[2011] UKFTT 342 (TC)

TC01202

Appeals numbers:  TC/2010/4318, 4320 & 5806 

Corporation tax - Closure notice applications under Schedule 18 FA 2008 - Categorisation of proceedings under Tribunal Procedure Rule 23 – criteria for recategorisation as a Complex case

FIRST-TIER TRIBUNAL
TAX 

	FINNFOREST UK LIMITED
CARD PROTECTION PLAN LIMITED
EXXONMOBIL CHEMICAL LIMITED
		Applicants

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 		Judge Peter Kempster
					Ms Gill Hunter					

Sitting in public at 45 Bedford Square, London WC1 on 25 November 2010

Mr Graham Aaronson QC, instructed by Dorsey & Whitney (Europe) LLP, for the Appellants

Mr Richard Coleman and Mr David Yates, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	The three Applicants (“the Taxpayers”) each applied to the Tribunal for a direction to be issued to the Respondents (“HMRC”) to give closure notices in respect of several open enquiries into the respective corporation tax returns of the Taxpayers.  There was also a question for the Tribunal as to the appropriate categorisation of the proceedings under the Tribunal Procedure Rules, which is dealt with separately at the end of this decision notice.
The Closure Notice Applications

2.	On 10 May 2010 Card Protection Plan Limited (“CPP”) filed an application pursuant to paragraph 33 of schedule 18 Finance Act 1998 (“Sch 18”) for a direction from the Tribunal that HMRC issue closure notices within 30 days of the date of the Tribunal direction in relation to the accounting periods ended 31 August 2000 and 2001, and 31 December 2001 to 2007.
3.	Also on 10 May 2010 Finnforest UK Limited (“Finnforest”) filed an identical application in relation to the accounting periods ended 31 December 2000 to 2004.
4.	On 8 July 2010 ExxonMobil Chemical Limited (“ExxonMobil”) filed an identical application in relation to the accounting period ended 31 December 2001.  
The Legislation on Closure Notices

5.	Sch 18 sets out the provisions relating to “Company tax returns, assessments and related matters.”  Paragraph 24 provides (so far as relevant):
“(1)  An officer of Revenue and Customs may enquire into a company tax return if they give notice to the company of their intention to do so (“notice of enquiry”) within the time allowed. ...”

6.	Paragraph 25 provides (so far as relevant):
“(1)     An enquiry into a company tax return extends to anything contained in the return, or required to be contained in the return, including—
(a)     any claim or election included in the return,
(b)     any amount that affects or may affect–
(i)     the tax payable by that company for another accounting period, or
(ii)     the tax liability of another company for any accounting period, ...”

7.	Paragraph 32 provides (so far as relevant):
“(1)     An enquiry is completed when an officer of Revenue and Customs by notice (a “closure notice”) informs the company they have completed their enquiry and state their conclusions.  The notice takes effect when it is issued. …”

8.	Paragraph 34 provides (so far as relevant):
“(1)     This paragraph applies where a closure notice is given to a company by an officer.
(2)     The closure notice must—
(a)     state that, in the officer's opinion, no amendment is required of the return that was the subject of the enquiry, or
(b)     make the amendments of that return that are required—
(i)     to give effect to the conclusions stated in the notice, …
 (2A)     The officer may by further notice to the company make any amendments of other company tax returns delivered by the company that are required to give effect to the conclusions stated in the closure notice.
(3)     An appeal may be brought against an amendment of a company's return under sub-paragraph (2) or (2A).
(4)     Notice of appeal must be given—
(a)     in writing,
(b)     within 30 days after the amendment was notified to the company,
(c)     to the officer of the Board by whom the closure notice was given.  …”

9.	The applications by the Taxpayers before the Tribunal stem from paragraph 33:
“(1)     The company may apply to the tribunal for a direction that an officer of Revenue and Customs gives a closure notice within a specified period.
(2)     Any such application is to be subject to the relevant provisions of Part 5 of the Taxes Management Act 1970 (see, in particular, section 48(2)(b) of that Act).
(3)     The tribunal shall give a direction unless satisfied that an officer of Revenue and Customs has reasonable grounds for not giving a closure notice within a specified period.”

10.	Finally in relation to Schedule 18, paragraphs 31A to 31D provide (so far as relevant):
“31A— Referral of questions to the tribunal during enquiry
(1)     At any time when an enquiry is in progress into a company's tax return any question arising in connection with the subject-matter of the enquiry may be referred to the tribunal for determination.
(2)     Notice of referral must be given—
(a)     jointly by the company and an officer of Revenue and Customs, ...
(c)     to the tribunal.
…
(4)     More than one notice of referral may be given under this paragraph in relation to an enquiry.
(5)     For the purposes of this paragraph the period during which an enquiry is in progress is the whole of the period—
(a)     beginning with the day on which an officer of Revenue and Customs gives notice of enquiry into the return, and
(b)     ending with the day on which the enquiry is completed.

31B— Withdrawal of notice of referral
(1)     An officer of Revenue and Customs or the company may withdraw a notice of referral under paragraph 31A.  
(2)     Notice of withdrawal must be given—
(a)     in writing,
(b)     to the other party to the referral and to the Special Commissioners,
(c)     before the first hearing by the Special Commissioners in relation to the referral.

31C— Effect of referral on enquiry

(1)     While proceedings on a referral under paragraph 31A are in progress in relation to an enquiry—
(a)     no closure notice shall be given in relation to the enquiry, and
(b)     no application may be made for a direction to give such a notice.
(2)     For the purposes of this paragraph proceedings on a referral are in progress where—
(a)     notice of referral has been given,
(b)     the notice has not been withdrawn, and
(c)     the questions referred have not been finally determined.
(3)     For the purposes of sub-paragraph (2)(c) a question referred is finally determined when—
(a)     it has been determined by the tribunal, and
(b)     there is no further possibility of that determination being varied or set aside (disregarding any power to grant permission to appeal out of time).

31D— Effect of determination
(1)     The determination of a question referred to the tribunal under paragraph 31A is binding on the parties to the referral in the same way, and to the same extent, as a decision on a preliminary issue in an appeal.
(2)     The determination shall be taken into account by an officer of Revenue and Customs in reaching their conclusions on the enquiry.
(3)     Any right of appeal under paragraph 30 or 34(3) may not be exercised so as to reopen the question determined except to the extent (if any) that it could be reopened if it had been determined as a preliminary issue in that appeal.”

11.	The applications in the current proceedings relate to a number of returns for each of the Taxpayers.  Mr Coleman for HMRC confirmed to the Tribunal that in relation to HMRC’s enquiries into all those returns for all three Taxpayers the only open items are certain cross-border group loss relief claims, discussed below.
Background

12.	In 2002 a large number of corporate taxpayers decided to challenge the validity of the UK domestic legislation governing intra-group surrenders of tax losses.  The then rules permitted such offsets only where both the surrendering and claimant companies were resident in the UK for UK tax purposes, or, at least, had some taxable presence in the UK.  The companies believed – correctly, as it eventually transpired – that the UK residence condition could be contrary to the guarantee of freedom of establishment contained in the European Community Treaty. HMRC contested that challenge, arguing – again correctly, as it eventually transpired – that the reality of national limits to taxation permitted at least some form of restriction on the ability to offset losses cross-border.  The companies launched their challenge by a group litigation order sanctioned by the High Court: the Loss Relief GLO.   The three Taxpayers are all participants in the Loss Relief GLO.
13.	As soon as it was launched the Loss Relief GLO ran into a jurisdictional problem: should the High Court entertain proceedings concerning tax liabilities when such disputes were, by statute, to be adjudicated in the first instance by the Special Commissioners (a forerunner of the current Tribunal)?  That proved to be a knotty problem considered, with various conclusions, by the High Court, the Court of Appeal and the House of Lords.  The outcome, by a three-to-two majority decision of the House of Lords in Re Claimants under Loss Relief Group Litigation Order [2005] STC 1357 (“Autologic”), was that a distinction was drawn between group relief claims made within the statutory time limits and those claims filed out of time.  The in-time claims were to be heard by the Special Commissioners.  
14.	The Special Commissioners had in December 2002 heard a tax appeal by Marks & Spencer plc (“M&S”), which had also made a group relief claim although was not a participant in the Loss Relief GLO.  M&S’s dispute eventually reached the High Court where questions were referred to the European Court of Justice (“ECJ”).    The terms of the ECJ’s decision (Marks & Spencer plc v Halsey [2006] STC 237 – “M&S ECJ”) are discussed later.  M&S’s dispute is still live, with the state of the proceedings as at the date of the current hearing being that the Court of Appeal is to hear an appeal against a decision of the Tax & Chancery Chamber of the Upper Tribunal.
15.	Around 15 of the participants in the Loss Relief GLO are represented by the same solicitors: Dorsey & Whitney.  Until Spring 2009 it suited everyone (including HMRC) to leave their disputes over the group loss relief claims in abeyance. The House of Lords had ruled that the (in-time) claims must in due course progress through the normal tax appeals process (now, this Tribunal), and M&S was fighting the vanguard on the issues being challenged by the participants in the Loss Relief GLO.  In Spring 2009 Dorsey & Whitney concluded that their clients’ common interests with the M&S ECJ litigation had been outweighed by the distinctions between their positions and that of the M&S group.  In particular, the group structures of those companies were not identical to that of the M&S group (the structure considered by the ECJ).  So on 3 April 2009 Dorsey & Whitney wrote to HMRC with a proposal.  Before exploring the correspondence between the parties from April 2009 we state the decision in M&S ECJ and give a summary of the dispute between the parties that gives rise to the current applications.   
M&S ECJ
16.	The decision of the ECJ in M&S ECJ was as follows (at 267):
“59. ... as Community law now stands, arts 43 EC and 48 EC do not preclude provisions of a member state which generally prevent a resident parent company from deducting from its taxable profits losses incurred in another member state by a subsidiary established in that member state although they allow it to deduct losses incurred by a resident subsidiary. However, it is contrary to arts 43 EC and 48 EC to prevent the resident parent company from doing so where the non-resident subsidiary has exhausted the possibilities available in its state of residence of having the losses taken into account for the accounting period concerned by the claim for relief and also for previous accounting periods and where there are no possibilities for those losses to be taken into account in its state of residence for future periods either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party.” 

17.	This is commonly and uncontroversially interpreted as invoking a two part test:
(a)	Is the connection between the two companies sufficient to give Community law protection from discrimination? – “the Grouping Test”.
(b)	Have the possibilities of local use of the losses been sufficiently exhausted? – “the No Possibilities Test”.

Summary of current dispute
18.	On the Grouping Test, the particular structure considered by the ECJ in M&S ECJ was a loss-making subsidiary in a non-UK member state surrendering losses to a profitable parent in the UK.  The M&S group structure does not apply exactly to any of the three Taxpayers.  In outline:
(a)	Finnforest’s stucture involves a loss-making company in a non-UK member state (and its subsidiaries in the same or other non-UK member states) surrendering losses to a profitable sister company in the UK, all with a parent in a non-UK member state.  
(b)	CPP’s stucture involves a loss-making company in a non-UK member state surrendering losses to a profitable sister company in the UK, both with a UK parent.  
(c)	ExxonMobil’s stucture involves a loss-making company in a non-UK member state surrendering losses to a profitable sister company in the UK, both with a non-EU (USA) parent.  
19.	Can one extrapolate from the particular structure considered in M&S ECJ to those three structures?  The Taxpayers contend that M&S ECJ establishes certain principles clearly applicable to structures similar but not identical to that of the M&S group.  HMRC contend that any structure not identical to the M&S group must be considered independently.      
20.	On the No Possibilities Test, there is a factual question, which must be addressed on a case-by-case basis, of whether the stipulation made by the ECJ can be satisfied by the evidence in each particular case.  It was common ground between the parties that a case-by-case approach was necessary, and the nature and quantity of the required evidence would be substantial.  The Taxpayers accept they will at some point need to satisfy the evidential burden in relation to the No Possibilities Test.  But, they say, the very significant amount of work that will involve should not be required of them earlier than necessary or, in particular, if it would prove futile because the Grouping Test cannot be satisfied.  In other words, the Grouping Test should be sorted out first, and only if the answer to that test provides hope to the Taxpayers should they then undertake the evidence gathering and disclosure necessary for the examination of the No Possibilities Test.  That approach leads them to propose that the Grouping Test should be addressed as a preliminary issue on their appeals.  In particular, they identify that preliminary issue as being one that may require a reference to the ECJ at some point – especially given HMRC’s stance that M&S ECJ does not give the answer for the Taxpayers’ own structures. 
Correspondence between the parties since April 2009
21.	As stated at ¶15 above, on 3 April 2009 Dorsey & Whitney wrote to HMRC outlining a proposal that (a) the in-time claims of their clients (ie those claims that, if not agreed, would be pursued by appeals to this Tribunal) should be progressed in priority to the out-of-time claims that would be heard by the High Court, in accordance with the House of Lords decision in Autologic; and (b) common issues in relation to their 15 clients be discussed with a view to identifying possible representative test cases.
22.	On 20 July 2009 HMRC responded stating, in summary:
(a)	 HMRC agreed that the operation of the group relief regime and its compatibility with the EU Treaty should be litigated before the Tribunal. 
(b)	That commencing litigation on other claims while the M&S ECJ litigation was ongoing was potentially unnecessary and wasteful of costs unless, by doing so, final determination of those other claims could be reached. 
(c)	That HMRC had advised their relevant local offices that the Solicitor’s Office would review each of the 15 sets of claims so that responses could be co-ordinated. 
(d)	That it was always for the claimant to demonstrate that it could fulfil the necessary statutory requirements for a group relief claim and that it met the No Possibilities Test by adducing the relevant evidence before the Tribunal. 
23.	On 18 August 2009 Dorsey & Whitney replied they agreed that points which would be determined in the context of the M&S ECJ proceedings should be so decided, but noting that a number of questions arose in the claims which did not arise in the M&S ECJ case. They suggested that the most sensible and cost-efficient approach to such issues would be to agree a joint reference to the Tribunal.  The alternative would be to apply for closure notices in relation to any open enquiries and have the issues ventilated in the context of those applications. 
24.	On 18 September 2009 HMRC responded including the following:
“Solicitor's Office has received these claims on an ad hoc basis since April 2009 and it is only now that we are aware of the identities and number of claimants who wish to pursue their Taxes Act claims. In order to prepare effectively we need adequate time to properly consider the facts of each claimant and the legal issues which arise in relation to each claim. If any of these claims falls mainly within the terms of the M&S decision then it would appear sensible to await the outcome of the concurrent appeals to decide how that claim should be dealt with - do you agree? ...” 
“In respect of proof of the exhaustion of possibilities of loss relief [ie the No Possibilities Test] we will of course need to see documentary evidence. We believe that the evidence which was adduced by M&S in the recent proceedings before the First-Tier Tribunal would also be required in these cases. For ease of reference we enclose at Annex 1 a list of documentary and witness evidence which we feel, as presently advised, should be produced by the claimants if they argue that they fulfil the no-possibilities test. It may be necessary to add to this list in the future and HMRC reserve the right to make further requests for information as and when necessary. ...” 
“In relation to two of the claimants [including ExxonMobil] these company groups have parent companies which are resident in third countries and which cannot therefore purport to exercise rights of establishment or indeed any Community law rights. We do not understand why you feel these claimants should be able to rely on Community law to advance their claims (or indeed any late claims) particularly bearing in mind the decision of the ECJ in the Thin Cap decision and therefore we would be grateful if you would explain how you feel these claims should proceed?” 
Annex 1 to the letter listed:
“Documentary and legal evidence required from claimants: 
In relation to the documentary evidence required in respect of each (EU-resident) surrendering company to prove that they have in fact incurred losses in the State of Residence and that those losses satisfy the "no possibilities" test the following information and documents should be produced by the claimant/taxpayer:- 
(a) Comprehensive Group (and Consortium) Structure Charts of the international company groups - throughout the period of the claims for Group Relief.
(b) Records of all relevant shareholdings held by the ultimate parent (& intermediate parents) and throughout the company group over the entire accounting periods of the Group Relief claims.
(c) Minutes of meetings of the board of directors of the loss-making subsidiaries in particular regarding any plans and/or proposals to deal with the losses and/or proposals to transfer the lasses or to sell loss making subsidiaries to third parties.
(d) Audited profits and loss accounts of the surrendering company for all relevant accounting periods: The accounts of the surrendering company should be adjusted to comply with UK GAAP and accompanied by tax computations showing the amount available for surrender. 
(e) Tax returns of the surrendering company to the national Revenue for all relevant accounting periods.
(f) Tax assessments (and any relevant adjustments) issued by the national revenue in relation to the surrendering company’s tax returns; 
(g) A letter [or report] from the national Revenue (obtained by surrendering company) setting out the accounting periods in which the losses had arisen, the carry forward or back of those losses over time, the latest position as to those losses and whether any of the losses had been (& whether they still could be) relieved under national loss relief rules in the future.
(h) If the surrendering company is in liquidation, copies of court documents by which the liquidator/trustee in bankruptcy has been appointed and copies of the reports and/or updates made by the liquidator and/or trustee to the courts and/or to the surrendering company/parent company. 
(i) If the group structure of the claimant company group is dissimilar to that in Marks & Spencer (for instance if the parent is resident in a third country, or if the parent is resident in another Member State of the EU or States which are part of the EEA, with subsidiaries resident in other Member States and the claim(s) is (are) made a UK resident subsidiary) - the claimant is requested to set out its argument in full as to why the group relief provisions are contrary to EU law.” 
25.	In a witness statement dated 17 September 2010 Mr Michael Anderson – a tax partner at Dorsey & Whitney with conduct of this matter – stated:
  “On receiving this letter, we were optimistic that HMRC had taken on board the comments of Lords Nicholls and Millett in Autologic and that we would be able to continue a sensible, co-operative and constructive dialogue with them in order to progress some common issues of principle loosely in parallel with the M&S case. Nevertheless, before responding, we awaited the promised further communication following HMRC's meeting with Counsel …”
26.	On 4 November 2009 Dorsey & Whitney wrote including the following:
“Our clients' main objective is to establish what issues arise in their claims and, if possible, to have those issues resolved. It is certainly not our clients' intention to litigate issues which are being taken in the M&S case. Rather, the first stage is to establish what issues do not arise in the M&S case which arise in these claims. For example, one such issue which has arisen ... concerns group structures without a common UK resident parent. 
Consequently we do not envisage a detailed review of these claims at this stage, other than insofar as is necessary to identify common issues requiring determination as matters of principle. We do not, therefore, propose that a detailed analysis is undertaken in each claim to determine whether the no possibilities test is met or what the quantum of losses is. Quantum is of course one of the key issues in the M&S case. Rather, we envisage a process whereby a number of common issues of principle are identified, we agree between us which of them it would be appropriate to resolve in advance of the conclusion of the M&S case and then have those issues determined in separate proceedings perhaps through the selection of one or more representative cases. 	 
This strikes us as the most cost efficient way of addressing the proceedings and the type of approach for which the system of agreed references to the Tribunal is ideally suited. The alternative struck us as likely to be more demanding of HMRC's time as it would require a full review and testing of the detailed facts of multiple cases. Please let us know if you do not agree with this approach. ...
Evidence that "no possibilities test” is fulfilled 
We note your request for documents to support each claimant's contention that the no possibilities test has been fulfilled. As stated above, however, we do not intend at this stage that the [Tribunal] enters into a detailed assessment of each claimant's individual facts and circumstances. ...
Next Steps
On the basis that you are in agreement to proceed with a joint reference to the [Tribunal], we will write shortly to set out the common issues that we see arising in the claims and to provide you with a draft Notice of Referral for your comments.” 

27.	On 25 November 2009 Dorsey & Whitney wrote again attaching a draft notice of referral which included the following:
“The questions being referred to the First Tier Tribunal pursuant to this Notice concern the claims made for group relief in relation to the losses of the companies and in the accounting periods listed. The questions are: 
A. No Possibilities Test 
At the dates on which the claims for group relief were made, did the Test Claimants meet the substantive requirements set out at paragraph 55 of Case C-446/03 Marks & Spencer plc v Halsey [2006] Ch 184 (the "No Possibilities Test"), to enable any claimed losses to be surrendered? 

B. Group Structure 
Where the No Possibilities Test is satisfied, are the losses claimed by the Test Claimants still capable of being surrendered notwithstanding that: 
	(a) 	the losses are being claimed by a UK resident subsidiary (direct or indirect) of the company in which they have been incurred; 
	(b) 	the surrendering and claimant companies have a common parent company resident in another Member State of the European Union ("EU") or European Economic Area ("EEA") other than the United Kingdom; 
	(c) 	the surrendering and claimant companies have a common parent company resident outside the EU/EEA? 
C. Procedural Issues 
At the dates on which the claims for group relief were made, did the Test Claimants meet the procedural requirements required to enable any claimed losses to be surrendered? 
Which of the Test Claimants' claims should be allowed in principle?” 

28.	A schedule to the draft notice set out “Common issues of fact and law” as follows:
“A - 	No Possibilities Test 
(i) 	losses were, at the time of the claims, no longer capable of being used in the foreign jurisdiction because the relevant local time limits for doing so had expired; 
(ii) 	losses were, at the time of the claims, no longer capable of being used in the foreign jurisdiction because the loss-making company had merged with another entity, the effect of which, under local laws, was to "strand" the losses; 
(iii) 	a loss-maker has suffered catastrophic losses and, although using some of the losses by way of carry forward relief, will take many decades to use all the losses. 
B -     Group Structure 
(i) 	the losses are being claimed by a UK resident subsidiary (direct or indirect) of the company in which they have been incurred; 
(ii) 	the surrendering and claimant companies have a common parent company resident in another Member State of the European Union ("EU") or European Economic Area ("EEA") other than the United Kingdom; 
(iii) 	the surrendering and claimant companies have a common parent company resident outside the EU/EEA.” 
29.	On 11 December 2009 HMRC wrote including the following:
“Whilst some of the issues raised in the Notice of Referral may not fall to be determined in either Marks & Spencer or Philips Electronics, your clients' claims may otherwise fail regardless of how these further issues are resolved (e.g. on time limits or on the issue of when the [No Possibilities Test] falls to be determined). 
In any event, HMRC will require full factual details in relation to each of the relevant claims before being able to agree any questions for a Notice of Referral. As you have indicated in your letter dated 4 November 2009, you yourselves have not yet carried out a detailed review of the cases. In HMRC's view, unless each of your client's cases is properly understood by both parties, there is a real likelihood of any issues listed in the Notice of Referral being incomplete or inadequate. 
However, given our comments above, namely that litigation of these claims should await the final resolution of Marks & Spencer and Philips Electronics, HMRC are content for your clients to postpone a detailed review of the cases for the time being. Your clients if so advised should, of course, continue to make any group relief claims and appeal any relevant matter within the time limits afforded under UK law.”
30.	On 21 December 2009 HMRC wrote again, including the following:
“The No-Possibilities test: 
Although this is an evidential rather a procedural matter, we felt it might be helpful to comment on this also. The claims which we have reviewed to date where they refer to the [No Possibilities Test] criteria of the ECJ generally simply include blanket assertions that the surrendering company fulfils the [No Possibilities Test] criteria, although no evidence is adduced to demonstrate this is the case. You will be aware from our earlier correspondence that we have drawn your attention to the nature of the evidence required to sustain any such assertion. 
In addition where surrendering companies have been sold to third parties ... no evidence/explanation has been adduced to explain how the transfers impacted on the use of the losses.” 
31.	Mr Anderson stated in his witness statement:
“At this point, it was clear to us that HMRC were not in fact going to agree to a Notice of Referral and so the only other option for getting these claims before the Tribunal was by way of applications for closure notices. We therefore entered into further discussions with our clients as it was apparent that the process of progressing the claims would be more involved and time consuming (and therefore, from the clients' point of view, more expensive) than previously expected. … HMRC appeared to us to have made a strategic decision sometime between September and December 2009 to be as obstructive as possible. … We then set about identifying and seeking agreement from a number of potential representative claimants to apply for closure notices, essentially as test cases for the following group.  Before actually making the applications, we wrote to HMRC on 12 April 2010 to inform them of our intentions and to give them a final chance to agree to the preferable route (in our view) of agreeing a Notice of Referral. That letter sets out the Applicants' position clearly and rehearses the history of the correspondence up to that point. We requested HMRC's response by 26 April. HMRC responded with a request for an extension to that date until 7 May but having not heard from them further by 10 May 2010, we proceeded to lodge with the First-tier Tribunal applications for closure notices as previously indicated.” 
32.	On 14 May 2010 HMRC wrote a lengthy response including:
“In our view your precipitate approach is not helpful in the conduct of this litigation and it would have been a far more effective use of time and resources for you to have waited for a substantive response from HMRC. 
Your application for these enquiries to be closed without providing any evidence whatever about the no-possibilities test or indeed without clear evidence of the group structure and shareholdings over the relevant period of the claims was entirely premature. We need to properly understand the group structures in order to determine whether any claimant presents issues for determination which have not been the subject of the extant litigation in Marks & Spencer or Philips Electronics UK Ltd. We intend to draw these issues to the attention of the Tribunal. ...
Group Structure 
As we indicated in our letters of 20 July or 18 September 2009 we need to properly understand the group structures and shareholding of each group company you represent in this litigation in order to determine whether any present issues of domestic and Community law which the courts should determine while awaiting the outcome of the current Community law litigation. We await the production of the group structure materials we have previously told you we needed - see our letter of 18 September. 
Having regard to the different group structures in the EC we would also like you to address the issue as to whether the EC subsidiaries belong to a Fiscal Unity or a Group Structure which allows the transfer, pooling or carry forward/back of losses amongst that group. Please regard this as a supplemental condition to those set out in Annex 2 to our letter of 18 September. 
Full group information such as the group structure, group relationships and changes in ownerships for all relevant accounting periods in which group relief claims for overseas losses have been made is required to clearly indicate the State of Residence of the members of the group, its ultimate ownership and/or consortium (& link companies) and also to clearly indicate the shareholding of the respective corporate members of the group/consortium over the relevant period of the claims to group relief. See Annex 1 (A) to our letter of 18 September 2009. 
Evidence which demonstrates the No-Possibilities Test 
We note that in neither CPP nor Finnforest have you produced any evidence to demonstrate that in relation to any of the nine accounting periods that the losses of any of the EU resident subsidiaries satisfy the no-possibilities test. 
We informed you in our letters of 20 July 2009 and 18 September 2009 that if any of these claims were to be litigated we expected evidence which could clearly demonstrate the no possibilities test was satisfied. Indeed, we attached a 2 page Annex to our letter of 18 September in which we set out in nine sub-headings the information required for HMRC to consider whether the no possibilities test was met. 
The pro-forma letters sent by the original 15 tax managers to the relevant LBS offices on 3 April 2009 stipulated in the first and final paragraphs that HMRC should respond to Dorsey & Whitney in relation to the claims. 
Notwithstanding the fact that Solicitor's Office notified you in July and September 2009 that your clients would have to substantiate these claims by production of evidence you have taken no step to produce such evidence. In our view your attempt to close open enquiries without providing such evidence is entirely inappropriate conduct. ...
Way Forward 
In the short-term, we believe the best way forward is for you not to proceed with your application for Closure Notices for CPP and Finnforest, to produce the group structure and shareholding materials in relation to every one of the CPP (and 12 other companies you represent) and provide the evidence requested in our letter of 18 September. We would then be in a position to enter into a sensible discussion with you. 
Your proposed course of action would require the Tribunal to adjudicate on Community law issues in the abstract, without regard to the facts of each case and the particular legal issues which arise on the different facts. HMRC cannot enter into litigation without access to key evidence relating to the no-possibilities test, nor can we attempt to agree directions, or a statement of issue or statement of case without knowing the facts of each appeal. 
If the information we have previously requested from you (group structure charts and shareholdings over the period of the claims) is now provided to us, we will be able to decide whether a closure notice is required or whether a Notice of Referral should be considered in relation to these or any other claimants as a more preferable way forward.” 
33.	Dorsey & Whitney responded on 28 May 2010.  Mr Anderson stated in his witness statement:
“The basic group structures of the Finnforest and Exxon claims have been well known to HMRC for some five or six years now. They do not require any further information to determine whether or not those structures raise "novel issues". It is clear that they do. In any event, all the relevant group structure charts and additional evidence has now been provided to HMRC.  As to evidence in support of the no possibilities test, this has also now been provided to HMRC and explanations are contained in the three witness statements from representatives of the three Applicants.” 
34.	On 27 May 2010 and 2 June 2010 HMRC sent information notices to Finnforest and CPP pursuant to paragraph 1 of Schedule 36 of Finance Act 2009.  Those notices were appealed on 25 June 2010.  An information notice was made on ExxonMobil on 16 November 2010.
35.	There was further correspondence between the parties and with the Tribunal.  The applications then came to this hearing.
 
Case for the Taxpayers
36.	Mr Aaronson for the Taxpayers submitted that HMRC could close their enquiries immediately. It was clear that HMRC were not satisfied the relevant group structures are eligible under the Grouping Test; HMRC are unequivocal that the Grouping Test is not met by any of the three Taxpayers. HMRC’s position was, in effect, that a taxpayer group whose structure was not identical to that of the M&S group could take no comfort from the M&S ECJ decision and must instead start again from square one to establish its Community law rights.  It was not correct for HMRC to say that the No Possibilities Test needed to be examined at this point. HMRC had already formed their view to refuse these claims on the basis of the Grouping Test. There will be no prejudice or disadvantage in deferring the extensive amount of work required in relation to the No Possibilities Test until the Grouping Test issue had been determined.
37.	 On the Grouping Test it was accepted each Taxpayer must have a suitable group structure leading to Article 43 freedoms. Whether the test is met in any particular case is a strict question of European law.  The three Taxpayers in the current closure notice applications represent three group structures being advanced as test cases. They were self-selected because of HMRC's lack of cooperation. Dorsey & Whitney were of the view that the questions to be addressed in relation to their 15 clients who are participants in the Loss Relief GLO were fairly represented by the three Taxpayers.
38.	Details of CPP’s group structure were provided to HMRC first in 2003 with more details provided subsequently. The group structure of Finnforest was first explained in 2004 and more details provided subsequently. The group structure of ExxonMobil was first explained in 2005. HMRC have made clear they do not accept that any of these structures fulfil the Grouping Test.  
39.	The No Possibilities Test must also be met. That involves extensive fact-finding and witness evidence as to why the taxpayer did or did not do certain things – for example, other intra-group transfers of losses and group loss elections.  The factual enquiries would take a lot of time and effort.  That may be necessary in due course, but not if the Taxpayers are wrong on the Grouping Test.  
40.	The two tests should be approached in the order that makes the resolution of the dispute as efficient as possible.  Lord Nicholls in Autologic  (at ¶¶ 31-33) had advocated sensible case management and co-operation between the parties - HMRC had not co-operated in permitting the Grouping Test to be referred to the Tribunal, so Lord Nicholls’ assumption was not well founded:
 “Mr Aaronson QC [for the taxpayers] advanced further arguments on the inconvenience of requiring claimant companies to follow the statutory route [ie to pursue appeals before the Special Commissioners]. He submitted that in cases where no claim for group relief has yet been made a claimant should not have to incur 'up front' expenses unnecessarily. A claim for group relief must quantify the amount of relief claimed. The Revenue require that companies' accounts be drawn in accordance with United Kingdom accounting principles and adjusted for UK tax rules. If the claimants proceed in the High Court the expense of complying with these requirements can be postponed until the European Court has ruled on the Community law problems.
The force of this argument is difficult to evaluate. That some expense will be involved is clear. That this will be substantial is not self-evident. Since the Revenue are insisting on taxpayers following the statutory route even though this was not designed for non-resident companies, it behoves the Revenue to exercise their dispensing powers with appropriate regard to the circumstances. I consider that, looking at matters in the round, the House should proceed on the footing that, at least in general, the 'up front' expenses involved will not be a significant factor in the context of individual company claims.
One other general point calls for brief mention. Unlike the High Court the appeal commissioners have no power to co-ordinate proceedings by making a group litigation order or the equivalent. I doubt whether in practice this should prove a significant handicap in marshalling the mass of appeals involved in this litigation. I see no reason to doubt that the parties will co-operate in making sensible practical arrangements.”
41.	HMRC's proposal in relation to the problem is to say they need full group structure details. The Taxpayers say these have already been provided; any outstanding information on the relevant group structures can be provided quickly.  HMRC also say they want to test the No Possibilities Test. The Taxpayers accept that they must answer legitimate questions on topics such as the use of losses elsewhere and expiry dates at the appropriate time, but that is not - as HMRC contend - now.  The problem with HMRC's proposal is that the two issues are totally different in character. The No Possibilities Test requires an immense amount of time and effort and, moreover would never arise if the Grouping Test were decided against the Taxpayers. The Taxpayers were not, of course, adverse to providing all necessary information in relation to the No Possibilities Test but only at the appropriate time. It was not appropriate for all this information to be provided until the Grouping Test is resolved, and that may require one or more of the group structures now being tested to have questions referred to the ECJ for an answer.  It was clear from the group litigation actions involving issues of European law that the inevitable course of action for the Courts would be to make an immediate referral of suitable questions to the ECJ – see, for example, Test Claimants in the FII Group Litigation v RCC [2010] STC 1251, at ¶ 95.  That is exactly what should happen in the context of the current proceedings, and it should be done without further unnecessary expenditure of resources or time. 
42.	The best argument that HMRC had put forward in favour of their approach requiring the No Possibilities Test to be examined immediately was because of what they say in their internal Manuals. This was borne out by the witness statements provided to the Tribunal. That represented a hidebound attitude that was not appropriate in the context of potential group litigation. HMRC's approach suggested they could not see the wood for the trees - why go through all this work if they already know that they will reject the claims on the basis of the Grouping Test?
43.	The Taxpayers’ original proposal was that both sets of issues should be treated as preliminary matters before the Tribunal - the group structures should be tested as to whether they meet the Grouping Test, and also hypothetical questions as to expiry or availability of losses in relation to the No Possibilities Test. The Taxpayers’ proposal now was that they accepted it was inappropriate to examine now issues of availability of losses in relation to the No Possibilities Test - that was too much subject to individual questions for each of the Taxpayers. But the first issue as to eligibility of group structure should be decided quickly and first. The relevant questions could be put forward shortly and succinctly. If reference to the ECJ was felt necessary then that could be done by the Tribunal.
44.	It was open to the parties to refer jointly the Grouping Test to the Tribunal by way of a preliminary question under para 31A of Sch 18. HMRC had completely failed to state cogently why they would not do so. The only alternative open to the Taxpayers was to demand closure of the enquiries. Closure would not stop HMRC testing the No Possibilities Test by means of suitable disclosure during the subsequent litigation of an appeal against the closure notices. It was not correct that once the enquiry had been closed then HMRC could not get further information. In order for the Taxpayers to prove their entitlement to group relief they must satisfy the No Possibilities Test. That would properly arise later in the process, and only if HMRC were correct in relation to the Grouping Test.
45.	There were three procedures available to the Tribunal. 
(a)	First, the Tribunal could immediately order closure notices. HMRC had already made up their minds that these claims will not be admitted because the Grouping Test is not satisfied. Regardless of the No Possibilities Test that leads, on HMRC's contention, to the losses not being available. HMRC can then raise assessments by way of closure notices.
(b)	Second, the Grouping Test could be referred as a preliminary matter to the Tribunal under paragraph 31A. The Taxpayers believed that was the obvious course and HMRC had advanced no cogent explanation of why they would not consent to such a course of action.
(c)	Third, in deciding whether to grant a closure notice, the Grouping Test could be considered as a substantive issue of law.  Detailed argument could be taken on that issue, with the possibility of a reference to the ECJ. In RCC v Vodafone 2 [2006] STC 1530 this point was considered in the context of a closure notice application and Arden LJ stated (at ¶¶ 24-25):
“For all these reasons I conclude that para 33 confers jurisdiction on the [Special] Commissioners to decide incidental questions of law rising on an application under that paragraph.
The question of the jurisdiction conferred by para 33 is quite different from the question of the exercise of the power to determine incidental questions of law. In the present case the Commissioners took the view that they were able 'to define the factual and legislative context of the questions referred [to the ECJ] as a working hypothesis without the lengthy hearing otherwise necessary to find the facts' (see [2005] STC (SCD) 549, para 137). There are likely to be cases where it is not possible to say that a point of law raised by a taxpayer needs to be, or can be, determined before a closure direction application under para 33 is determined. It will be a matter that the Commissioners will have to consider in the light of the facts surrounding the particular application before them. Because the facts of the individual case inevitably have to be examined, I agree with the judge that the Commissioners will be in a position to prevent para 33 being used by taxpayers improperly as a means of delaying Revenue enquiries. In the present case the Commissioners took into account that the burden on the taxpayer of investigating the facts would be considerable (see para 113 of the decision of the Commissioners). I agree that that is a relevant consideration in a decision whether to determine a preliminary point of law before dealing with a para 33 application.”
46.	The claims were first filed in the 2003 - 2004 period and early resolution was both desirable and fair.

Case for HMRC
47.	Mr Coleman for HMRC submitted that the tack now taken by the Taxpayers was slightly different from that originally postulated.
48.	The matters under enquiry by HMRC concerned complicated issues. Until April 2009 the Taxpayers had not given detailed facts. In addition to the current applicants, there were ten other taxpayer clients of Dorsey & Whitney about whom HMRC had little information. 
49.	The purpose of a closure notice was expressed by Park J in the High Court in Vodafone 2 [2006] STC 483 (at ¶ 43):
“Paragraph 33 [of Sch 18] is meant to be a protection to a taxpayer, by giving it a procedure whereby, if it believes that an enquiry is being inappropriately protracted and pursued by the Revenue, it can bring the matter before the independent and specialist tribunal. The Special Commissioners can, I believe, be relied upon to spot cases where the procedure is being abused and to give short shrift to applications in such cases. And I repeat the point that the making of a para 33 application does not halt the enquiry, either temporarily or permanently. Only a decision of the Commissioners to accede to a para 33 application can have that effect.”

50.	These closure notice applications were an attempt to force a premature closure of legitimate enquiries without proper consideration of the relevant facts.  The enquiry process was not being unnecessarily prolonged or abused.  Any delays were due to the Taxpayers’ failure to provide necessary information.  The applications appeared to be calculated to force HMRC to reject the claims on the single ground of the Grouping Test, thereby requiring HMRC to stake all on what may prove to be a contentious and difficult question of Community law, and to deprive HMRC of the ability to investigate whether the claims are unfounded on other grounds as well - including, perhaps, less contentious and more straightforward ones concerned with the No Possibilities Test.   
51.	The closure notice applications were flawed on four grounds. 
(a)	First, they involved a misconception as to the purpose of the enquiry.  The validity of the group loss claims was being challenged and evidence gathered to support the loss relief claims.  The closure notice applications were made in May and July 2010.  Only in September 2010 did the Taxpayers produce requested information in support of their claims – after the closure notice applications had already been made and HMRC had issued formal information notices.  There had been belated attempts to supply information and the Taxpayers conceded that the information provided to date was insufficient – pertinent queries remained outstanding.  It would be wrong of HMRC to conclude their enquiries at this stage.  The amounts in dispute are large and legitimate questions had not yet been fully answered.  The proper context for obtaining the required information was in the course of a formal enquiry, not as part of subsequent pre-litigation disclosure exercises.  Given that litigation was ongoing elsewhere in relation to the effect of the terms of closure notices (on appeal from Tower MCashback LLP 1 and another v RCC [2010] STC 809), HMRC had a legitimate desire to have the full information provided before being required to issue closure notices.
(b)	Second, it was wrong in principle and practicality to seek to resolve complicated questions of law in a factual vacuum.  It was clear that each group relief claim must be examined on a case-by-case basis - Lidl Belgium GmbH & Co KG v Finanzamt Heilbronn [2008] STC 3229. The group structure scrutinised in M&S ECJ was a “vertical upward surrender” whereas the claims submitted by the Taxpayers were “horizontal surrenders”.  Further, the claim by ExxonMobil appeared also to require consideration of the non-discrimination provisions of the UK/USA Double Taxation Convention.
(c)	Third, comparisons with group litigation actions were misleading - the Taxpayers were not in that position. All parties were at the stage of pre-litigation with open enquiries which HMRC considered it was not appropriate to close.  These were not truly test cases because HMRC had had no opportunity to examine the claims to agree suitable test cases – the Taxpayers were self-selected.  
(d)	Fourth, the proposal suggested by the Taxpayers would have undesirable practical ramifications.  The Taxpayers had suggested there may be a reference to the ECJ. HMRC did not agree that such a referral was inevitable.  Even if there was a referral, the answer back from the ECJ would depend on the question posed and that question depended heavily on an understanding of the facts. One would not know what question to ask of the ECJ until the factual background was known. In M&S ECJ the question referred by the High Court was steered by the particular facts of the M&S group. The answer given by the ECJ reflected the terms of the questions and the factual assumptions buried in the questions posed. The M&S ECJ litigation was still requiring further questions to be raised which still need to be answered - for example, at what point in time should the No Possibilities Test be applied?  The Tribunal was being invited to close the enquiries and embark on legal arguments when it was still not clear the factual issues were met concerning the No Possibilities Test.  Vodafone 2 concerned a case where an enquiry was being pursued on an incorrect basis (relating to the controlled foreign companies legislation) and was distinguishable from the current applications, where it was accepted that the enquiries were addressing the relevant issues.
52.	The passages cited from Autologic did not assist or hinder either party. Lord Nicholls was referring to HMRC's power to extend time limits for claims; that was different from the issue in the current case concerning provision of information.  Autologic considered a procedural problem of some complexity; there was no such issue in the current case - it was clear that the Tribunal had jurisdiction in relation to the closure notice applications.  Further, Lord Millett stated (at ¶ 63):
“It is impossible to foresee all eventualities, and I agree with Lord Nicholls that the proceedings in the High Court in respect of claims which should have been brought before the commissioners should be stayed and not struck out. This would have two advantages. It should encourage the Revenue to co-operate in waiving or extending time limits and removing procedural and other obstacles to the commissioners' jurisdiction; and it would enable the High Court claims to be revived in the event of unforeseen difficulties arising before the commissioners which cannot be overcome.”
Seeking to establish the facts of a claim to group relief in the course of an enquiry was not a “procedural or other obstacle” to the Tribunal’s jurisdiction.
53.	No criticism should be made of any of the parties in relation to events before April 2009. It was proper for the Taxpayers to make protective appeals and also for those appeals not to be pursued pending the outcome of the M&S ECJ litigation. Now it was suggested that HMRC were unreasonable in not having certain points referred without considering factual issues. There were no serious suggestions of delay on the part of HMRC. Rather, the Taxpayers merely say that it is unreasonable not to separate the legal issues. HMRC's position was that they had not set their face against a para 31A referral - indeed such a referral might be helpful - but not in a factual vacuum and without disclosure of documents. The draft referral put forward by the Taxpayers in November 2009 contained a very wide invitation to agree very wide facts. HMRC are trying to deal with some 95 claimant companies and HMRC's approach to this major piece of work has been entirely reasonable – indeed, to have adopted any other course would have been a dereliction of duty.  
54.	The group relief claims submitted by the Taxpayers simply asserted that the No Possibilities Test was met without explaining why, let alone demonstrating that to HMRC.  From the very beginning of the correspondence between the parties HMRC had made clear that any claim must be supported by evidence – which should in any event have been obvious.  It was only on 17 September 2010 that the Applicants produced any information in support of their claims for cross-border group relief. Since then HMRC have analysed such information as has been provided, identified the missing information, and have reverted with relevant queries and questions. 
55.	HMRC are currently not in a position to close the relevant enquiries due to: 
(l) Outstanding factual queries concerning the satisfaction of the No Possibilities Test; 
(2) Difficulties in understanding documentation which has been supplied in German or French; 
(3) Queries in relation to group structure; and
(4) Queries in relation to the operation of foreign tax law (whether Austria, Danish, French or German). 
56.	The enquiries, despite being formally open for a considerable time, should not be closed because: 
(i)  the claims have necessarily been put on hold by common consent, until 3 April 2009, pending the resolution of issues in the M&S ECJ litigation; and
(ii) since then, the Taxpayers have not co-operated over the supply of information. The next step is for the Taxpayers to supply the information that has been identified by HMRC.  There is also an outstanding dispute concerning HMRC's request for information made under the information notices dated 27 May, 2 June and 16 November 2010, which is stalling the progress of the enquiries. 
57.	HMRC are conscious that substantial amounts of tax are at stake in these claims, and in the claims of other taxpayers that may follow them. HMRC intend to complete their enquiries diligently. This was not a case of the enquiry procedure being abused, or being unnecessarily prolonged by HMRC, or being conducted in a disproportionate way. There has been delay, but this was for good reason, and by common consent, up until 3 April 2009, and thereafter has been caused by the Taxpayers’ unwillingness to supply the information necessary to allow HMRC properly to investigate their claims. In all the circumstances, HMRC had reasonable grounds for not giving a closure notice within a specified period. 
Post-hearing submissions in relation to Tower MCashback

58.	Some time after the hearing the Supreme Court gave its judgment in HMRC v Tower MCashback LLP1 [2011] UKSC 19 and both parties made further written submissions to the Tribunal on the effect of that judgment on the current proceedings.  Both parties contend the judgment supports the submissions they made in the hearing.
59.	The Taxpayers submit it is open to HMRC to issue closure notices where detailed facts remain uninvestigated, though the notice will need to be more generally expressed.  See Lord Walker (at ¶ 18):
“This should not be taken as an encouragement to officers of HMRC to draft every closure notice that they issue in wide and uninformative terms. In issuing a closure notice an officer is performing an important public function in which fairness to the taxpayer must be matched by a proper regard for the public interest in the recovery of the full amount of tax payable. In a case in which it is clear that only a single, specific point is in issue, that point should be identified in the closure notice. But if, as in the present case, the facts are complicated and have not been fully investigated, and if their analysis is controversial, the public interest may require the notice to be expressed in more general terms.”

60.	The Taxpayers submit HMRC are well positioned to indicate to the Taxpayers that their group relief claims are rejected, and the general grounds for so deciding.  That refusal can then begin to be disputed through the usual appeals process, and the Taxpayers will under normal case management procedures provide all information necessary.
61.	HMRC submit a distinction is to be drawn between legal arguments (which can be advanced or refined after the issue of the closure notice) and factual enquiries (which should be completed, so far as possible, before the issue of the closure notice).  In Tower HMRC were criticised for taking the course of action now advocated by the Taxpayers.  See Lord Walker (at ¶ 13):
“A great deal of expensive legal argument might have been avoided if Mr Frost [the Inspector] had stood his ground and insisted that he needed more time to consider the matter.”
Also Lord Hope (at ¶¶ 83 & 85):

“ … it is desirable that the statement by the officer of his conclusions should be as informative as possible. This is because of the function that the terms of the notice will serve in identifying the subject matter of any appeal. In this case the closure notice that Mr Frost issued was in very bald terms. … No details were given of the reasons why he had reached the conclusion to which his amendment gave effect. The statute does not spell out exactly what it means by the words “his conclusions”. But taxpayers are entitled to expect a closure notice to be more informative.
…
Our decision to dismiss the cross-appeal should not be taken as indicating that uninformative closure notices of the kind that Mr Frost, no doubt under pressure, issued in this case should be the norm. The aim should be to be helpful, both to the taxpayer and to the Tax Tribunal which will have to case manage any appeal. The officer should wherever possible set out the conclusions that he has reached on each point that was the subject of enquiry which has resulted in his making an amendment to the return.”

Consideration
62.	The applications before us are that HMRC should be required to give to (some or all of) the Taxpayers closure notices in relation to their enquiries into the tax affairs of the Taxpayers for the relevant years.  Paragraph 33 of Sch 18 is clear about the approach this Tribunal is to adopt.  We must direct HMRC to give a closure notice within a specified period unless HMRC have reasonable grounds for not giving a closure notice within a specified period.  The issue for the Tribunal is whether, in the words of Park J in the High Court in Vodafone 2 (at ¶ 43), the enquiries are being inappropriately protracted and pursued by HMRC.  
63.	This was expressed as follows by the Special Commissioner in Jade Palace Ltd v Revenue and Customs Commissioners [2006] STC (SCD) 419 (at 424):
“Once an application for closure is made it is … for the Revenue to show reasonable grounds for not giving a closure notice within a specified period. These grounds should take account of proportionality and the burden on the taxpayer.
The issue on such application is not simply whether a closure notice should be directed, but whether it should be directed within a specified period. The reasonable grounds must cover the setting of a period.
Since para 32 requires the Revenue to state their conclusions when giving a closure notice, it is clear that the 'specified period' within para 33(1) must be sufficient for this to be possible. The period necessary will vary with the circumstances and complexity of the case and the length of the enquiry.
The longer the period of the enquiry, the greater the burden on the Revenue to show reasonable grounds as to why a time for closure should not be specified.
Both parties accepted that it is for the tribunal giving a direction to specify the period. … 
In the present case there is a clear dispute as to whether the accounts correctly state the appellant company's profits. There has been a protracted correspondence. The inspector is not satisfied that the accounts are correct and has identified a number of concerns with the explanations advanced.
I accept the submission by Mr Maas [for the taxpayer] that the Revenue do not have to be satisfied in order to state their conclusions. If they are not satisfied, this will be part of the conclusion; in such a case the closure notice will go on to make a judgment as to what the correct figure should be. Such judgment will be on the same basis as on a discovery assessment under s 29 [TMA 1970]. Although it may be possible in some cases to state a figure with confidence, … in many cases no precision will be possible. The measure of profits is often a matter of judgment.
Where a judgment or estimate is necessary the Revenue must have reasonable time to make enquiries if necessary issuing para 27 notices and to make a judgment as to the tax due.”
64.	The only open items in relation to the enquiries for the three Taxpayers are the disputed group relief claims (see ¶ 11 above).  The amounts in dispute are large, being a seven- or eight-figure sterling amount for each of the Taxpayers.
65.	In considering the length of time the enquiries have been continuing we consider it fair and appropriate to ignore the period before April 2009.  Up to that point all parties were content to leave matters in abeyance pending the outcome of the M&S ECJ litigation.  We have recited (at ¶¶ 21 to 35 above) what we consider to be the pertinent points of the correspondence between the parties from April 2009 to this hearing – a period of around 20 months.  
66.	The effectiveness of the group relief claims turns on the satisfaction of the two requirements identified in M&S ECJ: the Grouping Test and the No Possibilities Test.
67.	On the Grouping Test the Taxpayers say sufficient information has been produced and HMRC’s view is already clearly that the Grouping Test is not met.  HMRC accept that is their current position but maintain they need further information, which has been requested, in order to reach a conclusion.  The Taxpayers say these are mere details – peripheral points that do not detract from the fact HMRC have already effectively reached a conclusion on the Grouping Test for all the Taxpayers – and the continued requests for more detailed information illustrate, in Mr Aaronson’s phrase, that HMRC cannot see the wood for the trees.  There is a difference of opinion between the parties as to whether more information needs to be provided in relation to the Grouping Test.  We note that formal information notices have been issued and appealed, and that more information has been provided (we do not know if this was done within or outside the terms of the notices).  From the papers produced to us we consider it is appropriate for additional information to be requested by HMRC (we do not comment on the specific terms of the information notices) in relation to the Grouping Test.  For each of the Taxpayers their international group structures are complicated and have varied over different accounting periods.  We consider it reasonable that HMRC should need to gather detailed information on specific points they require to be clarified.  It might be that those information requests should be confined to a specified period, but para 33 permits the Tribunal to order a closure notice within a specified period only in relation to the whole enquiry, not confined to particular aspects of the enquiry (eg the Grouping Test).
68.	On the No Possibilities Test the Taxpayers accept that much more information will need to be provided to HMRC.  Both Mr Aaronson in his submissions and Mr Anderson in his witness statement accept there are legitimate questions to be answered in detail in relation to the No Possibilities Test but they highlight the considerable amount of work anticipated to provide those answers, and they propose a different course of action.  This is that the enquiries in relation to the No Possibilities Test should be put to one side while the matter of the Grouping Test is addressed and resolved.  Mr Aaronson proposes three ways of achieving this. 
69.	The first proposal is that the enquiries should be closed now and all necessary information in relation to the No Possibilities Test would be provided as part of the pre-hearing disclosure on the inevitable appeals against the closure notices.  We consider that is not the appropriate course of action.  We have commented at ¶ 67 above on the legitimate need for continuing requests (at least for a reasonable period) in relation to the Grouping Test.  Further, HMRC are entitled to enquire into the factual basis on which the Taxpayers contend the No Possibilities Test is satisfied in each of their respective claims.  We consider the Supreme Court judgment in Tower supports this approach.  The closure notice is expected to set out the conclusions HMRC have reached, and we consider that HMRC would need to consider both parts of the M&S ECJ test in concluding whether to accept the group relief claim.  The current enquiries are the proper context for those questions, as explained by Park J (in the High Court) in Vodafone 2 (at ¶ 19).  The Taxpayers do not allege HMRC are being unreasonable in asking questions or expecting detailed answers – rather they would prefer, for good reasons articulately submitted, to have to cross that bridge only after the Grouping Test challenge has been resolved.  While we sympathise with that desire and see some merits in it, to order the closure of the entire enquiries and expect HMRC to rely on pre-hearing disclosure on major information gathering is, we consider, not the correct action.  Given the accepted volume of information still to be provided, it is not reasonable to stipulate a specified period within which HMRC should complete their enquiries.  Accordingly, we would not make a para 33 direction to HMRC to close the enquiries.
70.	The second proposal is that the parties should make a para 31A referral to the Tribunal in relation to whether the Taxpayers meet the Grouping Test.  This referral mechanism (which was introduced in 2001) is a useful tool; there is an equivalent mechanism for income tax return enquiries in s 28ZA Taxes Management Act 1970.  It recognises there may be a number of items under examination in an enquiry and enables the parties, if they both agree, to “carve out” a particular issue for separate determination by the Tribunal, as if it was a preliminary issue in a dispute between the parties.  The enquiry can continue in the background in relation to all the non-referred issues until the referred question is determined (or withdrawn).  HMRC are not allowed to close the enquiry (paragraph 31C(1)(a)) and the taxpayer cannot ask the Tribunal to direct HMRC to give a closure notice (paragraph 31C(1)(b)).  The referral to the Tribunal may be any question arising in connection with the subject matter of the enquiry.  The Tribunal cannot order the parties to make a para 31A referral, it must be consensual.  
71.	HMRC consider a para 31A referral premature as they are awaiting information.  Further, HMRC find the terms of the draft referral produced by Dorsey & Whitney in November 2009 (¶¶ 27 & 28 above) unacceptable. Mr Coleman confirmed that HMRC have not closed their mind to such an approach, at what they consider to be the appropriate time.  We consider that the draft referral was very widely drawn; it was a first draft – perhaps intended to be the starting point for a negotiated document – and HMRC were fully entitled to decline to subscribe to its terms.  We consider the possibility of a para 31A referral is the most constructive method of advancing this dispute.  As already stated above, the enquiries could continue in relation to the non-referred matters (eg the No Possibilities Test) while the referral (on the Grouping Test) is before the Tribunal.  We would urge the parties to devote some effort to attempting to agree the terms of such a referral.  If agreement proves not possible then it is always open to the Taxpayers to renew their closure notice applications. 
72.	The third proposal is for the Tribunal to address the Grouping Test immediately, in the context of the closure notice applications – as was done in Vodafone 2.  We consider it would be premature for this Tribunal to adopt that course.  There is still information to be provided in relation to the Grouping Test (see ¶ 67 above) and all parties would need to prepare carefully for a full argument of the Grouping Test, especially as there is the distinct possibility of a referral to the ECJ being necessary or desirable.  We consider it would be preferable for this issue to be raised in the context of a para 31A referral, which takes us back to the second proposal.  If that is not possible then this third proposal could be raised again in any renewal of the closure notice applications.
Decision on Closure Notice Applications
73.	For the reasons stated at ¶ 69 above, the closure notice applications are REFUSED.
74.	It is open to the Taxpayers (or any of them) to make a further closure notice application at a later stage of the enquiries, if they so wish.
The Categorisation Issue
75.	The closure notice applications had been allocated to the Basic category of cases pursuant to Tribunal Procedure Rule 23 (“Rule 23”).  This was in accordance with paragraph 3(b)(iii) of the Senior President’s Practice Direction dated 27 July 2010:
“When the Tribunal receives a notice of appeal, application notice or notice of reference in one of the following types of cases, the Tribunal must allocate the case to the Basic category unless the case is of a type listed in paragraph 2, or the Tribunal considers that there is a reason why it is appropriate to allocate the case to a different category. ... 
(b) Applications ... (iii) for a direction that HMRC close an enquiry.”
76.	Rule 23(3) provides:
“The Tribunal may give a further direction re-allocating a case to a different category at any time, either on the application of a party or on its own initiative.”
77.	By applications dated 8 and 15 July 2010 the Taxpayers applied pursuant to Rule 23(3) for the closure notice application proceedings to be reallocated as Complex category cases.  The principal significance of such a recategorisation is the possibility of a costs shifting regime pursuant to Tribunal Procedure Rule 10(1)(c).   
78.	The criteria for categorisation of a case as Complex are set out in Rule 23(4):
“The Tribunal may allocate a case as a Complex case ... only if the Tribunal considers that the case – 
(a) will require lengthy or complex evidence or a lengthy hearing; 
(b) involves a complex or important principle or issue; or 
(c) involves a large financial sum.” 
79.	It was common ground between the parties, and the Tribunal agrees, that any future determination of the substantive dispute concerning the group relief claims would meet the criteria for Complex categorisation; the present issue is whether the closure notice application proceedings should be reallocated as Complex category cases.
80.	Mr Aaronson for the Taxpayers submitted:
(a)	Case categorisation was considered in the recent Upper Tribunal decision of Capital Air Services Ltd v HMRC [2010] UKUT 373 (TC).  Whether a matter is "complex" for the purposes of Rule 23 (by way of meeting one of the criteria set out) is a "matter for the judgment of the Tribunal" (¶ 27).  However, where a case meets one of the criteria in Rule 23, the general presumption should be that the case should be allocated as Complex (¶ 30):
 “However, we do say this: if the tribunal does have a discretion to allocate other than as Complex a case which is capable of being allocated as Complex, it must be a discretion of limited scope. The general rule should, we consider, be that a case capable of being allocated as Complex ought to be so allocated. Any discretion to allocate other than in accordance with that general rule should be exercisable only in the light of special factors.”
(b)	That case involved a relatively ordinary, if detailed, commercial arrangement for the leasing of a helicopter. At stake was about £500,000 of VAT. The issues raised were novel, and there was no previous authority on the subject matter. It was on the basis of the "complex or important principle or issue" raised by the facts that the Upper Tribunal categorised the appeal as complex for the purposes of Rule 23(4)(b). The Upper Tribunal did not reach a view on whether the value of the claim was large.
(c)	The current proceedings involved similar considerations. This was a group-style action co-funded by ten taxpayers for whom similar issues arise. There are likely to be many more taxpayers to whom these issues are relevant. The issues are novel, complex, and of importance to both the Taxpayers and the following body of claimants. Using the criteria in Capital Air Services, the issues are sufficiently complex and/or of importance that the Tribunal can and should categorise the appeal as Complex.  
81.	Mr Coleman for HMRC submitted:
(a)	Categorisation as Basic cases pursuant to the Practice Direction was appropriate.  These were ordinary closure notice applications.
(b)	At the time of making the recategorisation application the Taxpayers considered the closure notice applications hearing would last five days and involve detailed consideration of the Vodafone 2 case.  Their stance had changed and the hearing had been disposed of in a single day.
Consideration
82.	It is important to bear in mind that the recategorisation application before us is in relation to the closure notice applications, not the dispute over the effectiveness of the group relief claims.  Applying the three criteria in Rule 23 (4) in turn:
(a)	Although the evidence for the hearing ran to six large ring-binders, the hearing was dispatched in one day, assisted by the expertise and efficiency of the presentations of both counsel.
(b)	The issue is whether the enquiries should continue or be ordered to close, and that depends on the facts of this particular case rather than giving rise to any general point of principle.
(c)	Although the group relief claims themselves are for large amounts, the subject matter of the recategorisation applications (the closure notice applications) does not in itself have a monetary value.  The Taxpayers may say that the financial sum involved is the costs they will be put to in complying with a continuation of the enquiries, but we consider the question of such work is material to the decision whether to order a closure notice rather than the matter of categorisation of the closure notice proceedings.

83.	We conclude that none of the Rule 23(4) criteria are satisfied.  
Decision on the categorisation issue
84.	For the reason given at ¶ 83 above, we REFUSE the application for re-allocation of the closure notice proceedings to the Complex category of cases. 

Rights of appeal
85.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.
86.	This decision notice contains corrections to ¶¶ 12–15 and 37 proposed by the parties, and replaces that originally issued. 

Peter Kempster
TRIBUNAL JUDGE
RELEASE DATE: 20 May 2011