Factual and Procedural Background
This opinion concerns resumed trial proceedings in July 2013 regarding claims brought by two test claimants in a group litigation order relating to Controlled Foreign Companies (CFC) and Dividend tax issues, hereafter referred to as the Portfolio Dividend Group Litigation. The initial trial was adjourned in November 2010 due to procedural issues arising from limitation periods and jurisdictional questions following earlier Court of Appeal decisions. The fundamental legal issue of the lawfulness of the Schedule D Case V charge on dividends paid by foreign subsidiaries to UK-resident parent companies remained unresolved pending further Supreme Court and European Court of Justice (ECJ) rulings.
Subsequent developments included Supreme Court rulings that overruled earlier procedural bars, allowing the claims to proceed in the High Court. The ECJ delivered important judgments clarifying the EU law principles applicable to the UK’s tax treatment of foreign dividends, particularly concerning the free movement of capital under Article 63 TFEU. The court set out a detailed list of issues for determination, including the remedial approach to the invalid Case V charge, the lawfulness of advance corporation tax (ACT) charges on onward distributions, technical insurance company taxation issues, third country dividends, remedies available, interest payable, limitation, and potential stays of claims.
The litigation involves complex interactions between UK domestic tax legislation and EU law principles, with significant reliance on prior ECJ decisions and UK Supreme Court rulings. The test claimants’ submissions were supported by detailed expert evidence, and the court expressed gratitude to the parties’ legal teams for their assistance.
Legal Issues Presented
- Whether the admitted invalidity under EU law of the Case V charge on portfolio dividends can be remedied by a conforming construction or requires disapplication of the domestic legislation.
- Whether the ACT charge on onward distribution of portfolio dividends infringes Article 63 TFEU and how any invalidity should be remedied.
- Technical issues regarding the special taxation regime applicable to insurance companies in light of the above issues.
- Whether and to what extent test claimants can rely on Article 63 in relation to third country portfolio dividends.
- Whether valid restitutionary claims exist under Woolwich and/or mistake-based causes of action, including the availability and extent of any restitutionary defences such as change of position.
- The basis on which interest is payable on any recoverable sums.
- The extent to which claims are barred by a six-year limitation period or by section 320 of the Finance Act 2004.
- Whether any claims should be stayed on Autologic principles due to open years or statutory appeal routes.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Test Claimants in the CFC and Dividend Group Litigation v Revenue and Customs Commissioners [2010] EWHC 2811 (Ch) |
Initial judgment setting out procedural context and issues regarding CFC and dividend claims. |
Referred to as foundational judgment; current judgment is a sequel and builds on it. |
| Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2008] EWHC 2893 (Ch) |
High Court decision on franked investment income litigation. |
Used as precedent and reference point for procedural and substantive issues. |
| Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2012] UKSC 19 |
Supreme Court ruling on limitation, effectiveness, and procedural bars. |
Overruled Court of Appeal on key procedural issues, enabling claims to proceed in High Court. |
| Joined Cases C-436/08 and C-437/08, Haribo Lakritzen Hans Riegel BetriebsgmbH and Österreichische Salinen AG v Finanzamt Linz [2011] ECR I-305 |
EU law principles on equivalence of exemption and imputation systems for national and foreign dividends under Article 63 TFEU. |
Applied to assess administrative burdens and equivalence of tax treatment for portfolio dividends. |
| Case C-310/09, Ministre du Budget v Accor SA [2012] STC 438 |
Clarification of tax credit requirements and administrative burdens under EU law. |
Confirmed necessity of providing detailed proof of foreign tax paid for tax credits and that administrative burden is not excessive. |
| Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue and HMRC (FII (ECJ) II) [2013] STC 612 |
Grand Chamber ECJ ruling on lawfulness of Case V charge considering nominal and effective tax rates. |
Held UK Case V charge unlawful due to failure to account for nominal and effective foreign tax rates; proportionality test failed. |
| Vodafone 2 v Revenue & Customs Commissioners [2009] EWCA Civ 446 |
Principles governing conforming construction of domestic legislation to comply with EU law. |
Applied to assess whether UK legislation can be interpreted to grant required tax credits. |
| Wilkinson v Fitzgerald [2012] EWCA Civ 1166 |
Restatement of principles on conforming interpretation consistent with EU obligations. |
Reinforced approach to broad and far-reaching obligation to construe legislation in conformity with EU law. |
| Lady & Kid A/S and others v Skatteministeriet (Case C-398/09) [2012] STC 854 |
ECJ ruling on defences to San Giorgio claims; only passing on is recognized as substantive defence. |
Excluded change of position as a defence to repayment claims for unlawfully levied tax under EU law. |
| Autologic Holdings Plc v Inland Revenue Commissioners [2005] UKHL 54 |
Principles on jurisdiction and stay of claims relating to tax years for which statutory appeal routes are available. |
Applied to determine whether claims relating to open years should be stayed pending statutory appeals. |
| Sempra Metals Limited v IRC [2007] UKHL 34 |
House of Lords decision on entitlement to compound interest as part of restitutionary claims for unlawfully levied tax. |
Held compound interest is payable on restitutionary claims for overpaid or prematurely paid tax, calculated on conventional government borrowing rates. |
| F J Chalke Limited and Another v Revenue and Customs Commissioners [2009] EWHC 952 (Ch) |
High Court decision on compound interest and effectiveness of domestic remedies for overpaid VAT. |
Held no common law right to compound interest co-existing with statutory scheme; reference to ECJ sought. |
| Littlewoods Retail Ltd and Others v HMRC (Case C-591/10) |
ECJ ruling on interest payable on unlawfully levied VAT; national law governs simple or compound interest subject to equivalence and effectiveness. |
Confirmed EU law requires reimbursement of tax with interest but left choice of simple or compound interest to Member States. |
Court's Reasoning and Analysis
The court undertook a detailed analysis of the UK tax legislation governing life assurance and pension business, focusing on the Schedule D Case V charge on portfolio dividends and the ACT charge on onward distributions. It examined the relevant EU law principles, especially the free movement of capital under Article 63 TFEU, as interpreted by the ECJ in a series of landmark cases including FII (ECJ) I and II, Haribo, and Accor.
The court identified that the UK legislation failed to provide a tax credit for the actual underlying foreign tax paid on distributed profits, a defect that infringed Article 63 rights. Furthermore, the court accepted the ECJ’s reasoning that the exemption of domestic dividends is equivalent to granting a tax credit at the full nominal rate of tax applicable in the source state. Accordingly, the UK legislation should have granted a dual credit: one for the actual underlying tax paid and one for the nominal foreign tax rate, capped at the UK nominal rate applicable to the taxpayer (including the special lower rates for insurance companies).
The court rejected arguments that the reasoning in FII (ECJ) II was confined to non-portfolio dividends, holding that the principles apply equally to portfolio dividends. It concluded that a conforming construction of the UK legislation to provide the required dual credit is possible and preferable, thus avoiding the need for disapplication of the Case V charge.
On the issue of entitlement to tax credits for the underlying tax actually paid, the court found that the claimants could not realistically be expected to provide detailed proof for thousands of dividends over many years. However, relying on the ECJ’s Haribo decision, the court held that provision of such information is an intrinsic part of the imputation system and cannot be regarded as an excessive administrative burden. The failure of foreign companies to provide information is not attributable to the UK and does not negate the principle of effectiveness.
Regarding the ACT charge on onward distributions, the court applied the same principles as for the Case V charge, concluding that a conforming construction requiring credit for underlying tax and nominal rates is appropriate.
In relation to technical insurance taxation issues, the court found that certain provisions discriminated against foreign portfolio dividends, breaching Article 63, but that the remedy should be a tax credit rather than exemption. It also rejected claims for additional tax credits under section 242 of ICTA 1988 as misconceived.
On third country portfolio dividends, the court held that claimants are entitled to rely on Article 63 for all third countries, without exclusion, provided they supply the necessary information on the country and nominal tax rate. It endorsed the reasoning of the Upper Tribunal in a related pension scheme case regarding verification of claims under double taxation conventions.
On remedies, the court accepted that the claims for unlawful corporation tax and ACT are San Giorgio claims recoverable by Woolwich or mistake-based restitutionary causes of action, subject to defences and limitation. The only pleaded defence was change of position.
The court held, based on ECJ authority, that change of position is not a recognized defence to San Giorgio claims under EU law, and therefore unavailable to the Revenue. Even if it were available, the Revenue had adduced no evidence to establish it, and no directions for a split trial on the defence had been made.
On interest, the court reviewed the development of ECJ jurisprudence and English law, including the House of Lords decision in Sempra. It concluded that EU law requires interest to be payable on unlawfully levied tax but leaves the form (simple or compound) to national law subject to principles of equivalence and effectiveness. English law, as interpreted in Sempra, permits and requires compound interest as part of the restitutionary remedy for overpaid tax, including both utilised and unutilised ACT and corporation tax claims, as well as interest for the post-utilisation period of ACT.
On limitation, the court reviewed the legislative history and amendments to the claims, concluding that if section 320 of the Finance Act 2004 is valid, it limits claims introduced after September 2003 to a six-year period. If invalid, extended limitation periods apply. The court rejected attempts to relate back claims by different parties or claims for ACT to the original claim dates, except where claims arise out of substantially the same facts.
Finally, on the issue of statutory claims procedures and stays under Autologic principles, the court held that it was appropriate to determine common legal issues in the High Court and that statutory appeal routes would be respected in the subsequent working out of the judgment. The Revenue abandoned any contention that statutory claims procedures exclude common law claims.
Holding and Implications
DISPOSED OF
The court held that the UK tax legislation, as applied to portfolio dividends, infringed Article 63 TFEU by failing to provide adequate tax credits for foreign underlying tax and nominal foreign tax rates. A conforming construction of the legislation to grant a dual credit is possible and appropriate, thus avoiding the need to disapply the Case V charge. The ACT charge on onward distributions is subject to the same principles.
The claimants are entitled to restitutionary claims for unlawfully levied tax under both Woolwich and mistake-based causes of action, with no defence of change of position available to the Revenue under EU law. Compound interest is payable on all successful claims, calculated on a conventional government borrowing basis.
Limitation periods apply in accordance with existing legislation, subject to pending ECJ determinations on the validity of section 320 of the Finance Act 2004. Claims relating to third country dividends are not excluded from relief under Article 63, provided appropriate information is supplied.
The decision resolves key issues in the Portfolio Dividend Group Litigation, providing clarity on the remedial framework for breaches of EU law in UK tax legislation. It does not establish new precedent beyond the application of existing ECJ and UK Supreme Court jurisprudence, but confirms the broad obligation of UK courts to interpret domestic tax law in conformity with EU law and to provide effective remedies for unlawfully levied tax.