HM Revenue and Customs v The GKN Group
| Jurisdiction | England & Wales |
| Judge | Lord Justice Aikens,Lord Justice Lewison,Lord Justice Ward. |
| Judgment Date | 31 January 2012 |
| Neutral Citation | [2012] EWCA Civ 57 |
| Docket Number | Case No: A3/2011/0771 |
| Court | Court of Appeal (Civil Division) |
| Date | 31 January 2012 |
[2012] EWCA Civ 57
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE, CHANCERY DIVISION
SIR ANDREW PARK
HC03C02223 and Others
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Ward
Lord Justice Aikens
and
Lord Justice Lewison
Case No: A3/2011/0771
A3/2009/1340
Mr Rupert Baldry QC and Mr James Rivett (instructed by HMRC Solicitor's Office) for the Appellant.
Mr David Cavender QC (instructed by Dorsey & Whitney) for the Respondent.
Hearing date: 29 November 2011
In March 2001 the Court of Justice of the European Communities, ( known since the Lisbon Treaty as the Court of Justice of the European Union ("ECJ")) handed down its judgment in Metallgesellschaft Ltd v Inland Revenue Commissioners and Hoechst AG v Inland Revenue Commissioners 1 ("the Metallgesellschaft case"). The ECJ held that a UK tax regime which required that Advance Corporation Tax ("ACT") to be levied on dividends of UK resident subsidiaries which were paid to their non-UK resident parent companies but which did not require it to be levied when such dividends were paid to UK-resident parent companies was contrary to Community law. The ECJ also held that any company that had been obliged to make an advance payment of tax contrary to Community law was entitled to recover a sum equivalent to the interest that would have been earned on the sums foregone. Since that decision potentially affected ACT and "mainstream corporation tax" ("MCT") paid by any UK-resident companies with EU or other non-UK resident subsidiaries and could affect companies' Corporation Tax liabilities since the UK became a member of what was then the EEC in 1972 and/or the introduction of the ACT regime in 1973, a large scale litigation war was unleashed between companies that have had to pay UK Corporation Tax and Her Majesty's Revenue and Customs ("HMRC").
The war has been fought on a large number of fronts but this appeal concerns only one part of a particular skirmish. The current respondents ("GKN") and other companies obtained an order (dated 19 May 2009) from Sir Andrew Park, sitting as a deputy judge in the Chancery Division, that HMRC should make an Interim Payment to them in the context of a much larger piece of Group Litigation. HMRC argue on this appeal, brought with the permission of Jacob LJ, that Sir Andrew erred in law in making this Interim Payment order. We heard argument in the case on 29 November 2011 and reserved judgment.
The background to the Group Litigation and the application for an Interim Payment
To understand the Group litigation of which the present appeal is a part I should state some rules about the UK law concerning the system of ACT, which was instituted in 1973 and abolished effectively from 5 April 1999 (by section 31 of the Finance Act 1998). The basic rule of UK Corporation Tax is that it is payable by UK resident companies in accordance with the specific statutory provisions in schedules setting out what income or gains will be taxed. Income on foreign dividends falls within Case V of Schedule D, (known as "DV"), although this has always been subject to various deductions. At the relevant time UK resident companies were not subject to Corporation Tax on dividends received from other UK resident companies; however, dividends received from companies resident outside the UK were subject to Corporation Tax but carried the right to a credit equal to the amount of any foreign tax paid, but capped at the UK rate.
Prior to 6 April 1999 a UK resident company had to pay ACT on dividends which it paid to its shareholders, unless the payment was within a group of companies and a group income election had been made. However, a UK resident company could obtain a credit against its liability to ACT by reference to the amount of dividends it received from a UK resident company. If the credit was obtained those dividends
were known as "franked investment income" or "FII". But a UK resident company could not obtain the same credit for any dividend income which it received from a non-UK resident company. So ACT had to be paid on those dividends, with the consequence that UK resident companies receiving dividends from non-UK resident companies built up substantial "surpluses" of unutilised ACT, ie. ACT which had been paid but which could not then be set against any liability to pay Corporation Tax. This problem of unused ACT surpluses became notorious and the regime was changed in 1994, so that thereafter UK resident companies could elect to designate dividends received from non UK resident companies as "foreign income dividends" or "FIDS", in respect of which ACT would be repaid if not utilised to pay Corporation Tax. 2 In these proceedings the UK resident company receiving a dividend directly from a company resident outside the UK has been referred to as a "UK water's edge company" and the company resident in a Member State which has remitted the dividend to the UK water's edge company has been called an "EC water's edge company". 3The present appeal arises as part of the "Franked Investment Income" ("FII") Group Litigation, which was begun following a Group Litigation Order ("GLO") made by Chief Master Winegarten on 8 October 2003. The FII Group Litigation Order ("FII GLO") claimants are companies that belong to groups of companies which have UK resident parents and foreign subsidiaries in both the EU and elsewhere. The lead or test claimants in the proceedings are companies in the BAT Group. The broad purpose of the litigation is to determine a number of common or related questions of law arising out of the taxation treatment of dividends paid by UK resident parent companies out of profits received from non-UK resident subsidiaries, when ACT was payable, by comparison with dividends received from UK resident subsidiaries, when no ACT was payable, by comparison with dividends paid out of profits received from UK resident subsidiaries when no ACT was payable. The claimants allege that these differences in the taxation of the dividends depending on their origin were unjustified and in breach of the provisions of Articles 43 and 56 (freedom of establishment and movement of capital respectively) of the EC Treaty and its predecessors.
Various selected test claims in the FII Group Litigation advanced as far as a trial before Park J in June 2004. It then became apparent that there had to be a preliminary reference of issues of law to the ECJ. The ECJ gave its judgment on the reference in December 2006. 4 It was then ordered that the test claims should proceed to trial on all the issues in the FII GLO, including the issue of any liability for restitution, "save in so far as those issues concern causation and quantification".
The trial of the test claims took place before Henderson J in July 2008 and he delivered his reserved judgment on 27 November 2008. It runs to 450 paragraphs and has been aptly described as a tour de force.
There are two broad questions considered in Henderson J's decision that became relevant to the subsequent application for Interim Payments before Sir Andrew Park, which are summarised at [4] and [5] of Sir Andrew's judgment of 19 May 2009. The first question was whether the requirement of HMRC that Corporation Tax under Case V of Schedule D be paid by a UK resident parent company on dividends received from a subsidiary resident in another Member State was contrary to Community law. The second question concerned cases where the non-UK resident subsidiary had itself paid whatever corporate tax was payable in its own Member State of residence and then the UK-resident company receiving the dividend from that non-UK resident subsidiary paid onward dividends based (at least in part) on the revenue it had received by way of dividend from its subsidiary. HMRC required the UK-resident parent to pay ACT on the onward distribution of all the dividends received from the non-UK resident subsidiary, whatever corporate tax may have been paid on that sum. 5 Again, the issue was whether that regime was contrary to Community law.
Henderson J held, on the first question, that as a result of the ECJ's decision in Case C-446/04, (ie. the reference that had been made by Park J in this Group Litigation) the requirement that the dividends received from the non-UK subsidiaries be subject to UK Corporation Tax under Case V of Schedule D was contrary to Community law. He held that the UK resident parent was entitled by way of a restitutionary claim to recover (a) the unlawfully levied Corporation Tax and (b) interest on it. On the second question, Henderson J held that to the extent that the UK-resident parent company had paid a greater amount of ACT on the onward dividends than it would have done had the incoming dividends been treated as FII, the levy of that additional ACT was contrary to Community law and was, in principle recoverable by a restitutionary claim.
There are, however, two further aspects of Henderson J's decision which were important to the claim for an Interim Payment before Sir Andrew Park and are central to the appeal to this court. The first concerns the "Foreign Income Dividend" system or "FID" system, which Henderson J described as the third of the four broad issues that he had to decide. 6 As noted above, the FID system was operated for dividends paid by non-UK subsidiaries to UK resident parent companies between 1 July 1994 until ACT was abolished with effect from 5 April 1999. As I have said, during that period a UK resident company could elect to treat dividends that...
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