Bat Industries Plc and Others v Commissioners of Inland Revenue

Hearing dates: 22, 23, 24, 27 November 2023, and 1 December 2023

Approved Judgment

This judgment was handed down remotely at 10.30am on 5 February 2024 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

INTRODUCTION

The Claimants are members of the FII Group Litigation Order (the “FII GLO”) which was established on 8 October 2003. As a consequence of litigation that has been pursued over the last 20 years, members of the FII GLO have succeeded in demonstrating that, when they paid certain tax to the UK revenue authorities (“HMRC”), they did so on the mistaken understanding that the UK tax regime then applicable to overseas dividends was compatible with the provisions of the various treaties establishing, variously, the European Economic Community, the European Community and the European Union (referred to compendiously in this judgment as the “Treaty” and the “EU”).

Accordingly, members of the FII GLO are in principle entitled to recover from HMRC amounts by way of tax that they paid under that mistake of law. The only question remaining is whether and to what extent they have brought certain of their claims within the limitation period. In the remainder of this judgment, I address that question drawing, where relevant, on a number of authorities, both of this country and of the European Court of Justice and the Court of Justice of the European Union (together the “CJEU”). The judgments I will refer to most frequently are the following:

By his order dated 30 January 2015, Henderson J concluded that the limitation period commenced on 8 March 2001, the date on which the CJEU gave its judgment in Hoechst. Henderson J made that order following his judgment reported in FIIHC2.

In its judgment in FIICA2 the Court of Appeal reached a different conclusion, namely that the limitation period started on 12 December 2006, the date on which the CJEU gave judgment in FIICJEU1. Both Henderson J and the Court of Appeal approached the question of limitation on the basis that s32(1)(c) of the Limitation Act 1980 (the “ Limitation Act”) applied to claims for the restitution of sums paid under a mistake of law. They therefore considered when the Claimants discovered their mistake, or could with reasonable diligence have discovered it.

The Supreme Court in its judgment reported at FIISC2 conducted a wholesale re-examination of (i) the threshold question of whether s32(1)(c) of the Limitation Act applied to payments made under a mistake of law at all and (ii) if so, the principles that should be applied in deciding when the limitation period commenced.

In FIISC2, the Supreme Court held (by a majority) that s32(1)(c) of the Limitation Act does apply to the Claimants' claims for restitution of sums paid under a mistake of law. However, the Supreme Court differed from both Henderson J and the Court of Appeal as to principles that apply when determining the commencement of the limitation period. Concluding that it did not have the necessary evidence before it to decide when the claimants could with reasonable diligence have discovered their mistake, it remitted that question back to the High Court for consideration. It is that question which I determine in this judgment.

THE CONTEXT IN WHICH THE LIMITATION ISSUE ARISES

I will assume that any reader of this judgment has a good understanding of the UK tax regime applicable to both the payment of, and receipt of, dividends by UK resident companies in the period from 1973 to 1999. The previous 20 years of litigation in the FII GLO have subjected that tax treatment to microscopic scrutiny and it would not be possible to capture the nature of that scrutiny in any short summary.

A high-level overview of the UK tax regime applicable to dividends both paid and received by a UK resident company is set out in an agreed statement that Henderson J recorded at [12] of FIIHC1. The following aspects of that regime are of particular significance to this judgment:

i) Profits earned by a UK company were in principle subject to corporation tax. Accordingly, a dividend paid by a UK resident company to a shareholder was paid out of profits that had, in principle, already been subjected to UK tax. Between 1965 and 1973, the UK operated a “classical” system of dividend taxation. A UK resident non-corporate shareholder was fully subject to income tax on a dividend received from a UK resident company. This could result in economic double taxation as the profits represented by the dividend could be taxed both by the company earning those profits and by the shareholder receiving the dividend.

ii) In 1973, the UK moved towards an “imputation” system to mitigate the effects of this economic double taxation. As described in more detail below, a UK resident who received a dividend from a UK resident company could obtain a tax credit which reduced the tax charge arising on the dividend. This tax credit could be understood as “imputing” part of the corporation tax borne by the paying company on its profits to the UK resident shareholder. Non-UK resident shareholders were not generally entitled to any tax credit on receipt of a dividend from a UK company. However, by way of exception to that general rule, some tax treaties between the UK and other countries entitled non-UK resident recipients of dividends to some tax credit.

iii) A dividend paid by a UK resident company between 1973 and 1999 in principle required the paying company to account for advance corporation tax (“ACT”) on that dividend. An exception was where the dividend was paid by one UK member of a group to another, in which case a “group income election” could be made which prevented ACT from becoming due. A group income election could only be made by two UK resident companies.

iv) In principle ACT paid by a UK resident company could be set off against the paying company's obligation to account for corporation tax on its profits (often called “mainstream corporation tax” or “MCT”). However, if the paying company's liability to MCT in the accounting period in question was lower than the ACT paid in that accounting period a full set-off would not be possible and the company would have what was described as “surplus ACT”.

v) Surplus ACT could be carried forward or back by the UK paying company and could be surrendered to its UK resident subsidiaries where they had a sufficient UK corporation tax liability to allow set off. However, to the extent that surplus ACT could not be used in this way, it represented an absolute cost to the company or group concerned.

vi) Only dividends paid by a UK resident company which triggered a liability to ACT carried the tax credit described in paragraph ii). A UK recipient of that dividend who was not liable to tax (such as a pension fund) could, until 1997, recover the amount of that tax credit in cash from HMRC. UK resident individuals could recover the tax credit until 1999 and, to a limited extent, thereafter.

vii) A UK resident company receiving a dividend from another UK resident company was not subject to corporation tax on that dividend. In addition, to the extent that the dividend paid had triggered an ACT liability (so that in particular it was not paid under a group income election), the dividend carried with it a tax credit. The aggregate of the dividend plus the tax credit constituted “franked investment income” (“FII”) of the UK resident recipient. Being “franked” by the ACT that was payable when the dividend was declared, FII reduced the obligation of the recipient to account for ACT on dividends paid.

viii) A UK resident company that received a dividend from a non-UK resident company was subject to corporation tax on that dividend but was entitled to credit relief for foreign taxes paid (“double tax relief” or “DTR”). Such non-UK dividends were not treated as FII and so did not eliminate or reduce the ACT payable on onward...