Prudential Assurance Company Ltd v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Lord Hodge,Lord Mance,Lord Carnwath,Lord Reed,Lord Sumption |
| Judgment Date | 25 July 2018 |
| Neutral Citation | [2018] UKSC 39 |
| Court | Supreme Court |
| Date | 25 July 2018 |
[2018] UKSC 39
Lord Mance
Lord Sumption
Lord Reed
Lord Carnwath
Lord Hodge
Appellant
David Ewart QC
Rupert Baldry QC
Andrew Burrows QC (Hon)
Barbara Belgrano
(Instructed by HMRC Solicitors Office)
Respondent
Graham Aaronson QC
Tom Beazley QC
Jonathan Bremner
(Instructed by Joseph Hage Aaronson LLP)
Heard on 20 and 21 February 2018
Lord Mance, Lord Reed AND (with whom Lord Sumption and Lord Carnwath agree)
This is a test case brought against the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) by the Prudential Assurance Co Ltd (“PAC”). PAC is a typical United Kingdom-resident recipient of dividends on “portfolio” investments overseas, representing less (usually much less) than 10% of the relevant overseas companies' share capital. The issues originate from two features of the UK tax position in the period 1990 to 1 July 2009. First, throughout that period dividend income received from overseas investments was in principle taxable, subject (as will appear) to certain reliefs. Second, until 6 April 1999 Advance Corporation Tax (“ACT”) was levied on dividends distributed to UK companies' shareholders. The scope of the issues arising from these features and open on this appeal is, as will appear, itself in some dispute, but the appeal on any view involves a number of conceptually difficult points.
The principal issues on this appeal can be summarised as follows:
I. Does EU law require a tax credit in respect of overseas dividends to be set by reference to the overseas tax actually paid, or by reference to the foreign nominal tax rate (“FNR”)?
II. Is PAC entitled to compound interest in respect of tax which was levied in breach of EU law, on the basis that HMRC were unjustly enriched by the opportunity to use the money in question?
III. Subject to HMRC's being granted permission to argue the point, does a claim in restitution lie to recover lawful ACT which was set against unlawful mainstream corporation tax (“MCT”)?
IV. If the answer to (I) is that EU law requires a tax credit to be set by reference to the overseas tax actually paid, PAC seeks permission to cross-appeal on the following question: should the charge to corporation tax on the foreign dividend income under Case V of Schedule D (Income and Corporation Taxes Act 1988 (“ ICTA”), section 18) (“DV tax”) be disapplied, or should PAC be allowed to rely on FNRs, or on consolidated effective tax rates, as a simplification or proxy for tax actually paid?
V. If HMRC are granted permission to argue Issue III, PAC seek permission to cross-appeal on the following questions:
(a) where ACT from a pool which includes unlawful and lawful ACT is utilised against an unlawful MCT liability, should the unlawful ACT be treated as a pre-payment of the unlawful MCT liability, or is the ACT so utilised to be treated as partly lawful and partly unlawful; and
(b) where domestic franked investment income (“FII”) was carried back to an earlier quarter, is it to be treated as having been applied to relieve the lawful and unlawful ACT pro rata, or only lawful ACT?
The first issue — Issue I — arises from the approach adopted by UK law in order to avoid or mitigate double taxation of dividends. It is now clear that this was inconsistent with EU law, but in what precise respects and what is due by way of restitution or compensation are live issues. The inconsistency with EU law arose as follows. Domestically, dividends received by one UK-resident company, the source of which was a distribution made by another UK-resident company, were exempt from tax under section 208 of ICTA. The effect is that corporation tax was only levied once, on the latter company which made the profit out of which it distributed the dividend to the former company.
In contrast, dividends received by a UK-resident company, the source of which was an overseas company, were in principle subject to DV tax. But where the UK-resident company controlled a certain percentage of the voting power of the relevant overseas company (typically 10%), certain relief was given for foreign tax paid on the underlying profits out of which such dividends were paid. This was done either pursuant to a double taxation treaty or unilaterally under ICTA, section 790. No relief against DV tax was however afforded in respect of “portfolio” investments, that is investments involving lesser percentage holdings.
In Metallgesellschaft Ltd v Inland Revenue Comrs; Hoechst v Inland Revenue Comrs (Joined Cases C-397/98 and C-410/98) EU:C:2001:134; [2001] ECR I-1727; [2001] Ch 620, the European Court of Justice (“CJEU”) held that the unharmonized domestic tax regime fell under the EC Treaty, and could therefore be challenged if inconsistent with a Treaty provision. Pursuant to a group litigation order dated 30 July 2003, PAC was on 13 November 2003 appointed to conduct the present test case, in which PAC's primary contention has been that the UK tax position is inconsistent with article 63 of the FEU Treaty.
Article 63FEU (ex article 56 of the EC Treaty) provides:
“1. Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between member states and between member states and third countries shall be prohibited.
2. Within the framework of the provisions set out in this Chapter, all restrictions on payments between member states and between member states and third countries shall be prohibited.”
At an early stage in the present case, a reference to the CJEU was found necessary. But, before that reference was heard, the CJEU determined a separate UK reference, in Test Claimants in the FII Group Litigation v Inland Revenue Comrs (Case C-446/04) EU:C:2006:774; [2006] ECR I-11753; [2012] 2 AC 436 (“ FII ECJ I” — “FII” standing for franked investment income). In it, the CJEU held, at paras 1 and 2 of the operative part:
“1. … where a member state has a system for preventing or mitigating the imposition of a series of charges to tax or economic double taxation as regards dividends paid to residents by resident companies, it must treat dividends paid to residents by non-resident companies in the same way.
[The Treaty provisions] do not preclude legislation of a member state which exempts from corporation tax dividends which a resident company receives from another resident company, when that state imposes corporation tax on dividends which a resident company receives from a non-resident company in which the resident company holds at least 10% of the voting rights, while at the same time granting a tax credit in the latter case for the tax actually paid by the company making the distribution in the member state in which it is resident, provided that the rate of tax applied to foreign-sourced dividends is no higher than the rate of tax applied to nationally-sourced dividends and that the tax credit is at least equal to the amount paid in the member state of the company making the distribution, up to the limit of the amount of the tax charged in the member state of the company receiving the distribution.
Article [63FEU] precludes legislation of a member state which exempts from corporation tax dividends which a resident company receives from another resident company, where that state levies corporation tax on dividends which a resident company receives from a non-resident company in which it holds less than 10% of the voting rights, without granting the company receiving the dividends a tax credit for the tax actually paid by the company making the distribution in the state in which the latter is resident.
2. [The Treaty provisions] preclude legislation of a member state which allows a resident company receiving dividends from another resident company to deduct from the amount which the former company is liable to pay by way of advance corporation tax the amount of that tax paid by the latter company, whereas no such deduction is permitted in the case of a resident company receiving dividends from a non-resident company as regards the corresponding tax on distributed profits paid by the latter company in the state in which it is resident.”
This ruling was re-affirmed in the Reasoned Order by which the CJEU disposed of the reference made by the High Court in the present case: Test Claimants in the CFC and Dividend Group Litigation v Inland Revenue Comrs (Case C-201/05) EU:C:2008:239; [2008] ECR I-2875; [2008] STC 1513. The issue of a Reasoned Order, without a formal Advocate General's opinion and with the same juge rapporteur involved as in FII ECJ I, indicates that the CJEU saw the position as relatively straightforward.
In the light of these two decisions of the CJEU, it is common ground that the UK's treatment of overseas dividends was incompatible with EU law. In a judgment in the present case, Prudential Assurance Co Ltd v Revenue and Customs Comrs [2013] EWHC 3249 (Ch); [2014] STC 1236, Henderson J held (para 148) that the appropriate means of rectifying this was for PAC to be accorded an appropriate tax credit. (This was on the basis that a complete exemption from UK corporation tax would go further than the CJEU had stated that EU law required.) HMRC also accept that PAC is entitled to repayment or restitution of any corporation tax unlawfully charged as a result of the incompatibility: Amministrazione delle Finanze dello Stato v SpA San Giorgio (Case C-199/82) [1983] ECR 3595 (“ San Giorgio”). However, the amount to be awarded depends significantly on issues of EU law and domestic law which are either open or which HMRC seek to raise on this appeal.
Issue I is whether the credit in respect of overseas dividends should under EU law be set by reference...
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