Test Claimants in the Franked Investment Group Litigation v Commissioners of the Inland Revenue;
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden |
| Judgment Date | 23 February 2010 |
| Neutral Citation | [2010] EWCA Civ 103 |
| Docket Number | Case No: A3/2009/0210; 0210(A); 0212 |
| Date | 2010 |
| Year | 2010 |
| Court | Court of Appeal (Civil Division) |
[2010] EWCA Civ 103
Lady Justice Arden
Lord Justice Stanley Burnton
and
Lord Justice Etherton
Case No: A3/2009/0210; 0210(A); 0212
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION)
MR JUSTICE HENDERSON
Royal Courts of Justice
Strand, London, WC2A 2LL
Graham Aaronson QC and David Cavender (instructed by Dorsey & Whitney) for the Claimants
David Ewart QC, Andrew Burrows QC, Jonathan Swift, Rupert Baldry, Kelyn Bacon and Sarah Ford (instructed by HMRC) for the Respondents
Hearing dates: 5, 6, 7, 8, 9, 12, 13, 14 and 15 October, 2009
| INDEX | |
| SECTION | PARAGRAPH |
| Introduction | 1–3 |
| Factual Background | 4–6 |
| An Overview of the Relevant Principles of Community Law | 7–9 |
| An Overview of the Opinion of the Advocate General and the Decision of the ECJ | 10–17 |
| Relevant Provisions of Domestic Law | 18 |
| An Overview of the Judgment of the Judge | 19–23 |
| Liability Issues | 24–130 |
| Issues 1–3: Case V charge: compatibility with Articles 43 and 56 | 25 |
| Issues 4 and 5: ACT: corporate tree points | 89 |
| Issue 6: ACT: conforming interpretation | 97 |
| Issue 7: ACT: surrender / equivalent relief | 110 |
| Issue 8: ACT: Question 4 in the Order for Reference | 114 |
| Issues 9 and 10: FID provisions | 116 |
| Remedy Issues | 131–268 |
| Issue 11: Remedies required by Community law | 132 |
| Issue 12: The remedies in English law (set off of ACT, group relief and management expenses) | 152 |
| Issue 13: Availability of restitutionary remedy (set off of ACT, group relief and management expenses) | 175 |
| Issue 14: Availability of restitutionary remedy: ACT levied on upstream parent | 185 |
| Issue 15 – 17: Change of position | 189 |
| Issue 18 and 19: Sufficiently serious breach | 196 |
| Issues 20 and 21: ss.320 of the Finance Act 2004 and 107 of the Finance Act 2007 | 217 |
| Issue 22: s.32(1)(c) of the Limitation Act 1980 | 230 |
| Issue 23: s.33 of the Taxes Management Act 1970 | 246 |
| Concluding Points | 269 – 270 |
| Annex 1: Relevant Provisions of the Treaty | Annex 1 |
| Annex 2: Extract from the judgment summarising relevant domestic tax law | Annex 2 |
| Annex 3: The differing analyses of (1) Arden and Stanley Burnton LJJ and (2) Etherton LJ on Issue 1 | Annex 3 |
| Annex 4: Section 320 of the Finance Act 2004 and section 107 of the Finance Act 2007 | Annex 4 |
INTRODUCTION
This is the judgment of the Court to which all members of the Court have contributed, on an appeal from the judgment of Henderson J dated 27 November 2008. There are cross-appeals from the Judge's judgment, but in this judgment we refer to an appeal, singular, rather than appeals, plural. The case is a lead case under a group litigation order. It raises important legal issues as to the compatibility of United Kingdom corporate taxation with certain principles of Community law derived from the EC Treaty ("the Treaty") and as to the liabilities of the Revenue to a taxpayer who has overpaid tax on the basis of incompatible United Kingdom legislation. These issues are also important in terms of the amounts at stake in these proceedings, which we are told may be as much as £5bn. Moreover, the determination of issues in the present proceedings will affect the decision in other pending proceedings. However, there have been a number of important legislative changes affecting the taxing provisions in issue in these proceedings since the payments of tax giving rise to these proceedings were made: in particular Advance Corporation Tax ("ACT") was abolished with effect from 6 April 1999 (section 31 Finance Act 1998), and since 1 July 2009 both foreign-source and domestic-source dividends have been exempt from corporation tax, subject to certain exceptions ( Finance Act 2009, sch. 14). This decision may therefore be mostly relevant to working out the consequences of what has been done in the past.
To put this appeal in its legal context, this case forms part of the extensive and ever-increasing body of case law springing from the application by the Court of Justice of the European Communities, now (following the coming into force of the Lisbon Treaty) the Court of Justice of the European Union ("the ECJ"), of principles of Community law to domestic tax systems. References in this judgment to Member States are to Member States of the European Union or of the European Economic Area ("EEA"). We are told that, for the purposes of the issues on this appeal, there are no relevant differences between the two groups of Member States. When we refer to Third Countries, we refer to countries which are neither members of the European Union nor members of the EEA.
The parties agreed a list of the issues on this appeal. We will answer each of those issues, but before we do so we set out (1) the factual background, which includes an earlier reference to the ECJ; (2) an overview of the opinion of the Advocate General and of the judgment of the ECJ on that reference; (3) an overview of the relevant principles of Community law; (4) relevant domestic law; and (5) an overview of the judgment of the Judge. The relevant provisions of the Treaty appear in Annex 1 to this judgment, in their form prior to the entry into force of the Lisbon Treaty. Following the coming into force on 1 December 2009 of the Lisbon Treaty the EC Treaty is now known as the Treaty on the Functioning of the European Union and the articles of the EC Treaty with which are concerned have been renumbered. However, in this judgment we continue to refer to the articles by their numbers in the EC Treaty, and to Community law rather than European Union law, as the appeal was argued on that basis.
FACTUAL BACKGROUND
We shall have to set out the relevant legislation in greater detail below (see paragraph [18] below), but the core rule under challenge in these proceedings is the basic rule of United Kingdom corporation tax that United Kingdom-resident companies are not subject to corporation tax on dividends received from other United Kingdom-resident companies, while dividends received from companies resident outside the United Kingdom are subject to corporation tax but carry the right to a credit equal to the amount of any foreign tax paid. There were various implications flowing from this dual exemption/credit system. Prior to 6 April 1999 a United Kingdom-resident company had to pay ACT on dividends which it paid to its shareholders (unless the payment was within a group of companies and a group income election had been made). It could, however, obtain a credit against its liability to ACT by reference to the amount of dividends it received from a United Kingdom-resident company called "franked investment income" ("FII"). A United Kingdom-resident company could not use income which it received from a company which was not resident in the United Kingdom in the same way. Companies receiving dividends from companies not resident in the United Kingdom built up substantial surpluses of unutilised ACT, that is to say, ACT which could not be set against any liability to pay tax. The FII rules were changed in 1994 and a new regime was introduced which enabled companies to elect that dividends which they received from non-resident companies should be designated as "foreign income dividends" ("FIDs"), in respect of which the ACT could be repaid if not utilised.
All but three of the Test Claimants (who we shall call "the Claimants") are members of the British American Tobacco group of companies ("BAT"). The Judge set out a statement of facts agreed between the parties and relating to the BAT test case and then summarised the evidence of various witnesses (the Judge's judgment, [29] to [38]). This contained details of the history of the group structure, the dividends it had paid or received within the group and the group's ACT surplus. It is not necessary for us to set out this information. In these proceedings the United Kingdom-resident company receiving a dividend directly from a company resident outside the United Kingdom has been referred to as a "United Kingdom water's edge company". The company resident in another Member State has been referred to on this appeal as the "EC water's edge company".
The procedural history of this case is dealt with in [1] to [6] of the Judge's judgment, and we need not repeat it. When the reference to the ECJ was made by the Chancery Division, Park J approved the questions and the order for reference (the "Order for Reference") setting out the facts and the questions to be decided. However, he did not give a judgment setting out his own opinion on the questions referred. The new Practice Direction supplementing CPR 68 (introduced in 2009 and currently to be found in the second supplement to Civil Procedure 2009) now makes it clear that the schedule to the order for a reference to the ECJ may include the opinion of the referring court. As we see it, the referring court should, where possible, briefly express its views on the answers to the questions which it is posing, for the assistance of the ECJ. This may also help to avoid ambiguity and to ensure that all the questions on which a response is required are answered by the ECJ.
AN OVERVIEW OF THE RELEVANT PRINCIPLES OF COMMUNITY LAW
The Treaty contains articles guaranteeing certain freedoms. References in this judgment to an "Article" should be understood to refer to an article of the Treaty unless there is...
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