HM Revenue and Customs v The GKN Group

Factual and Procedural Background

In March 2001, the Court of Justice of the European Communities (now the Court of Justice of the European Union) ruled in the Metallgesellschaft case that a UK tax regime requiring Advance Corporation Tax ("ACT") on dividends paid by UK resident subsidiaries to non-UK resident parent companies—but not to UK resident parent companies—was contrary to Community law. This decision entitled companies to recover sums equivalent to interest lost on unlawfully paid tax. The ruling triggered extensive litigation between UK companies and Her Majesty's Revenue and Customs ("HMRC").

The present appeal concerns an Interim Payment order granted in May 2009 by a deputy judge in the Chancery Division in the context of a larger Group Litigation Order ("GLO") concerning Franked Investment Income ("FII"). The claimants, including the current respondents ("GKN"), sought interim payments from HMRC for ACT and related taxes allegedly overpaid. HMRC appealed the order, arguing legal error.

The FII Group Litigation arose from differences in UK tax treatment of dividends depending on whether they originated from UK or non-UK subsidiaries, with claimants alleging breaches of Articles 43 and 56 of the EC Treaty (freedom of establishment and movement of capital). Following preliminary references, the ECJ ruled the UK tax regime incompatible with Community law. Subsequent trials and appeals addressed liability, restitution, and limitation issues.

The interim payment application followed a judgment by Henderson J in 2008, which held that unlawfully levied taxes and associated interest were recoverable, including remedies for loss of use of funds. The Court of Appeal later overturned parts of Henderson J's decision but upheld the availability of certain remedies. The present appeal concerns the interim payment awarded to GKN, specifically relating to ACT paid under the Foreign Income Dividend ("FID") system from 1994 to 1999, within the six-year limitation period.

Legal Issues Presented

1. What is the correct construction of the conditions set out in CPR Part 25.7(1)(c) that must be satisfied before a court can make an Interim Payment order, and have those conditions been fulfilled in this case?
2. If the conditions are fulfilled, are there any bars to making an Interim Payment order, particularly because (a) the claimant is a non-test claimant in a Group Litigation Order action; (b) the case raises difficult legal issues; and (c) the trial judge was reversed on several issues on appeal?
3. How should the court approach determining a "reasonable proportion of the likely amount of the final judgment" for the purposes of an Interim Payment?

Arguments of the Parties

Appellant's Arguments (HMRC)

• It was wrong in principle to make an Interim Payment order where the first instance decision raised difficult legal issues, as demonstrated by the Court of Appeal reversing key findings.
• The structure of the Group Litigation Order meant that issues of liability were to be determined first, with causation and quantification to follow, so HMRC lacked disclosure from non-test claimants like GKN to properly challenge the evidence.
• The fact that the application was made by a non-test claimant in a GLO raised further concerns, although this point was not pursued due to procedural reasons.
• HMRC contested the calculation of interest, arguing it should be simple interest rather than compound interest as claimed by the claimants.
• HMRC maintained that, as a matter of principle, GKN was not entitled to any Interim Payment.

Respondent's Arguments (GKN)

• The judge's approach to granting the Interim Payment was correct in principle.
• On the basis of the Court of Appeal's judgment, GKN would recover at trial a sum notably more than the Interim Payment retained.
• The Interim Payment amount retained by GKN was proper and justified.
• GKN calculated interest on a simple basis and did not seek compound interest recovery.

Table of Precedents Cited

Court's Reasoning and Analysis

The court analyzed the statutory conditions for making an Interim Payment under CPR Pt 25.7(1)(c), concluding that the claimant must satisfy the court on the balance of probabilities that, if the claim went to trial, judgment for a substantial sum would be obtained against the defendant. The court emphasized that this requires actual satisfaction that the claimant would succeed and receive a substantial amount, not merely a likelihood.

The court rejected the argument that making an Interim Payment after a trial of some issues is barred, holding that the rule does not prohibit applications post-trial of certain issues. The fact that the claim raised difficult legal questions or that the trial judge was reversed on some points did not prevent the court from exercising its discretion to order an Interim Payment where the conditions were met.

Regarding the amount of Interim Payment, the court clarified that the relevant figure is the court's assessment of the "likely amount of the final judgment," not simply the claimant's calculation. Applying this, the court found that the amount retained by the claimant (approximately 75% of the claim) was a reasonable proportion of the likely final judgment.

The court dismissed HMRC's objections, noting that the claimants had adjusted their claim to exclude amounts outside the limitation period and that the remaining claim was supported by unchallenged calculations. The court accepted the use of simple interest for the Interim Payment, consistent with the claimant's approach.

Holding and Implications

DISMISSED: The appeal by HMRC against the Interim Payment order granted to GKN was dismissed.

The court held that the conditions for making an Interim Payment under CPR Pt 25.7(1)(c) were satisfied and that no sufficient specific reasons existed to refuse the payment, including the fact that the claimant was a non-test claimant in a GLO and that the case involved difficult legal issues. The court confirmed that Interim Payments may be made post-trial of some issues and that the amount awarded was a reasonable proportion of the likely final judgment.

The Interim Payment order was to be amended to reflect the reduced sum of £1,490,932, representing the claim within the six-year limitation period relating to the FID ACT. This decision affects the immediate financial position of the parties but does not establish new precedent beyond the interpretation of CPR Pt 25.7(1)(c) in the context of group litigation and interim payments.