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

JurisdictionEngland & Wales
Judgment Date27 November 2008
Neutral Citation[2008] EWHC 2893 (Ch)
Docket NumberCase No: HC03C02223 & OTHERS
CourtChancery Division
Date27 November 2008
The Test Claimants in the Fii Group Litigation
The Commissioners for Her Majesty's Revenue & Customs

[2008] EWHC 2893 (Ch)


The Honourable Mr Justice Henderson

Case No: HC03C02223 & OTHERS



Mr Graham Aaronson QC and Mr David Cavender (instructed by Dorsey & Whitney) for the Claimants

Mr David Ewart QC, Mr Rupert Baldry, Ms Kelyn Bacon and Ms Sarah Ford (instructed by the Solicitor for HMRC) for the Defendants

Hearing dates: 7, 8, 9, 10, 14, 15, 16, 17, 18, 21, 22, 23 and 24 July 2008

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.



Introduction 1—11

The Legislative Background 12—28

The Factual Background 29—38

I. Is the charge to tax under Case V of Schedule D compatible with Community law? 39—66

II. Article 56 EC and third country dividends 67-109

(1) Introduction 67—73

(2) Is it open to a UK company in receipt of dividends from a third country subsidiary to rely on Article 56? 74—85

(3) Article 57 and the introduction of the EUFT rules 86–109

III. Questions relating to ACT 110–163

(1) The “corporate tree” points 110–141

(2) The effect of the incompatibility with Community law of the ACT provisions142–153

(3) The ACT surrender point 154–163

IV. The FID regime: compatibility with Articles 43 and 56 164–191

(1) The legislative background 164–172

(2) The decision of the ECJ on Question 4 173–177

(3) The “corporate tree” points 178–179

(4) Third country FIDs and Article 57(1) 180–191

V. Remedies 192–302

(1) Introduction192–219

(2) The guidance given by the ECJ 220–235

(3) Restitution or damages? 236–276

(4) The FID enhancements: findings of fact 277–302

VI. Defences: (A) Change of position 303–352

(1) Introduction 303–308

(2) The pleaded defence 309–310

(3) Lipkin Gorman 311–322

(4) Later authority 323–334

(5) Discussion 335–348

(6) The evidence of Mr Ramsden 349–352

VII. Defences: (B) Sufficiently serious breach 353–404

(1) Introduction 353–356

(2) The guidance given by the ECJ 357–362

(3) Factortame No. 5363–375

(4) Evidence 376–393

(5) Discussion and conclusions 394–404

VIII. Defences: (C) Limitation 405–439

(1) Introduction 405–413

(2) The relevant principles of Community law 414–418

(3) Discussion 419–431

(4) Section 33 of TMA 1970 432–439

IX. Summary of conclusions 440–450

Mr Justice Henderson

Mr Justice Henderson:



The Franked Investment Income (“FII”) Group Litigation with which this judgment is concerned was established by a Group Litigation Order (“GLO”) made by Chief Master Winegarten on 8 October 2003. The claimants are all companies which belong to groups which have UK-resident parents and also have foreign subsidiaries, both in the European Union (the “EU”) and elsewhere (“third countries”). In the broadest terms, the purpose of the FII GLO was to determine a number of common or related questions of law arising out of the taxation 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 claimants argued that there were unjustified differences between the taxation treatment of UK companies with resident and non-resident subsidiaries respectively, which breached the provisions of Article 43 (freedom of establishment) and Article 56 (free movement of capital) of the EC Treaty and their predecessor articles, and which had caused them loss dating back (in at least some cases) to the accession of the UK to the EU in 1972 and the introduction of the advance corporation tax (“ACT”) regime in April 1973.


The system of UK corporate taxation relating to dividends which underlies the FII Group Litigation is the same as that which gave rise to the well-known decision of the Court of Justice of the European Communities (“the ECJ”) in the Hoechst case ( Metallgesellschaft Ltd v IRC, Hoechst AG v IRC (joined cases C-397/98 and C-410/98), [2001] ECR I-1727, [2001] Ch 620) and the spate of litigation which has followed it, including the landmark decisions of the House of Lords in Deutsche Morgan Grenfell Group Plc v IRC [2006] UKHL 49, [2007] 1AC 558 (“DMG”) and Sempra Metals Ltd v IRC [2007] UKHL 34, [2007] 3WLR 354 (“Sempra Metals”). That litigation has been managed in England under a different GLO, namely the ACT Group Litigation Order. Whereas the focus of the ACT Group Litigation was on the UK domestic legislation which prevented UK-resident subsidiaries of foreign parents from making group income elections, thereby obliging them to pay ACT when paying dividends to their foreign parents, the focus in the FII Group Litigation has been on UK-parented groups with foreign subsidiaries, and on the tax treatment of dividends coming into the UK from abroad. At the simplest level, therefore, the present litigation is concerned with factual situations which are the opposite of those which gave rise to the questions considered in Hoechst and the ACT Group Litigation.


On 28 June 2004 the trial of selected test claims in the FII Group Litigation began before Park J, but it was immediately apparent that a preliminary reference to the ECJ would be needed on the numerous issues of Community law arising in the case. Without delivering a formal judgment, Park J directed that a reference be made to the ECJ and asked the parties to agree an order for reference setting out the facts and questions to be decided. The order was eventually made on 13 October 2004 (“the Order for Reference”), following detailed consideration of its terms by the parties and Park J. As well as setting out the questions on which the ECJ was asked to rule, the Order for Reference contained a useful statement of the legal and factual background to the case upon which I shall draw later in this judgment.


On 6 April 2006 the Advocate General (Geelhoed) delivered his opinion, and on 12 December 2006 the ECJ gave its judgment on the reference ( Case C-446/04, Test Claimants in the FII Group Litigation v CIR, [2006] ECR I-11753, [2007] STC 326). Much of my judgment will be devoted to a detailed examination of the opinion of the Advocate General and the judgment of the ECJ. The case is notable, not only for its length and complexity, but also for the number of issues on which the ECJ differed, or arguably differed, from the opinion of the Advocate General. The decision does not lend itself to brief summary, but in general terms the claimants succeeded in many of their central complaints about the ACT regime, the Revenue was also successful on some important points, and a number of issues were left to be decided by the English court, including a crucial factual issue which will determine whether or not the UK corporation tax regime for taxation of foreign dividends under Case V of Schedule D is compatible with Community law, and some very important questions relating to remedies.


At a subsequent case management conference held on 5 July 2007 before Rimer J (as he then was), who had succeeded Park J as the judge designated to manage the FII Group Litigation, it was directed that the test claims should proceed to trial of all the issues in the FII GLO, including liability for restitution, “save in so far as those issues concern causation or quantification”. All issues relating to liability were therefore to be decided at the forthcoming trial, with questions of causation and quantum deferred for subsequent determination. Detailed directions were also given for service of amended pleadings and preparation for trial, including a direction for agreement of a list of questions to be decided by the court.


I do not think it would be useful to give a detailed synopsis of the pleadings and the issues at this stage, because what the parties mainly need is the decision of the court on questions of principle which can be stated in fairly abstract terms, without reference to the particular underlying facts. The pleadings play an essential role in defining the issues and laying the necessary factual foundations for the questions of law which have to be decided, but in group litigation of this nature the pleadings tend to recede into the background once the stage of trial has been reached. What I propose to do instead is to set out the basic legal background, and then to describe the factual background only to the limited extent necessary to explain how the main issues of law arise. I will then deal with the issues in the same general order as they were argued before me, and when questions of fact need to be determined I will explain what they are at the appropriate juncture and make my findings accordingly.


It may be helpful, however, if I say by way of introduction that the questions put to the ECJ, and the questions which I now have to decide, may be grouped under four broad headings:

(1) The first heading concerns 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 resident in third countries.

(2) The second heading concerns the lawfulness of the UK rules which charge ACT on the onward distribution by UK-resident companies of dividend income which they have received from subsidiaries resident in other member states, and (again in some contexts) from subsidiaries resident in third countries.

(3) The third heading concerns the lawfulness of new rules introduced with effect from 1 July 1994 which altered the UK taxation regime applicable to dividends paid...

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    ...v Dass [2019] EWCA Civ 360, CATest Claimants in the FII Group Litigation v Revenue and Customs Comrs (formerly Inland Revenue Comrs) [2008] EWHC 2893 (Ch); [2009] STC 254; [2012] UKSC 19; [2012] 2 AC 337; [2012] 2 WLR 1149; [2012] Bus LR 1033; [2012] 3 All ER 909; [2012] STC 1362, SC(E)Test......
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    • Singapore Academy of Law Journal No. 2018, December 2018
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