Sempra Metals (formerly Metallgesellschaft Ltd) v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | Mr Justice Park |
| Judgment Date | 16 June 2004 |
| Neutral Citation | [2004] EWHC 2387 (Ch) |
| Docket Number | Case No: CH1995 M No. 7327 |
| Court | Chancery Division |
| Date | 16 June 2004 |
[2004] EWHC 2387 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Park
Case No: CH1995 M No. 7327
Laurence Rabinowitz QC and Francis Fitzpatrick (instructed by Slaughter and May) for the Claimant
Ian Glick QC and Rupert Baldry (instructed by the Solicitor of Inland Revenue) for the Defendants
Hearing dates : 27.04 – 29.04.2004
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
In this judgment I use the following abbreviations.
Introduction and overview
| ACT | Advance corporation tax |
| CJEC, the | The Court of Justice of the European Communities |
| GLO | Group litigation order, as respects which see the Civil Procedure Rules, rule 19.10 to 19.15 |
| Group income election | An election under s.247 of the Income and Corporation Taxes Act 1988. See paragraph 4 below. |
| MCT | Mainstream corporation tax |
| Metallgesellschaft/Hoechst | The combined cases in the CJEC of Metallgesellschaft Ltd and others v IRC and HM Attorney General ( Case C-397/98) and (1) Hoechst UK Ltd v IRC and HM Attorney General ( Case C-410/98). The judgment of the CJEC was delivered on 8 March 2001 and is reported at [2001] Ch 620. |
| Revenue, the | The Inland Revenue of the United Kingdom |
| Post-utilisation period | The period from the time when an amount of ACT paid by Sempra was set off against MCT until judgment in the present case. See paragraph 8 below. |
| Premature tax payment period | The period between the payment by Sempra of an amount of ACT and the ACT being set off against MCT. See paragraph 6 below. |
| Sempra | Sempra Metals Ltd, the claimant company. It was previously called Metallgesellschaft Ltd. |
| Unutilised ACT | ACT which a company is not able to set off against MCT because it does not have sufficient taxable profits. Contrast utilised ACT. See also paragraph 33 below. |
| Utilised ACT | ACT which a company is able to set off against MCT because it does have sufficient taxable profits. Contrast unutilised ACT. See also paragraph 33 below. |
This judgment relates to another in the series of cases which have been heard, and in some cases remain to be heard, arising from the decision of the CJEC in Metallgesellschaft/Hoechst. Most of the cases are being brought and determined within the ambit of a Group Litigation Order, a GLO, of which I am the nominated judge. More details are given in the judgments of myself and the Court of Appeal in Pirelli Cable Holding NV v IRC [2003] EWHC Ch 32, [2003] STC 130; [2003] EWCA Civ 1849, [2004] STC 130.
The cases concern dividends paid by United Kingdom subsidiaries of overseas parent companies at times when the ACT system was in force as part of United Kingdom tax law. The normal operation of the system required a company which paid a dividend also to pay to the Revenue an amount of tax, called advance corporation tax, which it could later set off against what would otherwise have been its normal liability to pay corporation tax (sometimes referred to as 'mainstream corporation tax', or MCT) on its taxable profits. The effect was that, if a company chose to pay a dividend, it had to accept as a consequence that it would have to pay some of the corporation tax on its profits sooner than it would otherwise have had to do. On the assumption that the company did, sooner or later, have profits liable to MCT, the ACT system imposed on it a timing disadvantage and conferred a corresponding timing advantage on the Revenue. If the company did not, sooner or later, have profits liable to MCT, the ACT system was more drastic in its effects. However, the present case is concerned with companies which did, in time, have profits liable to MCT, so the disadvantage sustained by them was limited to the timing disadvantage.
There was an exception to the normal rule that a company which paid a dividend also had to pay ACT. If the dividend-paying company was a subsidiary of a United Kingdom parent company the two companies could join in making a group income election under ICTA 1988 s.247. The effect of an election was that the dividend could be paid without an accompanying liability to pay ACT, so that the timing disadvantage to the paying company was removed. However, group income elections could only be made where both the subsidiary and the parent company were resident in the United Kingdom. In Metallgesellschaft/Hoechst the CJEC decided that it was contrary to Community law (specifically article 52 of the EC Treaty, now renumbered as article 43) for United Kingdom domestic tax law to deny the ability to make group income elections to groups where the subsidiary (the dividend payer) was resident in the United Kingdom but the parent (the dividend recipient) was resident in another member state. This meant that United Kingdom law had effectively required the United Kingdom subsidiary to pay part of its mainstream corporation tax (its MCT) prematurely – earlier than, on a proper application of Community law, it ought to have had to pay it. The court also decided that United Kingdom subsidiaries of parents in other member states which had paid ACT in the past were entitled to compensation for the timing disadvantage which they had suffered. The amounts of compensation and other associated issues were to be determined by the national court.
A large number of multi-national groups, including their United Kingdom dividend-paying subsidiaries, commenced claims in the English courts. In most cases, including the present one, the parent companies which received the dividends were resident in other member states of the European Union, but some claims have also been brought where the parent company was resident in a third jurisdiction. In those cases the claims are based, not on Community law, but on non-discrimination articles in double taxation agreements. For an example see my judgment in NEC Semiconductors Ltd v IRC [2003] EWHC Ch 2813, [2004] STC 489. The cases have all been gathered together within a GLO, and I have already delivered judgments in three cases which raised issues of principle different from the one raised in the present case. I now deliver judgment in a fourth case. (I have also delivered judgment in another case which was consequential on the CJEC decision in Metallgesellschaft/Hoechst, but that case was not brought under the GLO. As with previous cases my role at this stage is limited to one of determining a question of principle.
It is clear from the CJEC judgment in Metallgesellschaft/Hoechst that United Kingdom subsidiaries of member state parents which paid ACT in circumstances where, if they had been permitted by United Kingdom domestic law to make group income elections, they would not have paid it are entitled to a remedy from the United Kingdom (represented in this connection by the Revenue), and that the remedy may be described as either restitution or compensation. In cases where the amount of ACT paid has later been set off against a liability to MCT, the restitution or compensation was to be calculated by reference to interest over the period from the date when the ACT was in fact paid until the later date when it was set off against MCT. In this judgment I refer to that period as 'the premature tax payment period': the basis of the CJEC's decision that United Kingdom law was in breach of the EC treaty was that the ACT system had the effect of compelling United Kingdom subsidiaries of parents in other member states to pay part of their corporation tax prematurely.
The main question of principle in this case is whether the calculation of interest over the premature tax payment period (or, as I think it may be more accurate to express it, the calculation of an amount equal to interest over the premature tax payment period) should be effected on the basis of compound interest, as Sempra contends, or on the basis of simple interest, as the Revenue contend. In my judgment it should be effected on the basis of compound interest (always assuming that it has been pleaded in that way). I will explain my reasons as this judgment progresses, but the key point is that a compound interest calculation will in principle result in full restitution or compensation, whereas a simple interest calculation would result only in partial restitution or compensation. In my judgment the decision of the CJEC requires full restitution or compensation, and therefore a calculation on a compound basis gives fuller effect to the decision than would a calculation on a simple basis.
There is a second question which has also been raised by the GLO and the pleadings. The decision of the CJEC in Metallgesellschaft/Hoechst shows that the entitlement to restitution or compensation crystallised when the amount prematurely paid by way of ACT was set off against a liability to MCT. So that is when the cause of action accrued. The main question addressed in this judgment concerns how the amount of restitution or compensation falls to be ascertained. But, whatever the amount of it may have been, the claimant seeks interest on it for what I will call 'the post-utilisation period', that is the period from the time when the cause of action crystallised until judgment. That is a different species of interest altogether from that to which the main question relates. It is not interest required by Community law. It is interest under domestic United Kingdom law, on the basis of the normal rule that there can be included in a judgment interest from the date when the cause of action...
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