Test Claimants in the Franked Investment Income Group Litigation v Inland Revenue

Factual and Procedural Background

The Franked Investment Income (“FII”) Group Litigation was commenced under a group litigation order on 8 October 2003. The test claimants (“Company A,” “Company B,” etc.) are United-Kingdom-resident parent companies with subsidiaries across the European Union and elsewhere. They seek restitution or damages for corporation tax (notably Advance Corporation Tax (“ACT”) and Foreign Income Dividends (“FIDs”)) that was allegedly levied contrary to articles 49 and 63 TFEU (formerly articles 43 and 56 EC).

Judge Henderson at first instance ([2008] EWHC 2893) held, inter alia, that the tax legislation was incompatible with EU law, and that recovery could proceed on two domestic grounds: (i) restitution for unlawful demand (Woolwich) and (ii) restitution for mistake (DMG). The Court of Appeal ([2010] EWCA Civ 103) largely upheld that judgment but held that the Woolwich remedy alone satisfied EU law, and that two Finance Act provisions (section 320 FA 2004 and section 107 FA 2007) validly curtailed mistake-based claims.

Both sides obtained permission to appeal to the Supreme Court on five remedy-based issues. The Supreme Court (seven-judge panel) delivered split judgments. All members agreed on most domestic issues; however, they divided on whether EU law requires the availability of both domestic remedies and, as a result, on the validity of section 320 FA 2004. Because of that division the Court directed a reference to the Court of Justice of the European Union (“CJEU”).

Legal Issues Presented

1. Whether Parliament could, without notice, curtail the extended limitation period in section 32(1)(c) Limitation Act 1980 for mistake claims by enacting:
   • (a) section 320 Finance Act 2004; and
   • (b) section 107 Finance Act 2007, which cancelled pending mistake-based claims.
2. Whether section 33 Taxes Management Act 1970 provides an exclusive code that bars common-law restitution or damages in respect of corporation tax charged under Schedule D, Case V.
3. Whether section 32(1)(c) Limitation Act 1980 applies to claims brought on the Woolwich unlawful-demand ground.
4. Whether the Woolwich restitution remedy arises only where a tax is “demanded” by the tax authority, and, if so, what constitutes such a demand.

Arguments of the Parties

Appellants’ Arguments (Company A et al.)

• EU law requires every effective national remedy to remain available; removing the mistake action’s extended limitation period breaches the principles of effectiveness, equivalence, legal certainty and legitimate expectations.
• The Woolwich remedy applies only where there is a formal demand; ACT was self-assessed, so mistake relief is indispensable.
• Section 33 TMA 1970 is not an exclusive statutory code and cannot displace common-law causes of action, especially where EU rights are engaged.
• Section 32(1)(c) should be construed broadly so that any causative mistake (even if not an element of the cause of action) postpones time for Woolwich claims.

Respondent’s Arguments (Defendant – the Revenue)

• A Woolwich claim, subject to the ordinary six-year period, fully satisfies EU law; EU law does not mandate concurrent mistake-based relief.
• Sections 320 FA 2004 and 107 FA 2007 merely align the mistake remedy with the ordinary limitation period and are compatible with EU principles.
• Section 33 TMA 1970 constitutes an exclusive statutory route for recovery where an assessment is involved and is sufficient for any EU-based claim.
• Section 32(1)(c) postponement applies only where the mistake is an element of the cause of action; it has no application to Woolwich claims.

Table of Precedents Cited

Court's Reasoning and Analysis

The Justices unanimously agreed on several domestic issues, notably that:

• The Woolwich ground does not require a formal “demand”; self-assessment suffices.
• Section 32(1)(c) Limitation Act 1980 postponement does not apply to Woolwich claims.
• Section 33 TMA 1970 is not an exclusive code and can coexist with common-law claims.

On the EU issues, the Court split:

1. Principle of Equivalence: A claimant can ordinarily choose the most advantageous domestic cause of action; thus, both Woolwich and mistake grounds must, in principle, be available when asserting EU rights.
2. Principle of Effectiveness:
   • Majority view (Judge Walker et al.): Retroactively removing the extended limitation period without transitional protection makes EU-derived repayment rights “impossible or excessively difficult,” breaching effectiveness.
   • Minority view (Judge Sumption et al.): Because a timely Woolwich action remained possible, effectiveness was satisfied; section 320 FA 2004 was therefore valid.
3. Legitimate Expectations: All Justices held that section 107 FA 2007, which cancelled pre-8 September 2003 mistake claims, unlawfully frustrated expectations and was incompatible with EU law. The Court divided on whether section 320 FA 2004 likewise breached expectations.
4. Reference to CJEU: Given the division, the Court concluded that the validity of section 320 FA 2004 under EU law is not acte clair; a reference under article 267 TFEU is required.

Holding and Implications

Partial, declaratory judgment:

HELD:

• Issues (3) and (4): Court of Appeal’s rulings are upheld.
• Issue (2): Appeal allowed; section 33 TMA 1970 is not an exclusive remedy and does not bar common-law restitution or damages.
• Section 107 Finance Act 2007 is incompatible with EU law and cannot be relied upon.
• Validity of section 320 Finance Act 2004 raises a question of EU law; matter referred to the CJEU.

Implications: The decision confirms that taxpayers may sue on both Woolwich and mistake grounds and that retrospective curtailment of limitation periods is closely policed under EU law. The forthcoming CJEU ruling on section 320 will clarify the extent to which national legislatures may adjust limitation rules when concurrent domestic remedies exist.