Conforming Interpretation of Domestic Tax Legislation: Aligning DTR and EU Law in Revenue & Customs v Taxpayers

Introduction

The Judgment in Revenue and Customs v The Applicants in the Post Prudential Closure Notice Applications – Appeals Group Litigation (“Taxpayers”) ([2025] EWCA Civ 166) addresses the complex interrelation between domestic corporation tax provisions and the requirements imposed by EU law on double taxation relief (DTR). At its core, the dispute explores whether and how domestic statutory claims for tax relief should be interpreted in light of EU principles such as legal certainty, effectiveness, and the protection of legitimate expectations.

The case involves a group of taxpayers, primarily investment funds, who had submitted company tax returns over several accounting periods. They alleged that the tax treatment of foreign source dividend income, which did not conform with the requirements of EU law, resulted in an unlawful overpayment of tax and an ineffective mechanism to claim credit at the foreign nominal rate (FNR). In parallel with earlier test cases (notably the FII and Prudential litigations), the dispute considered the proper construction and application of statutory provisions of the Taxes Management Act 1970, the Income and Corporation Taxes Act 1988, and the Finance Act 1998.

Key issues included whether claims for DTR credits should be regarded as effective when based on procedural applications (such as amendments to returns filed during enquiries or claims under paragraph 51 of Schedule 18 FA 1998), how adjustments arising from closure notices should affect the tax payable, and whether the conforming interpretation required by EU law gives rise to credits for underlying tax payable at the FNR.

Summary of the Judgment

The Court of Appeal, after a detailed examination of the statutory framework and the interplay of EU law principles, allowed HMRC’s appeal and dismissed the Taxpayers’ appeal. In doing so, the Court analyzed a multitude of issues arising from the treatment of foreign dividend income – including the application of amendments, the operational impact of closure notices, and the time limits for claims.

Central to the Judgment was the determination that, although EU law had dictated a conforming interpretation of domestic tax legislation (especially section 790 of ICTA 1988) to allow a tax credit reflecting the foreign nominal rate, the process of such interpretation is inherently retrospective and limited solely to aligning national law with EU obligations. The domestic procedural rules governing claims, amendments, and the specific formulation of DTR credits were not to be reinterpreted wholesale to grant additional benefits. The decision carefully distinguished between credits arising from withholding tax and those resulting from underlying tax relief at the FNR.

Ultimately, the Court concluded that the statutory framework – as applied by HMRC – could not be extended beyond the scope required to achieve compliance with EU law. The taxpayers’ arguments that a broader interpretation (including reallocation of management expenses or a retroactive extension of claim periods) should apply were rejected.

Analysis

Precedents Cited

A number of landmark cases provided the backdrop for the Court’s reasoning:

FII CJEU1 and FII CJEU2: These cases from the Court of Justice of the European Union established that a Member State’s system of double taxation relief must accord equivalent treatment to foreign and domestic dividends. In particular, they clarified that relief should not solely focus on the actual tax paid, but also on a credit calculated at the foreign nominal rate.
Salinen (Haribo): This case underlined the purpose of the domestic imputation system and its equivalence with an exemption system, highlighting that relief is capped at the domestic tax rate.
Other Domestic Authorities: Decisions such as Vodafone 2, Deutsche Morgan Grenfell (DMG), and the subsequent opinions in the Prudential litigations provided context on how domestic rules interact with retrospective conforming interpretations. These cases stressed that the national procedural mechanisms, including the requirements for claim submission and quantification of claims, should not be altered to extend beyond the necessary remedy required under EU law.

Legal Reasoning

The Court’s reasoning was multifaceted, hinging on several key legal principles:

Conforming Interpretation: The Court held that domestic tax legislation must be interpreted in conformity with EU law in order to secure the effective remedy against unlawful double taxation. This “conforming interpretation” has a retrospective effect – it reads the tax law in a way that reflects the required credit at the FNR – but it is limited to remedying the specific breach identified by EU case law.
Limitations of Domestic Procedural Rules: The judgment reinforces that the statutory procedures for filing tax claims (such as amendments under paragraph 31 or claims under paragraph 51 of Schedule 18 FA 1998) are fixed and not to be reinterpreted beyond their notice. Even when EU law appears to demand a broader relief, domestic law’s time limits and claim requirements remain binding.
Causal Connection and Adjustment: In evaluating claims under sections 806 and related provisions, the Court examined whether any “adjustment to tax payable” – for example, as triggered by a closure notice – legitimately activated an extended claim period. The reasoning clarified that merely realizing the potential to claim an FNR credit does not amount to a sufficient adjustment unless the domestic tax computation actually changes.
Differentiation Between Credits: The judgment distinguished between credits for withholding tax and credits for underlying tax calculated at the foreign nominal rate. While both forms of relief interact under the DTR regime, they cannot be conflated; a taxpayer’s claim must specifically indicate which relief is being sought.

Impact on Future Cases and Tax Administration

This Judgment is significant for several reasons:

It reinforces that the role of domestic courts is to ensure that national tax legislation complies with EU law without reengineering procedural rules or extending claim periods beyond those originally set by legislation.
Taxpayers will continue to bear the onus of accurately making claims for DTR credits within the prescribed time limits. The ruling confirms that even amid evolving interpretations, the clear articulation of claims at the time of filing remains essential.
The decision provides future litigants with guidance on the limits of conforming interpretation; while courts must align domestic provisions with EU law, there is no mandate to offer a remedy that surpasses the relief needed to prevent economic double taxation.
For tax authorities, the judgment affirms their discretion to apply statutory rules and closure notice procedures without being compelled to extend claim periods or reallocate credits in a manner that might create unintended windfalls.

Complex Concepts Simplified

Several technical concepts arise in the Judgment. Key among them are:

Conforming Interpretation: This is the judicial technique whereby domestic law is read in a way that is consistent with EU law obligations. It is retrospective by nature but is limited only to the amendments necessary to secure compliance.
FNR Credit: The foreign nominal rate (FNR) credit functions as an imputation relief. Instead of giving relief only for the tax actually paid, the system ensures that foreign dividends are taxed on a basis equivalent to the domestic tax rate, thereby preserving the principle of non-discrimination.
Closure Notice and Adjustment: A closure notice is an administrative tool used by tax authorities to conclude an enquiry into a tax return. An “adjustment” in tax payable refers to a genuine change in the tax liability calculation which might activate an extended time limit for making a claim.
DTR Credits and Claim Requirements: DTR credits must be actively claimed on a dividend-by-dividend basis within statutory time limits. Failure to claim within the prescribed period means the relief cannot be retrospectively modified even if EU law would have required its availability.

Conclusion

The Judgment in Revenue and Customs v Taxpayers marks an important reaffirmation of the limits of judicial reinterpretation in tax law. While domestic tax provisions must be interpreted in a manner that complies with EU law – ensuring that the effective relief against economic double taxation is achieved – such interpretation does not grant carte blanche to alter established statutory procedures. The decision effectively confirms that:

Taxpayers must meet the established procedural requirements and file claims within existing time limits.
The available relief under a conforming interpretation is limited strictly to remedying the disparities identified by EU jurisprudence, without extending additional advantages.
The domestic rules governing amendments, closure notices, and claim quantification remain binding and must be followed as originally enacted.

In summary, the Court of Appeal’s Judgment harmonizes domestic law with EU principles in a measured manner without disturbing the balance of national administrative procedures. This leads to a greater degree of consistency and legal certainty in future cases, while underscoring the importance of precision and timeliness in the assertion of statutory tax relief claims.