HMRC v Post Prudential Closure Notice Appellants

Hearing dates: 21, 22, 23 and 24 January 2025

Approved Judgment

This judgment was handed down remotely at 10.00am on 25 February 2025 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

Introduction

Those with some knowledge of tax litigation might be forgiven for thinking that there cannot be much more to say in the very long-running dispute about the non-compliance of some aspects of the UK corporation tax regime with EU law. They would be wrong. This court very recently heard an appeal concerning some aspects of the law as it stands following Supreme Court decisions in test cases arising out of two sets of group litigation, Prudential and FII: see AXA Sun Life plc v HMRC [2024] EWCA Civ 1430 (“ AXA Sun Life”). This is another such appeal. The most obvious difference is that this case concerns statutory appeals and applications to the First-tier Tribunal (“FTT”), rather than aspects of common law claims in restitution governed by a group litigation order (“GLO”).

As in the Prudential litigation and AXA Sun Life, the appellants and applicants in this case (the “Taxpayers”) held “portfolio” investments in other companies, a term used to refer to shareholdings of less than 10% of the paying companies' share capital (or more strictly, 10% of the voting power). Most of the Taxpayers are investment funds. The dispute relates to the corporation tax treatment of dividends received from the Taxpayers' investments prior to 2009, when the tax rules changed.

It is now well established that, before the 2009 changes, the tax treatment of non-UK source dividends breached EU law. In contrast to the exemption that generally applied to UK-source dividends, non-UK source dividends were taxable, usually under Schedule D Case V. In the case of dividends from portfolio holdings this was subject to double tax relief (“DTR”) only for any withholding tax suffered. No additional relief was generally available to reflect tax on the profits out of which the dividends were paid (underlying tax relief), whether in respect of any tax actually paid or, crucially (as it turned out), for tax at the nominal rate at which tax was chargeable in the foreign jurisdiction (the foreign nominal rate, or “FNR”). In contrast, for shareholdings of 10% or more DTR was available for both withholding tax and actual underlying tax, but not for tax at the FNR.

Although we were not provided with the details, it is understood that a significant proportion of the Taxpayers are members of the same GLO for which Prudential was a test case, namely the CFC and Dividend Group Litigation Order (the “CFC/Dividend GLO”). However, the relevant Taxpayers joined the GLO after 31 March 2010. As such they are members of “class 8” of that GLO. The date is important because of a change with effect from 1 April 2010 to the statutory claims procedure in paragraph 51 of Schedule 18 to the Finance Act 1998 (“FA 1998”). In broad terms, in relation to claims made on or after 1 April 2010 the revised regime ousted certain common law claims in favour of statutory claims: see AXA Sun Life at [167]–[169]. Unlike the decision in AXA Sun Life, so far as paragraph 51 is relevant to this decision we are concerned with the version that was in force up to 31 March 2010.

Four preliminary issues affecting the class 8 claimants in the CFC/Dividend GLO were decided by the then Chancellor, Sir Geoffrey Vos, in Claimants Listed in Class 8 of the Group Register of the CFC and Dividend GLO [2019] EWHC 338 (Ch), [2019] 1 WLR 5097 (“ Class 8”). The appeal to this court in Class 8 has been stayed pending this appeal.

In broad terms the Taxpayers in these appeals seek to rely on their statutory rights under the tax legislation, as interpreted to conform with EU law requirements, to generate tax refunds or reliefs as an alternative to common law claims in restitution. The disputes largely (but not exclusively) concern the applicable procedural mechanisms. Some of the Taxpayers appealed to the FTT against closure notices and decisions refusing repayments of tax, and others applied to the FTT for directions that HMRC should issue closure notices in respect of open enquiries. Eight test cases were selected for determination by the FTT from 177 appeals and 129 closure notice applications.

Both parties appealed the FTT's decision ( [2021] UKFTT 459 (TC), Judge John Brooks) to the Upper Tribunal (“UT”). Both parties now appeal again to this court, with the permission of the UT, from the UT's decision ( [2024] UKUT 23 (TCC), Richard Smith J and Judge Jonathan Cannan).

The Appendix to our judgments sets out a list of the principal authorities referred to and the shorthand terms used to refer to them, together with the most relevant statutory provisions of the Taxes Management Act 1970 (“ TMA”), the Income and Corporation Taxes Act 1988 (“ ICTA”) and FA 1998 in the form in which they were in force at relevant times.

We heard submissions from Mr Bremner KC on all issues for the Taxpayers. Mr Ewart KC led for HMRC, but we also had the benefit of submissions from Ms Belgrano and Ms Ruxandu on two issues. We are grateful for all Counsel's assistance, but particularly welcome the opportunity provided by HMRC for oral advocacy by junior Counsel, in line with the encouragement given by the Lady Chief Justice and Master of the Rolls in November 2023.

The issues

Fourteen issues were addressed at the FTT hearing (issues 1 to 14), and five further sub-issues later emerged which were dealt with via written submissions (issues A to E). As in the UT, it is simplest to adopt the same numbering and lettering. In outline, all of the issues remain in dispute except for issue 1, which has been common ground throughout (but remains relevant to other issues), issue 12 (which was decided by neither the FTT nor the UT), issue 13 (which was agreed in the FTT), issue 14 (a question of fact where there was no appeal to the UT against the FTT's decision in favour of HMRC) and Issue D (where HMRC do not appeal against decisions against them in the FTT and UT).

Of the outstanding issues, HMRC achieved a substantial measure of success in the UT, which reversed the FTT's decision in significant respects. HMRC appeal to this court against the UT's decision on issues 3 and C only.

The Taxpayers' appeal, although framed as two grounds, in effect covers all the other outstanding issues, namely issues 2, 4 to 11, A, B and E.

The FTT set out the relevant issues, as they existed at the hearing before it, as follows at [7] of its decision:

“ A – Issues Concerning the Validity of Claims

Issue 1: Non-resident dividend income returned as exempt

Appellants' wording: Can tax paid on dividend income in excess of that due upon the proper application of EU law be recovered in circumstances where the dividend income was returned as exempt?

Respondents' wording: Where non-UK dividends have been treated as exempt in a return, does that amount to a valid claim for full double tax relief (“DTR”)?

(Lead cases: Schroder Institutional Growth for the accounting period ending 30 June 2004 and Henderson for the accounting period ending 31 October 2006. Issue 1 also arises in Henderson for the accounting period ending 31 October 2007 and Fidelity UK Index Fund for the accounting periods ending 28 February 2007, 2008, 2009 and 2010.)

Issue 2: Paragraph 51 of Schedule 18 to the Finance Act 1998 (“Paragraph 51”)

Appellants' wording: Is a claim under Paragraph 51 a valid means to recover tax paid on dividend income in excess of that due upon the proper application of EU law? Alternatively, is a Paragraph 51 claim to be treated as a claim for double tax relief for underlying tax?

Respondents' wording:

2.1 Have valid Paragraph 51 claims been made?

2.2 Is a Paragraph 51 claim to be treated as a claim for DTR (underlying tax (“ULT”))?

2.3 Even if valid Paragraph 51 claims have been made, is relief due in respect of those claims?

2.4 Should HMRC give effect to claims made pursuant to Paragraph 51 on the basis that non-UK dividends were returned as taxable where credit at the FNR was not claimed and not given?

(Lead cases: SLMM for accounting periods ending 31 March 2004–06 and Schroder European for accounting period ending 15 January 2003. Issue 2 also arises in Henderson for the accounting periods ending 28 February 2009 and 2010.)

Issue 3: Non-resident dividend income returned as taxable

Agreed wording: Where the return claims DTR for withholding tax (“WHT”) and an enquiry was opened into the return should HMRC have allowed DTR for ULT at the FNR when closing the enquiry?

(Lead cases: Schroder Institutional Growth for the accounting period ending 30 June 2004 and Henderson for the accounting period ending 31 October 2007. Issue 3 also arises in Fidelity UK Index Fund for accounting periods ending 28 February 2007–2010.)

Issue 4: Schedule 1A to the Taxes Management Act 1970 (“ TMA”)

Agreed wording: In the alternative, do paragraphs 54, 55, 57 and 59 of Schedule 18 to Finance Act 1998 and Schedule 1A TMA create a...