No Automatic Restitutionary Interest on Set-Aside Payments: Fairness-Based Allocation to Interest First

Case: Evonik UK Holdings Ltd v Revenue and Customs [2025] EWCA Civ 1392

Court: England and Wales Court of Appeal (Civil Division)

Date: 7 November 2025

Introduction

This appeal sits at the intersection of appellate restitution, statutory interest, and the accounting of payments made under orders later set aside. It arises in the Financial Institution and Industrial (FII) Group Litigation concerning the unlawfulness under EU law of the UK’s advance corporation tax (ACT) regime and, specifically, ACT paid on Foreign Income Dividends (FIDs).

In 2016, Evonik UK Holdings Ltd (Evonik) obtained summary judgment in the Chancery Division for compound interest on ACT paid on FIDs for the “period of prematurity” (from payment to set-off/repayment), and HMRC paid £6.4m pursuant to those orders. The Supreme Court later set aside the compound-interest aspect in FII SC3 in light of section 85 Finance Act 2019 (FA 2019), which supplies a statutory—simple interest—remedy for unlawful ACT. By the time Evonik’s remaining claims (including non‑FID surplus ACT) returned to the High Court, the question was how to treat the £6.4m already paid: should it be unwound with restitutionary interest for HMRC, or credited against Evonik’s then-established overall entitlement, and if so, against interest or principal?

Richards J allocated the £6.4m entirely to interest accrued as at March 2016, thereby preserving Evonik’s principal claim (about £8.8m in surplus ACT) to continue accruing interest to judgment under section 35A Senior Courts Act 1981 (SCA 1981). HMRC appealed on two grounds: (1) that they enjoyed an entitlement to restitution (with interest) once the 2016 money order was set aside; and (2) that allocating the 2016 payment to interest was incoherent because Evonik had no liquidated interest entitlement in 2016. The Court of Appeal (Lewison LJ giving the lead judgment, with Phillips LJ and Popplewell LJ agreeing) dismissed the appeal.

Summary of the Judgment

• The Supreme Court’s order in FII SC3 set aside the 2016 money payment orders “to that extent only,” leaving the FID liability findings intact but removing the money award. The claims were remitted to the High Court to be re-quantified on the correct legal basis of section 85 FA 2019.
• As a matter of principle, where a party pays money under an order later set aside, the payer has a prima facie entitlement to restitution of that sum. The appellate court also has inherent jurisdiction to award interest on the repayment. However, there is no automatic right to restitutionary interest; whether interest is appropriate depends on what justice requires in the particular case.
• On the facts, the judge was entitled, as a matter of fairness, to treat the £6.4m paid in 2016 as a credit against Evonik’s overall indebtedness as it then stood and to allocate that credit to accrued interest rather than to principal. That allocation preserved Evonik’s £8.8m principal to continue to attract section 35A interest to judgment.
• HMRC’s “liquidated claim” argument failed: the allocation exercise was properly undertaken at the time of final judgment (2024), by which point Evonik’s entitlement to interest under section 35A SCA 1981 and section 85 FA 2019 was established and required to be awarded to satisfy the EU-law “adequate remedy” principle.
• Result: Appeal dismissed; the High Court’s allocation to interest was upheld. Although the Court of Appeal disagreed with the judge to the limited extent that HMRC did have in principle an entitlement to restitution once the order was set aside, that disagreement did not affect the outcome because justice did not require awarding restitutionary interest to HMRC.

Analysis

Precedents Cited and Their Influence

The Court anchored its reasoning in a line of authorities addressing the effect of reversing or setting aside orders, and the proper treatment of interest in those circumstances, alongside authorities from the FII litigation on interest entitlements.

• Rodger v Comptoir d'Escompte de Paris (1871) LR 3 PC 465: The Privy Council held that after a judgment is reversed on appeal, justice requires not only repayment but, in suitable cases, interest during the period the money was withheld. The Court of Appeal cited Rodger for the proposition that interest on restitution is grounded in what justice demands, not as an automatic entitlement.
• Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd [1997] 1 WLR 1627: The House of Lords confirmed the appellate court’s inherent jurisdiction to make consequential orders on appeal, including ordering repayment of sums paid under a judgment that is later set aside and, where appropriate, awarding interest. The Court of Appeal relied on this to recognise the power but emphasised its discretionary character.
• Delta Petroleum (Caribbean) Ltd v BVI Electricity Corp [2021] 1 WLR 5741: Lord Leggatt explained that post-appeal repayment is a form of sui generis restitution deriving from the appellate decision that the order should not have been made. There is no need to shoehorn the remedy into unjust enrichment doctrine, and defences in unjust enrichment do not necessarily apply. The Court of Appeal adopted this analytic frame.
• Gibbs v Lakeside Developments Ltd [2019] 4 WLR 6: An order remains valid until set aside. This underpinned the analysis that the 2016 payment was valid until FII SC3 set aside the monetary element; only then could restitutionary accounting arise.
• Parr’s Banking Co Ltd v Yates (1898) 2 QB 460 and In re Morley’s Estate [1937] 1 Ch 491: These cases reflect a long-standing “rule of thumb” that where simple interest accrues on a debt, payments are allocated to interest before principal, to avoid unjustly excusing the debtor from the continuing consequences of non-payment. The Court endorsed the rule as a fairness-based guide.
• Test Claimants in the FII Litigation (various stages):
  • FII HC 2 [2015] STC 1471 (Henderson J): A key background decision on the unlawfulness of ACT on FIDs and the separability of FID claims.
  • Evonik 2016 [2016] EWHC 86 (Ch): Summary judgment awarding compound interest for the “prematurity” period, derived from Sempra.
  • FII CA2 [2017] STC 696: Appeal with multiple issues, including FID interest.
  • Prudential [2019] AC 929: The Supreme Court departed from the common law compound interest approach in Sempra, setting the stage for FII SC3.
  • FII SC3 [2021] 1 WLR 4354: HMRC prevailed on the “Sempra issue”; section 85 FA 2019 supplies an adequate statutory remedy with simple interest for unlawful ACT; the 2016 summary money judgments were set aside “to that extent only” and the cases remitted.
  • FII SC2 [2022] AC 1: A separate limitation ruling affecting non‑FID claims; led to the later High Court trial where Evonik ultimately succeeded.
  • BAT Industries & Ors v CIR [2024] EWHC 195 (Ch), aff’d [2025] EWCA Civ 1271: Richards J’s limitation ruling allowing Evonik to final judgment on non‑FID claims.
  • Evonik UK Holdings & Ors v CIR [2024] EWHC 3239 (Ch): Section 85 FA 2019 governs the entirety of the FID element.
• Dr Drury’s Case (1610) 8 Co Rep 141b: Historical source showing the pedigree of the principle that payments made under orders later reversed can be reclaimed.

Legal Reasoning

1. Effect of the Supreme Court’s Order (FII SC3). The Court held that the order set aside only the money payment elements of the 2016 summary judgments “to that extent only,” leaving in place the liability findings for the FID claims but requiring re-quantification consistent with section 85 FA 2019. The remittal empowered the High Court to address the necessary consequential accounting; HMRC did not need to have pleaded a fresh unjust enrichment claim.
2. Restitution on set-aside: entitlement and interest. The Court accepted, contra the judge’s initial view, that in principle a payer is entitled to restitution of sums paid under an order later set aside. But the key point is interest: while the appellate court has inherent jurisdiction to award interest on the repayment, there is no entitlement to restitutionary interest. Whether to award it depends entirely on what justice requires in the circumstances.
3. Fairness-based accounting in this case. By 2024 it was clear that Evonik’s overall claim (including non‑FID surplus ACT) significantly exceeded the £6.4m paid in 2016. Evonik had been kept out of money for many years (ACT abolished in 1999; FIDs repaid by 2014). Justice did not require awarding HMRC restitutionary interest that would, in economic terms, cancel Evonik’s post‑2016 section 35A interest on the principal. The better course was to treat the £6.4m as a credit towards the debt as it actually stood in 2016.
4. Allocation to interest first. The Court endorsed the judge’s use of the well-known allocation principle: where a debt attracts only simple interest, part-payments are applied to interest first, then to principal. This prevents the debtor from avoiding the interest consequences of non-payment. The judge’s “£100 debt/£100 accrued simple interest” illustration showed why allocating to principal would be anomalous: it would halt accrual on the principal in a way inconsistent with fairness in a simple-interest system.
5. Rejection of the “liquidated interest” objection. HMRC argued that in 2016 Evonik had no liquidated interest entitlement, so the payment could not be allocated to interest. The Court rejected this: the judge’s task in 2024 was to do justice on the basis of the rights as then established. Interest under section 35A SCA 1981 and section 85 FA 2019 had to be awarded to provide an adequate remedy under EU law; the award is not a matter of unguided discretion. Allocation could therefore legitimately be made to interest as assessed at the date of final judgment.
6. Statutory context and rates.
   • Section 85 FA 2019 supplies simple interest for “unlawful ACT” over the prematurity period; the applicable rate from 27 January 2009 is 0.5% p.a., and the Supreme Court in FII SC3 held this to be an adequate remedy.
   • Section 35A SCA 1981 authorises simple interest on debts/damages; in the FII litigation the section 35A rate for surplus ACT was fixed (by order following FII SC3) at bank base rate + 2% from February 2009.
   • Crucially, the power to award interest to a payer upon repayment after a set-aside does not derive from section 35A but from the court’s inherent jurisdiction. The absence of a statutory “right” further underscores that interest is discretionary and turns on justice in the case.

Impact

The decision has significant implications for the handling of payments made under orders later set aside, within and beyond tax litigation:

• No presumption of restitutionary interest. Parties who have paid under orders subsequently set aside may recover the principal, but they should not assume they will also receive interest. The court will ask what justice requires, considering the final shape of the parties’ rights.
• Allocation to interest first in simple-interest environments. Where a claimant’s claim is ultimately quantified on a simple-interest basis, courts are likely, absent countervailing factors, to allocate any earlier part-payment to accrued interest first. This avoids the debtor escaping the full interest consequences of delay.
• Timing of the accounting. The allocation exercise is performed at the date of final assessment, not frozen as at the date of payment, especially where the interest entitlement matures or crystallises only upon judgment but is legally required for adequacy of remedy.
• Clarity on remittal orders. The judgment underscores the importance of precise appellate wording: “to that extent only” can leave liability findings intact while removing money awards, guiding the High Court on the narrow compass of remittal.
• Broader procedural lesson. The “sui generis” character of the appellate restitution following a set-aside avoids unnecessary detours into unjust enrichment elements and defences. That promotes efficient, just adjustments to reflect the appellate outcome.
• Practical effect for the FII litigation and similar group cases. Claimants who received payments under interim or summary orders later varied or set aside may retain the benefit of those payments as credits against accrued interest rather than seeing their principal eroded—subject always to the facts and overall justice.

Complex Concepts Simplified

• Advance Corporation Tax (ACT) and Foreign Income Dividends (FIDs): ACT was a prepayment of corporation tax due when companies made distributions (e.g., dividends). FIDs were a regime intended to mitigate the build-up of ACT for multinational groups; ACT on FIDs could be set against corporation tax or reclaimed to the extent matched with higher-taxed foreign profits. Aspects of ACT were unlawful under EU law.
• Period of “prematurity”: The time between paying ACT and the date it was set off or repaid. Historically, claimants sought compound interest for this period under Sempra; the Supreme Court in FII SC3 held section 85 FA 2019 supplies the remedy, with simple interest.
• Simple vs compound interest: Simple interest accrues only on the principal. Compound interest accrues on principal plus accumulated interest. In this litigation, statutory simple interest governs, but allocating part-payments to interest first avoids diluting the time value of money that simple interest otherwise undercompensates.
• Section 35A SCA 1981 vs Section 85 FA 2019: Section 35A empowers courts to award simple interest on debts/damages (here, e.g., on surplus ACT), with the FII order fixing a rate of base rate + 2% from February 2009. Section 85 is a specific statutory scheme for “unlawful ACT,” awarding simple interest at much lower rates for the prematurity period and further simple interest on the so‑called “principal amount” until payment. The Supreme Court has held section 85 gives an adequate remedy.
• “Adequate remedy” under EU law: Where EU-law rights are infringed, national law must provide an effective remedy, often including interest to compensate for the time value of money. This constrains the discretion under section 35A: once liability is established, awarding interest is not a matter of indulgence but of legal requirement for adequacy.
• Restitution after a set-aside: When an appellate court sets aside a money order, the payer can reclaim the sum paid. Whether they also get interest on that repayment is a matter for the court’s inherent jurisdiction, guided by what justice requires. It is a sui generis remedy, not necessarily subject to the usual unjust enrichment analysis.
• Allocation/appropriation of payments: Where a debt accrues simple interest, courts commonly apply payments first to accrued interest and then to principal. This prevents the debtor from profiting from delay by reducing principal prematurely and thereby diminishing ongoing interest accrual.
• “Liquidated interest” point: A “liquidated” sum is one fixed or readily calculable without further assessment. HMRC argued that because interest was not liquidated in 2016, the 2016 payment could not be allocated to interest. The Court rejected this as misplaced: allocation is undertaken at the time of final judgment, when the interest entitlement is established and must be awarded to achieve an adequate remedy.

Conclusion

Evonik v HMRC establishes an important, practical rule of fair accounting in the wake of appellate reversals: although a payer who has complied with a now‑set‑aside order is entitled in principle to restitution, there is no automatic right to restitutionary interest. The court’s task is to do justice in the particular case. In a simple‑interest regime—especially one shaped by statutory adequacy-of-remedy constraints—fairness will often favour treating prior payments as credits against accrued interest, preserving principal so that the claimant does not lose the time value of money through the happenstance of an interim payment later undone.

The Court of Appeal’s approach provides clarity on the scope of remittal following FII SC3, the inherent jurisdiction to award (or refuse) restitutionary interest after set‑aside, and the principled application of the “interest first” allocation rule. For future cases, it signals that the final accounting should reflect the parties’ true rights as established at judgment, not a mechanical rewind to the position as it appeared years earlier. In complex, long‑running litigation, that focus on substantive justice is both principled and pragmatic.