Test Claimants in the FII Group Litigation v HM Revenue and Customs

JurisdictionEngland & Wales
CourtSupreme Court
JudgeLORD CLARKE,LORD WALKER,LORD SUMPTION,LORD DYSON,LORD HOPE,LORD BROWN,LORD REED
Judgment Date23 May 2012
Neutral Citation[2012] UKSC 19
Date23 May 2012

[2012] UKSC 19

THE SUPREME COURT

Easter Term

On appeal from: [2010] EWCA Civ 103

before

Lord Hope, Deputy President

Lord Walker

Lord Brown

Lord Clarke

Lord Dyson

Lord Sumption

Lord Reed

Test Claimants in the Franked Investment Income Group Litigation
(Appellants)
and
Commissioners of Inland Revenue and another
(Respondents)

Appellant

Graham Aaronson QC

Laurence Rabinowitz QC

David Cavender QC

(Instructed by Dorsey & Whitney (Europe) LLP)

Respondent

David Ewart QC

Rupert Baldry QC

Andrew Burrows QC

Kelyn Bacon

Sarah Ford

(Instructed by Solicitor for Her Majesty's Revenue and Customs)

Heard on 21, 22, 23, 27, 28 and 29 February 2012

LORD HOPE
1

Very substantial judgments have been prepared in this case by Lord Walker, Lord Reed and Lord Sumption, to each of which I pay tribute. I wish in this short introduction to do two things. First, I shall say a bit about the background, to assist the reader in understanding at the outset what the issues are and to provide a guide to the passages in those judgments where they are dealt with. Second, I shall indicate briefly what my opinion is on each of them. I will however have to say a bit more about the one issue on which the court is divided: the DMG remedy/section 320 issue: see para 11, below. As it raises a question of EU law and the division of opinion shows that the answer to it is not acte clair, it is plain that it will need to be the subject of a reference to the Court of Justice for a preliminary ruling under article 267 TFEU.

The proceedings
2

As Henderson J explained at the outset of his judgment [2008] EWHC 2893 (Ch), [2009] STC 254, para 1, the Franked Investment Income ("FII") Group Litigation with which these proceedings are concerned was established by a group litigation order on 8 October 2003. The test claimants are all companies which belong to groups which have UK-resident parents and also have foreign subsidiaries, both in the European Union and elsewhere. In the broadest terms, the purpose of the litigation was to determine various questions of law arising from the tax treatment of dividends received by UK-resident companies from non-resident subsidiaries, as compared with the treatment of dividends paid and received within wholly UK-resident groups of companies. The provisions giving rise to these questions related to the system of advance corporation tax ("ACT") and to the taxation of dividend income from non-resident sources under section 18 (Schedule D, Case V) of the Income and Corporation Taxes Act 1988 ("the ICTA") ("the DV provisions"). The relevant provisions of the ICTA have since been amended, ACT was abolished for distributions made on or after 5 April 1999 and the DV provisions were repealed for dividend income received on or after 1 April 2009. But the problems created by their existence in the past have not gone away.

3

The test claimants' case is that the differences between their tax treatment and that of wholly UK-resident groups of companies breached article 43 (freedom of establishment) and article 56 (free movement of capital) of the EC Treaty (now articles 49 and 63 of the Treaty on the Functioning of the European Union) and their predecessor articles, and that these breaches have caused them loss dating back, at least in some cases, to the accession of the UK to the European Economic Community signed at Brussels on 22 January 1972 and the introduction of ACT in April 1973. Their arguments are directed in part to issues of domestic law. But they are also directed to the extensive case law resulting from the application by the Court of Justice of the European Communities and, since the coming into force of the Lisbon Treaty, the Court of Justice of the European Union of principles of Community law to domestic tax systems, including an earlier reference in this case: Test Claimants in the FII Group Litigation v Inland Revenue Comrs ( Case C-446/04) [2007] STC 326. They raise difficult issues, and very large amounts of money are at stake. Henderson J was told that the maximum amount of the claims advanced in the FII Group Litigation was of the order of £5 billion.

4

The issues with which Henderson J had to deal were grouped by him under four headings: see [2009] STC 254, para 7. These were (1) the lawfulness of the UK rules imposing corporation tax on dividends received by UK parent companies from subsidiaries resident in other EU member states and, in some contexts, from subsidiaries in third countries, (2) the lawfulness of UK rules charging ACT on the onward distribution by UK-resident companies of dividend income received from such subsidiaries, (3) the lawfulness of rules applicable to dividends payable out of distributable foreign profits which permitted an election to be made to treat such income as foreign income dividends ("FIDs") and (4) a number of fundamental questions relating to remedies.

5

He held that it followed from the judgment of the ECJ under the earlier reference that the UK rules on corporation tax on overseas dividends were not compatible with Community law as regards dividends from subsidiaries resident in other member states, and that the UK legislative scheme as regards FIDs also breached Community law. A further reference was however required in relation to two of the issues relating to liability: paras 138, 197. As for the issues relating to remedies, it was common ground that two types of restitutionary remedies are available in domestic law: a claim for restitution of tax unlawfully demanded under the principle established in Woolwich Equitable Building Society v Inland Revenue Comrs [1993] AC 70 (" Woolwich"), and the claim for tax wrongly paid under a mistake which was recognised in Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs [2006] UKHL 49, [2007] 1 AC 558 (" DMG").

6

Henderson J held that, under the principle laid down in Amministrazione delle Finanze dello Stato v SpA San Giorgio ( Case 199/82) [1983] ECR 3595 (" San Giorgio"), EU law required there to be an effective remedy for monies paid in respect of the tax that was unlawfully charged. The test claims were properly to be classified in English law as claims in restitution based on a mistake of law. The Woolwich cause of action (which is now time-barred), for which mistake was not a necessary ingredient, was likely to play a subsidiary role in such cases: para 260. It was not open to the Revenue to rely on section 320 of the Finance Act 2004 (" Section 320 FA 2004") or section 107 of the Finance Act 2007 (" Section 107 FA 2007") to exclude DMG mistake claims, as these provisions purported to curtail the extended limitation period under section 32(1)(c) of the Limitation Act 1980 without notice and without providing any transitional arrangements to protect the right under Community law. But the test claimants had failed to establish any sufficiently serious breach to entitle them to damages.

7

The case then proceeded to the Court of Appeal (Arden, Stanley Burnton and Etherton LJJ): [2010] EWCA Civ 103, [2010] STC 1251. The various issues were made the subject of an agreed list which the court amended and to which it gave numbers. They were identified in an index at the beginning of the judgment, to which reference may be made. Issues 1 to 10 related to liability. Issues 11 to 23 were concerned with remedy. The Court of Appeal was divided as to the meaning of para 54 of the judgment of the ECJ with respect to one of the test claimants' submissions on liability, so it held that a reference should be made on that issue. On all but one of the other issues relating to liability it agreed with the judge. On four issues relating to remedy the appeal by the Revenue was allowed. Differing from the judge, it held that the Woolwich restitution remedy was a sufficient remedy as EU law does not require that there must also be a remedy based on mistake (issue 12); that the Woolwich restitution remedy met the requirements of EU law and was not affected by sections 320 FA 2004 and 107 FA 2007 (issues 20 and 21); and that section 33(2A) of the Taxes Management Act 1970 (" TMA") (issue 23), which excludes relief under that section where Case V corporation tax has been paid under a mistake, applied to an assessment based on a provision that infringed Community law as a conforming interpretation could be given to it. Issue 22, as to whether section 32(1)(c) of the Limitation Act 1980 applied to a Woolwich claim, was not argued before the judge. But it was argued before the Court of Appeal, which held that it could not be given that wider meaning.

8

Applications for permission to appeal to the Supreme Court were lodged by both parties. On 8 November 2010 the panel refused permission on the issue as to which the Court of Appeal decided that there should be a reference, and it remitted another issue relating to liability to the management judge to frame a reference on that point also. The time limit for making an application for permission on a number of other issues, including issue 22, was extended until the references had been determined by the ECJ and its rulings applied by the Court of Appeal. But permission to appeal was given on four issues relating to remedy: issues 12, 20, 21 and 23. Shortly before the hearing of the appeal permission was given to the claimants for issue 22 to be argued also.

The issues
9

The parties are agreed that the issues in the appeal are best expressed as follows:

  • "(1) Could Parliament lawfully curtail without notice the extended limitation period under section 32(1)(c) of the Limitation Act 1980 for the mistake cause of action ( section 320 FA 2004) and cancel claims made using that cause of action for the extended period ( section 107 FA 2007)? In particular:

    • (a) Would a Woolwich restitution remedy be a sufficient remedy for the repayment claims brought on the basis of EU law (Court of Appeal issue 12)?

    • (b)...

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