could give a direction that the Revenue give a closure notice within a specified period, not necessarily being the same period as that specified by the company in its application, and the period would be specified by the Special Commissioners at the date when they make the direction.
69.	In oral argument Dr Plender first submitted that the Special Commissioners could only give a direction if they were satisfied that the Revenue did not have reasonable grounds for not giving a closure notice at the time when the decision was taken not to give a closure notice.
70.	However that submission developed in the course of argument to one which was made by analogy with the judgment of the Court of Appeal in Langham v Veltema [2004] STC 544, that where there is a challenge to legislation providing for a relevant tax charge, the question is whether at the time of the hearing the Special Commissioners are satisfied that the Revenue do not have reasonable grounds for giving a closure notice.
71.	That submission indicated an agreement – confirmed by Dr Plender in answer to a question from the Chairman – with what is our own view, namely that in exercising their jurisdiction under paragraph 33(3), the Special Commissioners test the issue of the reasonableness of the Revenue’s grounds for not giving a closure notice by reference to the facts and the law as they are respectively found and held to be at the hearing.
72.	However, Dr Plender was adamant that we were obliged to test the issue of reasonableness at the instant hearing (“now”) and that our jurisdiction under paragraph 33(3) obliged us to do so.  He submitted that our jurisdiction does not permit us to make a reference to the Court of Justice, which might clarify the legality as a matter of Community law of the CFC legislation but would only put us in a position to decide the issue of the reasonableness of the  Revenue’s grounds for not giving a closure notice by reference to the law as it would be held by us to be at the time of an adjourned hearing when the answers to the referred questions were returned to us by the Court of Justice.  He said that the question for the Special Commissioners is whether, in circumstances in which the ruling from the Court of Justice is uncertain, the enquiry is reasonable.  A reference to the Court of Justice would not assist in determining the issue before us, which is whether or not the Revenue have reasonable grounds for not giving a closure notice at the time of the instant hearing (“today”).
73.	We have no hesitation in deciding this issue in favour of the Applicant.  We do not accept that the “reasonable grounds” referred to in paragraph 33(3) depend on the belief of the Revenue as to the compatibility of the CFC legislation with Community law or indeed on the reasonableness of such belief.  If the legal basis of the reason for refusing closure is incorrect, the grounds are not reasonable.  In our judgment the reference in paragraph 33 (3) to “reasonable grounds” is a reference to the Revenue’s view of the facts relevant to an enquiry, not a reference to their view as to the relevant law.  We are fortified in this view by the fact that we regard it as consistent with the principle of effectiveness in Community law.
74.	Dr Plender accepts that the test of whether or not reasonable grounds exist must be tested at the time of the hearing of the application before us.  We are not considering whether the Revenue had reasonable grounds to refuse to issue a closure notice when they made their decision.  We consider that the crucial time is when we make our decision. 
75.	The question before us clearly turns on the answer to the compatibility issue.  If the CFC legislation, the possible application of which to the Applicant is being explored by the Revenue in their enquiry, is, as a matter of Community law incompatible with the Treaty, our decision would be that the Revenue should give a closure notice, unless the Applicant would be precluded from relying on its Community Law rights because that would involve an abuse of those rights.  Per contra, if the CFC legislation is compatible with the Treaty, our decision would be to dismiss the application.  Thus, contrary to Dr Plender’s submissions, we need to decide the point of Community law and, since the point is not acte claire, we ought to make a suitable reference to the Court of Justice if, taking all relevant circumstances into account, we conclude that that course would be a suitable exercise of our discretion.  
76.	We therefore reject Dr Plender’s submission that the issue before us is whether, in circumstances in which the ruling from the Court of Justice is uncertain, the enquiry is reasonable.  The issue is whether the enquiry is reasonable.  The ruling from the Court of Justice is uncertain, but that uncertainty can be removed by our making a reference.  If we do so, and consequentially adjourn this application until receipt of the Court’s answers to the questions referred, we will, at the adjourned hearing, decide the application, and any direction we make under paragraph 33(3) will run from the date of our decision.  This would be in accordance with Dr Plender’s revised submissions on the scheme of paragraph 33(3).  If we had considered Dr Plender’s submission to be well-founded in domestic law, we would have given careful consideration to referring a question to the Court of Justice as to the compatibility of paragraph 33(3) as so understood, with the principle of effectiveness in Community Law.  Dr Plender invited us to do so if so advised (see paragraph 87 below).  However we do not consider that to be necessary.
Our decision as to whether or not we ought to exercise our discretion to make a 
	reference. 

77.	The first day of the hearing was taken up with argument as to whether we had jurisdiction to make a reference and as to whether a reference was objectively necessary.  At the beginning of the second day of the hearing we indicated to the parties that we were persuaded that a reference is objectively necessary and that we have jurisdiction to make a reference.  We then invited submissions on whether we should exercise our discretion to make a reference and indicated that we would be minded not to make a reference if it appeared that the questions we could properly refer in this case were effectively covered by the question which the Special Commissioners referred in Cadbury Schweppes.  Taking a view as to whether or not to exercise our discretion involved considering what questions should or might be referred.
78.	The question referred by the Special Commissioners in Cadbury Schweppes was as follows:
“Do Articles 43, 49 and 56 of the EC Treaty preclude national tax legislation such as that in issue in the main proceedings, which provides in specified circumstances for the imposition of a charge upon a company resident in that Member State in respect of the profits of a subsidiary company resident in another Member State and subject to a lower level of taxation?”
79.	That question was prefaced in the Schedule to the Order for Reference by a summary of the salient facts and a résumé of the CFC legislation in the form in which it was in issue in that case and of its place in the context of the UK corporation tax code.  The résumé included a broad summary of the exceptions to the charge to tax under the CFC legislation, including the “motive test” exemption.  The Special Commissioners identified in the Schedule various uncertainties in the application of Community law in the circumstances of the case before them, stating that they were unable to resolve them without the guidance of the Court of Justice, and that they had accordingly decided to refer the question.
80.	One of the salient facts summarised by the Special Commissioners in the Schedule was that the foreign subsidiaries relevant in the Cadbury Schweppes case, which had been established as tax resident indirect subsidiaries in Ireland, had been so established “solely in order that the profits arising from their intra-group lending and treasury activities could benefit from the International Financial Services Centre regime [an Irish tax regime in accordance with which a tax rate of 10 per cent is charged] for group treasury companies in Ireland and would not be taxed in the United Kingdom”. The Special Commissioners also noted that none of the exceptions to the charge to tax under the CFC legislation applied on the facts of Cadbury Schweppes and in particular that the “motive test” exemption did not apply.
81.	Mr Whiteman submitted that the issues of Community law on which we need guidance from the Court of Justice in this case go beyond the question referred in Cadbury Schweppes. 
82.	First of all, he stressed the materially different factual backgrounds of the two cases.  Although the Revenue do not agree, the Applicant asserts, and at all times has asserted, that it was not the main reason or one of the main reasons for the establishment and continued existence of VIL (the foreign subsidiary with which this case is concerned) as a company resident for tax purposes in Luxembourg, to achieve a reduction in United Kingdom tax by a diversion of profits from the United Kingdom (cf. s 748(3)(b) ICTA 1988, the second limb of the “motive test” exemption).  Mr Whiteman relied on the fact that the Revenue accepted the commercial bona fides of the transactions undertaken in connection with the acquisition by Vodafone of a controlling interest in Mannesman AG and granted clearances under s. 138 Taxation of Chargeable Gains Act 1992 and s.765A ICTA 1988. and have agreed, in relation to the “motive test” exemption that no issue arises under s.748(3)(a) ICTA 1988 (purposes of the transactions).  The point of contention is whether s. 748(3)(b) ICTA 1988 is satisfied (reasons for VIL’s existence).
83.	Secondly, Mr Whiteman submitted that the question in the Cadbury Schweppes  reference should also be asked in a reference in this case.  He argued that it is proper and convenient to ask the same question in a subsequent reference for two reasons.  First, the question is asked in a significantly different factual context and, he submits, it will be convenient for the Court of Justice to have the opportunity of considering the question of interpretation in the different factual contexts presented by Cadbury Schweppes and this case respectively.  Secondly, he submitted that the form of the CFC legislation in relation to which we would make a reference in this case is different from the form of the CFC legislation in Cadbury Schweppes, because Cadbury Schweppes concerned the legislation in its form as effective in 1996, whereas this case concerns the legislation following material amendments enacted in 2000, which had effect in 2001.
84.	Thirdly, Mr Whiteman submitted that this case gives rise to a series of questions of interpretation of Articles 43, 49 and 56 EC  going beyond the question referred in Cadbury Schweppes.  
85.	The further questions identified by Mr Whiteman (slightly rearranged and amended by us in an attempt to improve intelligibility) are:
a.	whether those Articles preclude national legislation such as the CFC legislation in issue in this case by reason of: 
(i)	the obligation on a controlling company seeking to establish an exemption from the charge to tax imposed by the legislation to establish that such exemption applies to the controlled company; 
(ii)	the uncertainties inherent in the legislation as to the availability of an exemption on the establishment of the controlled company – these uncertainties arising from (a) ambiguities or obscurity in the wording of the exemption; (b) changes in the terms of the exemption from time to time; (c) changes of practice of the Revenue  in from time to time in applying the exemption; and (d) the subjective nature of the terms of the exemption including a requirement on the controlling company to prove a negative in respect of the absence of particular purposes or reasons;   	
(iii)	the burdens of compliance with the legislation where the controlling company does not seek or is not able to claim any exemption from the charge to tax, including the preparation of multiples computations of profits for tax and accounting purposes, the preparation of returns and responses to enquiries from the revenue authority;
(iv)	the additional burdens of compliance with the legislation where the controlling company does seek to obtain exemption from the charge to tax, including the obligation to review and consider the application of the legislation in respect of all its controlled companies affected by the legislation, and thereafter continuously to monitor the activities of each of its controlled companies so affected, to ensure qualification for exemption continues (if necessary by restricting the nature and extent of the business activities of such a company);
(v)	the inherent risk of litigation to establish that an exemption from the charge to tax applies, the burden of proof in that connection being on the controlling company and not on the revenue authority; 		
(vi)	the fact that the legislation would not apply but for an amendment to such legislation having effect after 1 January 1994, having regard to Article 58(1)(a) EC and Declaration No. 7 of the Maastricht Treaty;
(vii)	the fact that the legislation would not apply but for one or more exemptions from the charge to tax being unavailable by reason of an amendment to such legislation having effect after 1 January 1994, having regard to Article 58(1)(a) EC and Declaration No. 7 of the Maastricht Treaty;
(viii)	the fact that the conditions for the availability of one or more exemptions from the charge to tax  require that the controlled company’s income in the Member State in which it is established must consist of income from sources in that Member State and not from sources in any other Member State or jurisdiction;
(ix)	the fact that the conditions for the availability of one or more exemptions from the charge to tax  require that the controlled company’s income in the Member State in which it is established and derived from another company must comprise dividend income and not interest income from that company the fact that the legislation would not apply if the controlling company capitalised the controlled company with debt rather than equity;
b.	whether, if the legislation is precluded, a controlling company that can establish that it could have so arranged its affairs so as to avail itself of an exemption to the charge to tax (had it been available) can maintain a claim to the treatment it would have obtained had it done so, or, if not, whether some other remedy is available to it; and 
c.	where a Tribunal of a Member State is charged in proceedings before it with the responsibility of determining the reasonableness of administrative action taken by the revenue authority of that Member State in pursuance of an enquiry into a person’s tax affairs and the Tribunal concludes that there is some doubt as to the compatibility of the taxing rights which are in issue in the enquiry with the EC Treaty, may the Tribunal decide that the administrative action is “reasonable” without regard to the compatibility with Community law of the national legislation establishing the taxing rights and in particular the “principle of effectiveness”.
86.	Dr Plender’s response (on the basis that we are to make a reference, contrary to his primary submission that it is inappropriate to do so) was to suggest promoting Mr Whiteman’s last proposed question (subparagraph (c) of the immediately preceding paragraph) so that it becomes the first question, on the basis that it comes closest to the issue that is before us at this stage and if answered in his favour renders all the other questions superfluous.
87.	He proposed different wording for the question, as follows:
	“Where a Tribunal of a Member State is charged on an appeal with the responsibility of determining whether the revenue authorities of a Member State have reasonable grounds for pursuing an enquiry into a person’s tax affairs, does any rule of Community law [or do Article 43, 46, 56 or 58 EC] prohibit that Tribunal from concluding that the pursuit of the enquiry is reasonable on the premise that the revenue authorities, at the time of the enquiry, believe on reasonable grounds that the national taxing rules in issue are compatible with Community law, whereas the taxpayer maintains that they are incompatible with it and both the revenue authorities and the Tribunal accept that there are reasonable grounds for believing that those national provisions are incompatible with Community law.”
together with a possible addendum as follows:
	“it does not make any difference that the revenue authorities accept the obligation to make good in damages any costs incurred by the taxpayer in consequence of the enquiry should it be shown that their belief was based on a manifest error.”

88.	Dr Plender submitted that the rest of the questions proposed by Mr Whiteman should be subsumed within a question following the wording of the question referred by the Special Commissioners in the Cadbury Schweppes case.
89.	Mr Ewart, following for the Revenue, submitted that we should have regard to the form of questions, in a state of final draft when the submission was made, in the CFC and Dividend Group Litigation Order proceedings, before Mr Justice Park in the High Court.  Mr Whiteman objected to the production of the draft stating that the proceedings to date were in private and the draft had not been approved by the judge. Mr Ewart did not persist. He did, however, submit that we should take into account the fact that a reference would be made in the CFC GLO proceedings in deciding whether to make a reference in these proceedings.
90.	He criticised the wording of Mr Whiteman’s proposed questions but  ultimately accepted (without prejudice to the submission that the case was inappropriate for a reference) that two questions might properly be referred, one being the question referred in the Cadbury Schweppes case, and the other a question raising specifically the issue of the alleged compliance burden.
91.	So much for submissions on the content of the draft questions.  We conclude that the circumstances of this case give rise to questions of interpretation of the Treaty which are in addition to and go beyond the questions referred by the Special Commissioners in Cadbury Schweppes.  Having considered also the questions referred by Mr Justice Park on 18 March 2005 in the The Test Claimants in the CFC and Dividend Group Litigation v  Commissioners of Inland Revenue we are satisfied that the present case gives rise to questions going beyond those referred in that case also.
92.	We now address the issue of the extent to which we are able to supply the Court of Justice with an adequate factual background for a reference.  While agreeing with Dr Plender that we were not in a position at this hearing to find facts other than those limited facts which are agreed, as contained in a “draft statement of agreed facts” handed up by Dr Plender on the second day of the hearing, we take notice of advice received by the Special Commissioners from the Court of Justice to the effect that it is sufficient if “the national court is able to define [in a reference], if only as a working hypothesis, the factual and legal context of the question”.
93.	Dr Plender cited Telemarsicabruzzo Spa and Others v Circostel and Others Joined Cases C-320/90, C-321/90 and C-322/90 in which the Court of Justice declined to answer questions referred by the Vice Pretore of Frascati (Italy) on the ground that the Court of Justice had inadequate knowledge of the facts underlying the main proceedings to address the questions of interpretation referred.  The Court of Justice stated (at paragraph 6 of the Judgment):
	“It must be pointed out that the need to provide an interpretation of Community law which will be of use to the national court makes it necessary that the national court define the factual and legislative context of the questions it is asking or, at the very least, explain the factual circumstances on which those questions are based.”
94.	Dr Plender also cited Irish Creamery Milk Suppliers Association and Others v Government of Ireland and Others Case 36/80.  In that judgment (at paragraphs 6 and 7) the Court of Justice gave the following guidance relevant to our decision:
“The need to provide an interpretation of Community law which will be of use to the national court makes it essential … to define the legal context in which the interpretation requested should be placed.  From that aspect it might be convenient, in certain circumstances, for the facts in the case to be established and for questions of purely national law to be settled at the time the reference is made to the Court of Justice so as to enable the latter to take cognisance of all the features of fact and of law which may be relevant to the interpretation of Community law which it is called upon to give.
However, those considerations do not in any way restrict the discretion of the national court, which alone has a direct knowledge of the facts of the case and of the arguments of the parties, which will have to take responsibility for giving judgment in the case and which is therefore in the best position to appreciate at what stage in the proceedings it requires a preliminary ruling from the Court of Justice.” 										
95.	That case does not support Dr Plender’s proposition that, in a case such as this, we ought to find the facts first. The Court of Justice recognised in terms that the referring court is in the best position to appreciate at what stage in the proceedings a preliminary ruling from the Court of Justice is required.  In our judgment that stage is now.  Further, we are satisfied that on the basis of the materials available to us we are in a position to  explain the factual circumstances on which such questions as we are minded to refer are based, albeit that some of those facts are a working hypothesis.  The Applicant’s solicitors provided us with a detailed statement of facts supported by cross-indexed documentary evidence, none of which has been objected to by the  Revenue otherwise than on the basis that they have not been able to agree any of it (save to the limited extent evidenced in their own statement of facts) because they have not been able to pursue their enquiries.
96.	In an application where the legality of the obligation to deal with the  Revenue’s enquiries is in issue, it would in our judgment be wholly wrong to insist on establishing all the facts before we made a reference. We are therefore content with defining, if only as a working hypothesis, the factual and legal context of the questions we refer.  We can do this on the basis of the materials with which we have been provided, making clear that the facts we present to the Court of Justice are presented only for the purposes of the reference, and do not constitute findings which the parties are unable to contest at any adjourned hearing of the application. We consider that this approach will do justice in the present proceedings and satisfy the requirements laid down by the Court of Justice in Telemarsicabruzzo. 
97.	Finally, on the question of discretion, we record the submissions made in opening by Mr Whiteman to the effect that implementation of the Community law principle of effectiveness requires that we should make a reference at this stage. He relied on the judgment of the Court of Appeal in Re Claimants under Loss Relief Group Litigation Order v Commissioners of Inland Revenue [2004] STC 1054 at [21] to [28] inclusive (per Peter Gibson LJ) and [32] (per Longmore LJ) for the proposition that we must, in a case within our jurisdiction, apply Community law in its entirety, protect rights which Community law confers on persons in the Member State and set aside any provision of national law which may conflict with it (ibid. at [21] per Peter Gibson LJ).  Peter Gibson LJ referred (ibid. at [23]) to the comments of Advocate General Léger in Köbler v Austria (Case C-224/01) [2004] All ER (EC) 23 at [52]) to the effect that national courts have a duty to give “direct, immediate and effective protection of the rights which individuals derive from Community law”.  While Dr Plender submitted (and we accept) that the reference to “immediate” protection is a reference to protection given without the hindrance of a requirement to apply to another forum for it, and not a reference to protection given without any interval of time, we agree with Mr Whiteman that the approach taken by the Court of Appeal in Re Claimants under Loss Relief Group Litigation Order is a powerful indication that we ought to exercise our discretion in this case by making a reference to the Court of Justice if (as we have concluded) a reference can properly made which is different from, and goes beyond, the reference already made by the Special Commissioners in Cadbury Schweppes.

Vodafone 2’s application for ruling precluding further Revenue Submissions

98.	As already stated, we heard further submissions as to a reference on 27 April 2005.  On 13 April a draft of the Reference which we were presently minded to make, subject to anything arising at the further hearing, was sent by e-mail to the parties.  We invited skeletons by 26 April from each side with comments on the draft and any suggested drafting amendments.
99.	Both parties duly provided skeleton arguments on 26 April.
100.	The Revenue proposed substantive amendments both to the draft questions and to the introductory schedule.  In particular the Revenue sought to add a question addressing abuse of rights.
101.	Mr Whiteman asked for a ruling that, in view of their conduct of the litigation, the Revenue should be precluded from making submissions which relate to the redrafting of the draft sent to the parties.
102.	He said that on 5 November 2004 the Applicant had sent a draft statement of agreed facts and a draft order to the Revenue for consideration; this had been followed by a detailed chronology on 16 November.  Following a hearing on 25 November, a direction issued on 1 December (see paragraph 26 above) required both parties to agree a draft statement of facts and a draft order for reference.  Although the applicant had pressed for constructive discussions, the Revenue had responded on 13 January 2005 giving a cursory consideration of the draft statement of facts and no consideration of the draft order.  On 14 March following the two day hearing the Revenue sent a letter setting out their comments on the Applicant’s draft questions and proposing certain other questions.
103.	Mr Whiteman said that the Applicant had received the Revenue’s very extensive suggestions for change to the draft order at 5pm on 26 April.  He had not had the opportunity to consider them properly or to take instructions.
104.	He said that many of the comments or suggestions made now could have been made long ago.  Everything from 5 November 2004 if not earlier had happened as a result of deliberate planning on the Revenue’s part including the failure to comply with the direction released on 1 December 2004.  He said that by prevaricating and lengthening the proceedings the Revenue had tried to ensure that the reference to the Court of Justice in Cadbury Schweppes is heard alone.  There was no good reason why the suggested changes were not submitted before the day prior to the hearing on 27 April.  He said that on 8 March the Revenue had suddenly without warning sought to introduce the draft reference in the CFC GLO which was a private document which had not been agreed by the judge.  If counsel’s point that it made a further reference now unnecessary was valid, why was the point not made now (at the hearing on 27 April)?
105.	Mr Whiteman said that the Revenue should not be allowed to abuse the Tribunal’s process by raising new issues of fact and new issues of law at this stage.  He had anticipated that the hearing was to clarify the draft and not to give carte blanche to raising new issues such as abuse of rights.  The Applicant had been prejudiced by the extent of the proposed changes.
106.	Dr Plender said there was only one new element proposed, that of abuse of rights.  It seemed to the Revenue that a question was appropriate in the light of the opinion of the Advocate General in Halifax Plc and Others v Customs and Excise Commissioners (Case C-255/02).
107.	He said that the Revenue’s main submission in March was that the issue of compatibility of the CFC legislation with Community Law was not relevant to the issue whether the Revenue had reasonable grounds for not giving a closure notice.
108.	We considered that no satisfactory explanation had been given for the fact that the Revenue did not give the Applicant and the Special Commissioners more notice of their intention to introduce new questions at this late stage, however we declined to give the ruling requested by Mr Whiteman.  The possibility that an assertion of fundamental procedures might be an abuse of those freedoms had been raised by the Special Commissioners in the Cadbury Schweppes reference and was not therefore new.  When considering the making a reference it is clearly the duty of the national court to give careful consideration to what questions should be asked.  Once the Revenue had raised the issue of the potential relevance of the developing case law on abuse of rights, it was necessary for the Special Commissioners to address the issue.  We needed the maximum assistance from the parties in formulating the questions to be referred.  That assistance included submissions from the Revenue notwithstanding the late stage at which the new proposals were advanced.  Indeed the submissions of the United Kingdom to the Court of Justice in the Cadbury Schweppes reference contain an extensive passage addressed to that abuse of rights.

The questions referred

109.	We are satisfied that the present proceedings raise a number of material questions which go beyond the questions referred in Cadbury Schweppes (Case C-196/04) and the CFC GLO reference.
110.	The Revenue proposed (see paragraph 86) that we should refer an initial question specifically directed to the issue whether they had reasonable grounds to refuse a closure notice.  The question asked whether it is open to the Special Commissioners to decide that the tax authority has reasonable grounds for continuing the inquiry without determining whether the taxing rights in issue are in fact compatible with the EC Treaty.  The taxing rights referred to arise under the CFC legislation.
111.	We rejected the proposition that the “reasonable grounds” can refer as a matter of domestic law to the belief of Revenue whether or not that belief is correct in law.  In view of that conclusion the reference of a question on that issue does not arise. 
112.	These proceedings raise questions as to the compliance burden under the CFC legislation which are not raised in the Cadbury Schweppes reference where the Applicant does not contend that any of the exceptions or exemptions apply.  In the present case the Applicant contends that the motive test can be satisfied.  The factual context is therefore substantially different.  The CFC GLO reference does raise questions as to the compliance burden.  However Dr Plender did not suggest that this removed the need for such questions in this case.
113.	It is of course correct that the reference made is on a working hypothesis as to the facts, the facts not having been found.  It is clear that a hearing to determine the facts would require a lengthy hearing.  In ABTA v Inland Revenue Commissioners [2003] STC (SCD) 194 the hearing before the Special Commissioners took 18 days spread over a period of three months.  There is no reason to believe that a hearing to determined the facts in this case would be any shorter.  If it is eventually decided by the Court of Justice that the CFC legislation is not compatible with Community Law, the Applicant would have no effective remedy for the substantial costs and resources which such prior determination of the facts would involve.
114.	It is to avoid such expense and delay that the Applicant has sought a closure notice.
115.	In our judgment the working hypothesis provides a sufficient factual context for a reference.  It is important to note that although there is a substantial dispute as to the facts, most of the primary facts are clear.
116.	The present proceedings concern the CFC legislation in its form following  amendment in 2000.  The legislation relevant in the Cadbury Schweppes appeal reflected the law as it was in 1996.  The effect and relevance of Declaration No 7 of the Maashicht Treaty which arise in these proceedings do not arise in Cadbury Schweppes and is not raised in the CFC GLO reference either.
117.	No question based on the developing Community Law on abuse of rights was referred in either of the above cases although the matter is raised in Cadbury Schweppes.  While the factual basis of any allegation of abuse is strongly contested by the Applicant, we consider the reference of a question directly addressing the circumstances (if any) in which the Applicant should be precluded from relying on its rights under the Treaty because of abuse of rights to be necessary.
118.	We have concluded that a reference should be made and made a direction accordingly.  The direction is annexed to this Decision.

Whether the transmitting of the reference to the Court of Justice should be delayed to allow an appeal to the High Court

119.	Dr Plender indicated that the Revenue would be likely to wish to appeal against any decision to make a reference and also, depending on the terms, against those terms.  He submitted that as a matter of principle no reference should be made pending determination of such appeal.
120.	He relied on the practice in the High Court and submitted that the Special Commissioners should follow that practice.  CPR Part 68.3(3) provides,

“(3)	Unless the Court orders otherwise, the Senior Master will not send a copy of the order to the European Court until – 

(a)	the time for appealing against the order has expired; or 
(b)	any application for permission to appeal has been refused, or
(c)	any appeal has been determined.”

121.	Dr Plender accepted that the Special Commissioners have power to make an immediate reference but said that it would be wrong to do so while an appeal is pending.  He said that it might be different if there were exceptional circumstances, such as the possibility of a joint hearing with Cadbury Schweppes ; that however was always fanciful and would not now happen.  He accepted the advantage of the Court of Justice, when considering the reference in Cadbury Schweppes, being aware of this reference, but said that must be weighed against the disadvantage that the reference might be revoked or varied by the High Court.  In such event resources of the Court of Justice would have been wasted.
122.	Dr Plender was not able to cite any case in which the High Court has overturned a reference in a tax case, although there had been some immigration cases.  He said that the High Court would only interfere with the discretion exercised by the lower court where it was exercised unreasonably.  Here he submitted that the Special Commissioners had focused on the wrong issue.  The compatibility of the CFC legislation is not relevant to the issue whether  the Revenue have reasonable grounds for not giving a closure notice.  He asked for at least 14 days notice before transmission of the reference.
123.	Mr Ewart, following, said that the objections to the reference were not in any way based on Cadbury Schweppes but on the ramifications for the administration of tax if a reference is made in relation to a paragraph 33 application.  He said that there are a huge number of cases at the moment where there are issues of compatibility arising and it might completely shut down all the investigations that are being carried  on at the moment in these cases.  He said that there was no question of the Revenue objecting to a reference at the proper time or of any delay.  The Revenue were hampered because they were in the dark about the facts.
124.	Mr Whiteman said the Revenue had waved through a reference in Cadbury Schweppes with all possible speed.  Here at every stage there had been obstruction.  He referred to his submission when seeking a ruling precluding further submissions from the Revenue (see paragraph 103 to 106).
Conclusions on the timing of the transmission of the reference to the Court of Justice

125.	It has never been the practice in the tax tribunals to defer making a reference pending an appeal.  Indeed so far as we are aware this is the first time that the matter has arisen.
126.	The question of the compatibility of the CFC legislation with the EC Treaty raises a whole series of difficult issues.  Although the issue is already before the Court of Justice in two other references it is in our judgment necessary for the questions now referred to be considered by that Court.  It may well be that it is now too late for this reference to be heard with Cadbury Schweppes, however it is clearly desirable that the Advocate General and the judges deciding that case should be aware of this reference when so doing.
127.	Although the Revenue assert that no delay has been intended,  it is clear that throughout these proceedings the Revenue has been reluctant to do anything which might facilitate a reference.
128.	It is highly relevant that having notified an enquiry in November 2002, no notice was served under paragraph 27 to require the information requested in Mr Baird’s letter of 25 November 2002.  It seems to us that it is possible, or even likely, that this was because the Revenue wished to avoid an appeal under paragraph 27.  Such an appeal would have raised similar questions to the application for a closure notice.
129.	The criticism by Mr Whiteman of the response of the Revenue to the direction of 1 December 2004 is in our view justified.
130.	If we accede to the request to defer making a reference the effect will be to add still further to the delays which have already occurred. 
131.	If we considered that there was a real possibility that our decision to refer would be reversed on appeal or that the terms of the reference would be varied we would have acceded to Dr Plender’s request to defer transmitting the reference.  However we had no hesitation in holding that if the legal basis for refusing closure is wrong then the grounds for refusing closure are not reasonable.  We cannot of course exclude the possibility that a higher court will take a different view, but in spite of Dr Plender’s sustained submission we were wholly unconvinced.
132.	In view of the history and circumstances of the proceedings we declined to delay transmitting the reference to the Court of Justice.  The possibility that the reference might be revoked by the High Court or varied is in our view outweighed by the disadvantage of delay and denying the Court of Justice the opportunity of considering this reference when reaching its decision on the other references.

Summary of Conclusions

133.	The letter of 25 November 2002 which accompanied the notice of enquiry was not a notice under Schedule 18, paragraph 27 of the Finance Act 1998 (paragraph 19).
134.	The question whether the Revenue have reasonable grounds for not giving a closure notice under paragraph 33 does not depend on the belief of the Revenue as to the law or on the reasonableness of such belief.  “Reasonable grounds” refers to facts not law (paragraphs 73-76).
135.	The issue of the compatibility of the CFC legislation with Articles 43, 49 and 56 EC requires to be determined to enable us to give judgment on the application for a closure notice (paragraph 62).
136.	The issues of EU Law which arise go beyond the questions referred in Cadbury Schweppes and CFC GLO references (paragraph 91 and 109-118).
137.	We are able to define the factual and legislative context of the questions referred as a working hypothesis without the lengthy hearing otherwise necessary to find the facts (paragraphs 95 and 96).
138.	We declined to preclude the Revenue from raising new issues of fact and law at the hearing on 27 August 2005 including that of abuse of rights (paragraph 108).
139.	In the light of the history and circumstances of the proceedings we decided not to defer making the reference to allow the Revenue to lodge an appeal (paragraph 132).
140.	We attach to this Decision the Direction for a reference to the Court of Justice which we have made in this case, together with the Schedule thereto, which sets out the terms of our request for a preliminary ruling under Article 234EC.  We stay the application for a closure notice generally pending the receipt of the Court of Justice’s response to the reference.

JOHN WALTERS QC

THEODORE WALLACE
SPECIAL COMMISSIONERS
RELEASE DATE: 24 May 2005

SC 3118/04