Factual and Procedural Background
The present appeal and cross-appeal arise from the long-running Franked Investment Income ("FII") group litigation concerning the UK taxation regime in force until 5 April 1999, specifically the application of advance corporation tax ("ACT") and corporation tax under Schedule D Case V on dividends received by UK-resident companies from non-resident subsidiaries. The original claimants are UK-resident companies in the British American Tobacco ("BAT") group, joined by companies in the Ford and GKN groups, collectively referred to as "the Claimants". The respondents are the Commissioners for Her Majesty's Revenue and Customs ("HMRC").
The Claimants contend that the ACT and corporation tax charges breached EU law, notably articles 49 and 63 of the Treaty on the Functioning of the European Union, entitling them to remedies including repayment of wrongly paid tax under the principles established in Amministrazione delle Finanze dello Stato v SpA San Giorgio. They also argue that domestic law permits such remedies via both Woolwich claims and mistake-based claims, allowing extended limitation periods.
Previous stages of litigation have decided these points largely in the Claimants' favour, entitling them to repayment and relief dating back to the commencement of the ACT regime in 1973. The current issues concern specific defences HMRC wish to invoke and quantification of claims.
The procedural history is complex, involving multiple decisions of this Court, the Supreme Court, and the Court of Justice of the European Union (CJEU), with the assigned judge Henderson J presiding over the relevant judgment under appeal. The sums involved are substantial, including an order requiring HMRC to pay over £1.184 billion to the BAT Claimants, with potential total liabilities around £5 billion.
The procedural context includes the initial proceedings commenced by BAT in 2003, group litigation orders, multiple references to the CJEU, and subsequent trials and appeals addressing liability, remedy, and quantification issues. Related litigations include the Portfolio Dividends and Littlewoods group cases, raising overlapping issues.
Legal Issues Presented
- In what respects was the Case V charge unlawful under EU law?
- What is the appropriate Foreign Nominal Rate ("FNR") for tax credit purposes?
- How should special cases relating to FNR be treated?
- How should the lawful Case V charge be computed?
- Does EU law require credit within the ACT computation for underlying tax as well as for tax at the FNR?
- Does EU law require credit against ACT for withholding tax?
- How is the lawful ACT to be calculated?
- How should ACT paid by companies be linked with EU-source income to give effect to the CJEU judgments?
- Are claims in respect of Foreign Income Dividends ("FIDs") unlawful and how are they to be treated?
- Does it make any difference that the UK group had a non-resident parent which received double taxation treaty credits?
- Taking into account the interaction of ACT with shareholder tax credits, were HMRC enriched as a matter of English law and to what extent?
- Are HMRC's enrichment arguments precluded by EU law?
- Is a change of position defence available to HMRC as a matter of English law in respect of the Claimants' mistake-based claims?
- Have HMRC made out a change of position defence on the facts?
- Are HMRC precluded from relying on a change of position defence by EU law?
- Is HMRC's "actual benefit" argument available in respect of the Claimants' mistake claims under English law?
- If available, is the "actual benefit" argument made out on the facts?
- Is the "actual benefit" argument permitted by EU law?
- When did the Claimants discover, or when could they with reasonable diligence have discovered, their mistake for limitation purposes?
Arguments of the Parties
The opinion contains detailed accounts of the parties' arguments on multiple issues, including the lawful interpretation of EU law regarding tax credits, the appropriate methodology for calculating tax charges and credits, the availability and quantification of remedies under English law, and the application of limitation periods. For brevity and clarity, these are integrated into the Court's Reasoning and Analysis section below rather than separately summarized here.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Amministrazione delle Finanze dello Stato v SpA San Giorgio (Case 199/82) [1983] ECR 3595 |
Establishment of EU law principle entitling repayment of unlawfully levied tax (San Giorgio right) |
Foundation for Claimants' entitlement to repayment and remedies under EU law |
| Woolwich Equitable Building Society v Commissioners of Inland Revenue [1993] AC 70 |
Establishment of Woolwich claims for recovery of ultra vires tax payments |
Basis for domestic remedy available to Claimants for unlawfully levied tax |
| Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners [2006] UKHL 49, [2007] 1 AC 558 |
Recognition of mistake-based restitutionary claims for tax paid under mistake of law |
Supports Claimants' extended limitation period and alternative remedy |
| Prudential Assurance Co. Ltd v Commissioners for HMRC [2016] EWCA Civ 376 |
Interpretation of EU law regarding tax credits on portfolio dividends |
Confirms credit should be for the higher of actual tax paid or foreign nominal rate |
| Littlewoods Retail Ltd v Revenue and Customs Commissioners (Case C-591/10) [2012] STC 1714 |
Clarification on remedies and interest for unlawfully levied VAT under EU law |
Supports availability of effective remedies and indemnity for losses under EU law |
| Vodafone 2 v Revenue and Customs Commissioners [2009] EWCA Civ 446, [2010] Ch 77 |
Principles of conforming interpretation of domestic law to comply with EU law |
Guides interpretation of UK tax legislation to give effect to EU law rights |
| Sempra Metals Ltd v Inland Revenue Commissioners [2007] UKHL 34, [2008] 1 AC 561 |
Recovery of compound interest for premature payment of tax under mistake of law |
Supports Claimants' claims for time value of prematurely paid ACT |
| Benedetti v Sawiris [2013] UKSC 50, [2014] AC 938 |
Principles on valuation for restitution of services and use value of money |
Relevant to assessment of "actual benefit" arguments |
| Investment Trust Companies (in liquidation) v Revenue and Customs Commissioners [2012] EWHC 458 (Ch), [2012] STC 1150 |
Consideration of defences to restitutionary claims and application of tax credits |
Supports the moulding of domestic remedies to comply with EU law rights |
| Ghaidan v Godin-Mendoza [2004] UKHL 30, [2004] 2 AC 557 |
Principles of compatibility and interpretation of domestic legislation with Convention/EU law |
Supports expansive interpretation to conform UK law with EU obligations |
| Francovich v Italy (Case C-6/90) [1991] ECR I-5357 |
Conditions for damages claims under EU law for breaches of EU obligations |
Distinguishes San Giorgio restitution rights from damages claims |
| Lady & Kid A/S v Skatteministeriet (C-398/09) [2012] STC 854 |
Limits on defences to repayment claims under EU law, notably "passing on" defence |
Supports limited defences to San Giorgio claims under EU law |
| Zuckerfabrik Julich AG v British Sugar (Cases C-113/10, C-147/10, C-234/10) |
Obligation to repay interest on unlawfully levied taxes regardless of reimbursement to tax authority |
Clarifies nature of San Giorgio right to interest |
| Starmark Enterprises Ltd v CPL Distribution Ltd [2001] EWCA Civ 1252, [2002] Ch 306 |
Principles on conflicting Court of Appeal decisions and precedent |
Relevant to consideration of conflicting case law in this litigation |
| Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 |
Defence of change of position in restitution claims |
Foundational authority on availability and scope of change of position defence |
| Philip Collins Ltd v Davis [2000] 3 All ER 808 |
Application of change of position defence and proof standards |
Considered in context of government expenditure and restitution claims |
| Scottish Equitable plc v Derby [2001] EWCA Civ 369 |
Change of position defence and causation in restitution claims |
Clarifies causation requirements for change of position defence |
Court's Reasoning and Analysis
The court undertook a detailed examination of the taxation and remedies issues arising from the FII litigation, applying EU law principles and domestic law to the facts and legal context.
On the taxation issues, the court held that the UK corporation tax regime contravened EU law by failing to provide equivalent treatment between domestic and foreign dividends, requiring that credit be given for the higher of the actual tax paid by the foreign subsidiary or the foreign nominal rate ("FNR"), capped at the UK nominal rate. The court rejected HMRC's submission that credit need only be given at the FNR without regard to actual tax paid if higher, finding this inconsistent with the CJEU's decisions in FII CJEU1 and FII CJEU2 and the Court of Appeal's decision in Portfolio Dividends CA.
Regarding the appropriate FNR in cases involving "mixer" companies (entities blending income from multiple subsidiaries), the court agreed with the judge that the FNR should be determined by reference to the jurisdictions where the underlying profits were actually taxed, applying a weighted average consistent with section 801 ICTA, rather than disaggregating the dividend into components or applying the FNR of the water's edge company. This approach respects the existing UK legislative scheme and the practical realities of multinational group structures.
Special cases, such as capital gains excluded from the tax base or dividends paid by subsidiaries within the group, were considered individually, with the court generally endorsing the judge's reasoning and conclusions.
On the computation of lawful Case V tax, the court rejected HMRC's argument that credit need not be given for withholding tax, affirming that withholding tax must be credited to avoid illogical asymmetry and to accord with the actual UK tax system.
Concerning the ACT issues, the court agreed that EU law requires credit within the ACT computation for underlying tax as well as the FNR, and that credit must also be given against ACT for withholding tax. The lawful ACT is to be calculated by granting a notional tax credit capped at the UK ACT rate, being the higher of underlying tax and withholding tax actually paid or the nominal rate credit based on the FNR.
The court endorsed the Claimants' approach to linking ACT paid by companies with EU-source income, treating EU dividends as carrying a tax credit equivalent to domestic franked investment income ("FII") at the UK water's edge level, rather than HMRC's complex tracing method. This approach aligns with prior Court of Appeal decisions and respects the actual operation of the UK ACT system.
Regarding Foreign Income Dividends ("FIDs"), the court held that the entire ACT paid on FIDs was unlawful under EU law due to the integrated nature of the FID regime and the requirement that the underlying profits bear tax at a rate exceeding the UK corporation tax rate. The Claimants are entitled to repayment of that ACT without successful defence by HMRC.
On remedies, the court addressed the interplay between EU and English law. It explained that the San Giorgio right under EU law to recover unlawfully levied tax is a compensatory right independent of the actual enrichment of the tax authority. English law remedies, including Woolwich and mistake-based restitutionary claims, must be moulded to give full effect to this right.
The court rejected HMRC's arguments that they should be entitled to set off double taxation treaty credits paid to non-UK parents against restitution to UK subsidiaries, holding instead that HMRC can claim such credit (Issue 15). However, HMRC were held not to be enriched by the interaction of ACT and shareholder tax credits to the extent that tax credits were granted to shareholders (Issue 17).
The court held that the "actual benefit" argument is available to HMRC to reduce restitution claims but found that on the facts HMRC had not proved that their actual benefit was less than the objective use value of the prematurely paid ACT (Issues 22 and 23).
The defence of change of position was held available in principle to HMRC (Issue 19), but HMRC failed to establish it on the facts (Issue 20). The court emphasised that to succeed on this defence HMRC must establish that it would be inequitable to require restitution, which was not shown.
Importantly, the court concluded that EU law precludes HMRC from relying on the enrichment arguments, the actual benefit argument, or the change of position defence to reduce or defeat the mistake-based restitutionary claims (Issues 18, 21, and 24). This is because the principle of effectiveness and equivalence under EU law requires that both Woolwich and mistake-based claims be available and effective to vindicate the San Giorgio rights.
On limitation (Issue 28), the court held that the Claimants' mistake was not reasonably discoverable until the CJEU's authoritative judgment in FII CJEU1 on 12 December 2006. This follows the reasoning in Deutsche Morgan Grenfell Group plc v IRC, where a mistake of law actively disputed in litigation is only discoverable when authoritatively resolved. The court rejected the alternative date of 8 March 2001 (the Hoechst decision) as not representing discovery of the relevant mistake for these claims.
Holding and Implications
The court DISMISSED the appeals and cross-appeals except as follows:
- Allowed HMRC's appeal on Issue 15, declaring that HMRC are entitled to credit against repayment of overpaid ACT for double taxation treaty half tax credits granted to non-resident parents.
- Allowed HMRC's appeal on Issue 22, confirming that the "actual benefit" argument is available in principle to reduce restitution claims.
- Allowed the Claimants' cross-appeal on Issue 28, holding that the date of discovery of the mistake for limitation purposes is 12 December 2006.
All other appeals and cross-appeals were dismissed, including HMRC's challenges to the calculation and treatment of Case V tax and ACT, the rejection of their enrichment and change of position defences, and the requirement that EU law principles mould domestic remedies to ensure full vindication of San Giorgio rights.
The direct effect is that HMRC must repay unlawfully levied Case V tax and ACT with appropriate interest and reliefs, calculated in accordance with the court's interpretation of EU and domestic law. The decision reinforces the principle that domestic remedies must be effective and equivalent to vindicate EU law rights, and clarifies the application of limitation periods in complex tax litigation.
No new precedent beyond the application of existing EU and English law principles was established; rather, the court reaffirmed and applied established legal principles to the complex facts of this long-running litigation.