Applicants in the Post Prudential Closure Notice Applications Group Litigation and the Appellants in the Post Prudential Closure Notice Appeals Group Litigation
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 December 2021 |
| Neutral Citation | [2021] UKFTT 459 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 459 (TC)
Judge John Brooks
Jonathan Bremner QC, instructed by Joseph Hage Aaronson LLP appeared for the appellants
David Ewart QC, Barbara Belgrano and Laura Ruxandu, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – double tax relief – claims for relief –– underlying provisions were unlawful – test cases as to whether consequent claims were valid and related issues– multiple decisions made – all appeals allowed – FA 1998, Sch 18, para. 51, TIOPA 2010, s. 18 & 79.
The FTT made rulings related to double taxation relief claims arising after the Supreme Court decision in Prudential Assurance Company Ltd v R & C Commrs [2018] BTC 31. The Supreme Court had ruled that certain UK statutory provisions breached EU law. In post Prudential the FTT sought to resolve several issues relating to claims arising in respect of withholding tax on dividends paid to investment funds with portfolio shareholdings of less than 10% in the paying companies. Seven applicants and appellants (collectively referred to as “the taxpayers”) in post Prudential took test cases for 129 closure notice applications and 177 appeals. One further case was around a factual issue. Whilst the taxpayers were not successful on every issue for every year, in the main the FTT found in their favour, and all seven test cases were found in favour of the taxpayers.
In Prudential Assurance Company Ltd v R & C Commrs [2018] BTC 31, the Supreme Court ruled that certain UK statutory provisions breached EU law. Credit was not given against UK tax for the foreign nominal rate (FNR) of tax paid. The taxpayers in post Prudential were seeking to obtain relief from tax in accordance with the Supreme Court decision and were either seeking the FTT's direction on how HMRC should issue closure notices in respect of various years, or appealing closure notices that had been made by HMRC denying relief.
All years concerned in post Prudential pre-date the reform of dividend taxation introduced by Finance Act 2009.
The FTT considered fourteen separate issues across the eight cases, assigning each issue to a lead case. The fourteen issues were divided into five categories:
- The validity of claims
- Issues concerning ICTA 1988, s. 806(2) (now TIOPA 2010, s. 79) – time limits where an adjustment of UK or foreign tax makes double tax claims incorrect.
- Issues concerning the amendment of returns
- Management expenses issues
- One factual dispute
The taxpayers and HMRC could not agree on the formulation of every issue, and alternative formulations were thus given to the Judge in some cases. However, the Judge did not consider this affected his decisions.
In analysing the issues, the FTT reviewed several provisions in some depth. Some of these provisions applied across two or more of the fourteen issues.
In its formulation for the accounting periods in question, this provision covered where a company had paid tax under an assessment which it believed was excessive due to a mistake in a return. The paragraph detailed how and when claims for relief should be made, and circumstances in which relief would not be given.
The FTT was satisfied that believing provisions were lawful when, in fact, they did not conform with EU law, did give rise to a mistake in a return.
The tribunal also noted that where an “in time” amendment was made to a tax return that was subject to an enquiry, it could constitute a claim under paragraph 51, and be dealt with accordingly.
It had been argued by the taxpayers to which it applied that “in time” amendments made pursuant to the Supreme Court decision had to be accepted by HMRC; the FTT rejected that contention and referred to the paragraph 51 route as the appropriate procedure.
Paragraph 51 was substantially re-written and clarified by Finance Act 2009, and the provisions are now somewhat more prescriptive.
The FTT was satisfied that specific claims for the FNR were not needed for relief to be given under ICTA 1988 s. 790 (now TIOPA 2010, s. 18); claims for double tax relief for withholding tax were sufficient.
The changes to dividend taxation in 2009 mean that this is likely to be largely of historical interest.
The tribunal noted that in the Prudential Supreme Court decision, it had been accepted that the exemption of a dividend was equivalent to the grant of a tax credit at the FNR. Accordingly, the time limit under ICTA 1988 s. 806(1) (now TIOPA 2010, s. 19) applied to cases where a return had been amended to exempt a dividend following the Supreme Court decision.
The FTT considered whether reading ICTA 1988 s. 790 (now TIOPA 2010, s. 18) to conform with EU law resulted in “an increase in tax payable” outside the UK, with a consequent impact on the UK tax relief given. The tribunal concluded that it did. Accordingly, the provisions relating to time limits in ICTA 1988 s. 806(2) (now TIOPA 2010, s. 79) applied to the claims for credit at the FNR arising from the Supreme Court Case. However, this did not extend to non-EU dividends that would always be taxable.
Where applying the Supreme Court decision led to excess unrelieved foreign tax (EUFT), such EUFT could be claimed according to the time limit provisions of ICTA 1988 s. 806(2).
The position where the deduction of management expenses prevented the full use of DTR had been explored in the Supreme Court in Test Claimants in the Franked Investment Income Group Litigation v R & C Commrs [2021] BTC 22 (“FII SC3”). Following FII SC3, the FTT concluded that where the full use of DTR had been prevented by the deduction of management expenses, the unused DTR could be carried forward for offset. For the purposes of applying time limits, the period into which the DTR was carried forward was the appropriate period.
Whilst not all fourteen issues were decided in favour of the taxpayers, in each of the seven test cases the decisive decision went in favour of the taxpayers, so all seven test cases were decided in favour of the taxpayers.
Even after the Judge had conveyed his decisions on the appeals to the parties, they were unable to agree in full on how to dispose of the judgments. Five separate points arose, three of which related to the calculations required in respect of DTR and EUFT. In respect of those three points, it seems unlikely they will be of much wider application, and they will not be covered further. The other points were:
The FTT considered that where it had considered incidental matters of law and fact, and concluded an enquiry should be closed, it could direct the enquiry to be closed in accordance with its findings of law and fact.
HMRC argued in respect of a particular case that where one decision had left no tax payable in a year, a separate appeal should be dismissed. The FTT disagreed; both appeals could be allowed.
As these were test cases, the most important impact is for those companies joined in each appeal. The decisions themselves may have little wider impact, given that portfolio dividends are now covered by the provisions introduced by the 2009 reforms.
Changes in law mean the cases have implications largely limited to those involved and the followers of the test cases. The cases have thus not been covered in detail in this report. However, the long tail of EU law group litigations is illustrated vividly in this judgment, with adjustments in tax stretching back to 1991 being involved.
Of interest is the FTT's comment that it was satisfied it could direct not only that an enquiry should be closed, but how it should be closed.
[1] This case concerns the validity of statutory claims for the repayment of tax paid in accordance with United Kingdom (“UK”) legislation, as applied by the Respondents, HM Revenue and Customs (“HMRC”)1, on the grounds that the tax was imposed in breach of European Union (“EU”) law. The substantive EU law issue was resolved by the Supreme Court which held in Prudential Assurance Company Ltd v R & C Commrs [2018] BTC 31 (“Prudential (SC)”) that the UK statutory provisions breached EU law by failing, in particular, to give credit for the foreign nominal rate (“FNR”) of tax.
[2] The following eight test cases have been selected from 129 closure notice applications and 177 appeals (with all others being stayed pending the outcome of this litigation) to resolve a series of issues in relation to claims concerning tax on dividend income which relate, almost exclusively, to holdings under 10% (“portfolio holdings”) by investment funds:
(1) Schroder Asian Income Fund (“Schroder Asian”) for the accounting periods ending 31 January 1991 and 15 January 2009;
(2) Avon Insurance plc (“Avon”) for the accounting periods ending 31 December 1997 to 31 December 2003 inclusive; and
(3) Baillie Gifford American Fund (“Baillie Gifford”) for accounting period ending 30 April 2005.
(4) SLMM European Equity Fund (“SLMM”) for the accounting periods ending 31 March 2004, 31 March 2005 and 31 March 2006
(5) Schroder European Fund (“Schroder European”) for the accounting period ending 15 January 2003;
(6) Schroder Institutional Growth Fund (“Schroder Institutional Growth”) for the accounting period ending 30 June 2004;
(7) Fidelity UK Index Fund (“Fidelity UK Index Fund”) for the account periods ending 28 February 2007 to 28...
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