Deutsche Morgan Grenfell Group Plc v. Inland Revenue & Anor

Factual and Procedural Background

The Appellant is a United Kingdom-resident subsidiary within a multinational group whose parent (“Company A”) is resident in another Member State. Between 1993 and 1996 the Appellant paid Advance Corporation Tax (“ACT”) on three dividends remitted to Company A. Had a group income election been available under section 247 of the Income and Corporation Taxes Act 1988, no ACT would have been payable. On 8 March 2001 the Court of Justice of the European Communities (“ECJ”) held, in Metallgesellschaft Ltd v Inland Revenue Commissioners (Joined Cases C-397/98 & C-410/98) [2001] Ch 620, that limiting group income elections to parent companies resident in the United Kingdom infringed Article 43 EC. The Appellant began High Court proceedings on 18 October 2000 seeking restitution or compensation for the loss of use of the ACT payments. A Group Litigation Order was made to manage numerous similar claims. Park J held the claim to be timely; the Court of Appeal reversed that decision; the House of Lords (this opinion) restores Park J’s order.

Legal Issues Presented

1. Whether English law recognises a common-law action for restitution of tax paid under a mistake of law, in addition to the remedies created by Woolwich and statute.
2. If such a cause exists, whether the ACT payments were in fact made under a mistake of law (“the mistake issue”).
3. When the Appellant discovered, or could with reasonable diligence have discovered, the mistake for the purposes of section 32(1)(c) Limitation Act 1980 (“the discovery issue”).
4. Whether a “settled law” defence bars recovery where the payments accorded with the then prevailing understanding of the law.
5. If mistake of law were unavailable, whether the claim would still fall within section 32(1)(c) because the action is “for relief from the consequences of a mistake”.
6. Whether amendments adding later ACT payments introduced a new cause of action outside the limitation period (“the pleading issue”).

Arguments of the Parties

Appellant's Arguments

• Following Kleinwort Benson, money paid under a mistake of law is recoverable; tax payments are not excluded.
• The ACT payments were made in the mistaken belief that no group income election was legally available; the mistake was discovered only when the ECJ decided Metallgesellschaft on 8 March 2001.
• Section 32(1)(c) therefore postpones the limitation period; all claims are within time.
• A “settled law” defence is unknown to English law and, if needed, should be fashioned by Parliament, not the courts.
• The amendments merely supplied further particulars; no new cause of action was introduced.

Respondent's Arguments

• Woolwich and section 33 Taxes Management Act 1970 provide an exclusive code for recovery of overpaid tax; a mistake-of-law claim is unavailable.
• Even if available, the Appellant ceased to be mistaken once it learned of the ongoing ECJ challenge in 1995; section 32(1)(c) therefore does not assist.
• Payments made while conscious of legal doubt are voluntary and not mistaken.
• A “settled law” defence (or the statutory scheme itself) should bar recovery to protect public finances and legal certainty.
• The August 2002 amendments introduced fresh claims for the 1995 and 1996 payments that are statute-barred.

Table of Precedents Cited

Court's Reasoning and Analysis

1. Existence of the Cause of Action. Drawing on Kleinwort Benson, the House confirmed that English law recognises restitution for money paid under a mistake of law; Woolwich is not an exclusive remedy for overpaid tax. Limiting recovery to Woolwich would contradict the constitutional principle of equality between citizen and state and undermine coherence in the law of unjust enrichment.

2. Interaction with Statute. Section 33 TMA applies only to over-assessments; ACT was self-assessed without formal assessment, so the statutory remedy did not occupy the field. Nothing in the legislation impliedly excludes common-law restitution.

3. Mistake and Causation. The Appellant paid ACT believing it was legally obliged to do so; but that belief was incorrect because Article 43 conferred a right to elect. The absence of a formal group election was merely procedural; the substantive liability turned on the unlawfully discriminatory statute.

4. Time of Discovery. The mistake was not reasonably discoverable until 8 March 2001, when the ECJ authoritatively declared the UK regime incompatible with EU law. Prior industry speculation did not equate to discovery; before judgment, the true legal position did not exist in an ascertainable form.

5. Settled-Law Defence. The court declined to invent a common-law defence based on the previous “settled understanding” of the law. Crafting such a defence is a policy choice for Parliament, which has since legislated (Finance Act 2004 s 320) but only prospectively.

6. Pleading Amendment. The later inclusion of the 1995 and 1996 ACT payments was treated as supplying further particulars, not adding a new cause of action; therefore section 35 Limitation Act 1980 was satisfied.

Holding and Implications

Appeal ALLOWED; judgment of Park J RESTORED.

All three ACT payments are recoverable (by way of restitution or compensation) because the limitation period was postponed under section 32(1)(c) until the ECJ’s decision in March 2001. The ruling affirms that:

• Taxpayers can invoke mistake-of-law restitution even in tax matters unless expressly excluded by statute.
• Woolwich and statutory claims coexist with—but do not displace—mistake-based claims.
• “Settled law” is not a common-law defence; any such restriction must come from legislation (as partly achieved by Finance Act 2004).

While the Finance Act 2004 now curtails similar future claims, the decision preserves extended limitation for pre-2003 mistake-of-law tax claims and clarifies the broader framework of English unjust-enrichment law.