Sempra Metals Ltd v. Revenue & Anor

Factual and Procedural Background

The Plaintiff was required, under the then–prevailing advance corporation tax (“ACT”) regime, to pay tax before it would ordinarily have fallen due. Because group-income elections were unavailable to subsidiaries with non-resident parents, those ACT payments were later held to infringe Article 52 (now 43) of the EC Treaty. The payments were subsequently set-off against mainstream corporation tax, but the Plaintiff sought monetary relief for the period during which the Defendant had use of the money.

Four representative ACT payments (made between 1981 and 1994 and set-off between 1982 and 1996) were selected as a test case. The High Court (Judge Park) held that compensation should be calculated using compound interest at a “conventional” market rate. The Court of Appeal (comprising Judge Chadwick, Judge Laws and Judge Parker) affirmed, adding that compounding should occur at the same periodic rests as the chosen rate. The Defendant appealed to the House of Lords.

Legal Issues Presented

1. Does a claimant who paid tax prematurely under legislation contrary to EU law have a right, under English law, to an award calculated by reference to compound rather than simple interest?
2. Is such an award available (a) as damages for breach of statutory duty, (b) as restitution for an unlawful demand (Woolwich principle) and/or (c) as restitution for money paid under a mistake of law?
3. Do principles of Community law (effectiveness and equivalence) require domestic courts to grant compound interest in order to provide an “effective legal remedy”?
4. Should the House of Lords depart from earlier domestic authority—most notably Westdeutsche Landesbank v Islington LBC and La Pintada—so far as they preclude compound interest?

Arguments of the Parties

Appellant's Arguments (Defendant)

• English law permits only simple interest (except in narrow fiduciary or fraud contexts); granting compound interest would contradict Westdeutsche and statutory schemes.
• Even if EU law mandates interest, it does not dictate compounding; simple interest satisfies the principles of effectiveness and equivalence.
• A claim based on mistake of law should not yield compound interest and, in any event, is time-barred absent statutory extension.
• The High Court’s use of a single “conventional” borrower’s rate disregards the Defendant’s actual use (or non-use) of the funds.

Respondent's Arguments (Plaintiff)

• The premature levy unjustly enriched the Defendant; full restitution requires disgorgement of the time value of money, properly measured by compound interest.
• EU law obliges national courts to afford an “effective remedy”; only compound interest gives full compensation and restores equal treatment.
• Common-law and equitable principles should evolve; the court has power—particularly in equity—to award compound interest where justice demands.
• The proposed “conventional” borrower’s rate is an administratively workable proxy and accords with commercial reality.

Table of Precedents Cited

Court's Reasoning and Analysis

The majority considered that domestic law must supply an effective remedy consonant with EU principles. Damages: Loss of use of money was plainly foreseeable; modern commercial practice compounds interest; therefore compound interest is the correct measure.
Restitution: The Defendant’s enrichment consisted not only of the principal but of the opportunity to use the money. Equity historically awards compound interest against fiduciaries and can extend this auxiliary jurisdiction to cases of mistaken payment. The House overruled its earlier restrictive stance in Westdeutsche, holding that courts have a discretionary equitable power to award compound interest where required to reverse unjust enrichment.
Policy: Compound interest reflects economic reality; simple interest under-compensates and would undermine the “effectiveness” principle articulated by the ECJ. A “conventional” rate tied to government borrowing costs provides a workable proxy without exhaustive inquiry into actual use.

The minority (notably Judge Scott) accepted compound interest as damages but would not extend it to restitution absent proof of actual benefit, viewing the majority’s approach as conflating compensation with restitution.

Holding and Implications

Appeal Dismissed in Substance. The House affirmed that the Plaintiff is entitled to an award calculated on the basis of compound interest, using conventional rates reflecting government borrowing costs, for the period between each ACT payment and its set-off against mainstream corporation tax. Procedural variations to the lower-court order were directed to reflect this methodology.

Implications: The decision recognises a discretionary equitable jurisdiction to grant compound interest both as damages and as restitution, departing from portions of Westdeutsche and narrowing the impact of La Pintada. English courts may, where justice requires, award compound interest to achieve full compensation or to strip unjust enrichment, aligning domestic remedies with commercial reality and EU effectiveness standards. The ruling is expected to influence numerous pending tax-recovery claims and broader commercial litigation.