Test Claimants in the Franked Investment Income Group Litigation & Others v Commissioners of Inland Revenue

JurisdictionEngland & Wales
CourtSupreme Court
JudgeLord Hamblen,Lord Sales,Lord Hodge,Lord Reed,Lord Briggs
Judgment Date23 July 2021
Neutral Citation[2021] UKSC 31

[2021] UKSC 31

Supreme Court

Trinity Term

On appeals from: [2010] EWCA Civ 103 and [2016] EWCA Civ 1180


Lord Reed, President

Lord Hodge, Deputy President

Lord Briggs

Lord Sales

Lord Hamblen

Test Claimants in the Franked Investment Income Group Litigation
Commissioners for Her Majesty's Revenue and Customs


David Ewart QC

Jennifer MacLeod

Elizabeth Wilson

Barbara Belgrano

Frederick Wilmot-Smith

(Instructed by HMRC Solicitor's Office (Bush House))

Test Claimants

Graham Aaronson QC

Jonathan Bremner QC

(Instructed by Joseph Hage Aaronson LLP)

Heard on 7, 8, 9 and 10 December 2020

Lord Hodge

Lord Reed AND( with whom Lord Briggs, Lord Sales and Lord Hamblen agree)


This is the third occasion on which important legal questions arising out of the Franked Investment Income Group Litigation (“FII Group Litigation”) have come before this court. As we explain more fully below, the questions of law arise out of 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.


As the issues which have been raised in this appeal are disparate, involving both issues of principle and issues relating to the quantification of the claimants' claims, and in view of the length of the judgment, it may be helpful to explain at the outset how the judgment is structured. The matters raised on these appeals are dealt with in the following order:

(1) General introduction (paras 3–9).

(2) Overview of the tax provisions (paras 10–20).

(3) The history of the proceedings (paras 21–51).

(4) Matters determined by agreement between the parties following the decision of this court in Prudential Assurance Co Ltd v Revenue and Customs Comrs [2018] UKSC 39; [2019] AC 929 (paras 52–57).

(5) Res judicata, issue estoppel, no jurisdiction and abuse of process (paras 58–84).

(6) Whether and on what basis the claimants are entitled to recover interest for tax which they have paid prematurely (paras 85–118).

(7) The nature of the remedy required by EU law in respect of the set off of group relief and management expenses (paras 119–159).

(8) Whether the revenue were enriched as a matter of English law taking into account the interaction of ACT with shareholder credits and whether EU law precluded an argument that the revenue were not enriched by reason of that interaction (paras 160–193).

(9) Does it make any difference that the UK group had a non-resident parent which received double taxation treaty credits? (paras 194–200).

(10) Are the DV provisions permitted by virtue of the standstill provisions of article 57(1) (now article 64(1) of the TFEU) in light of the Eligible Unrelieved Foreign Tax Rules? (paras 201–222).

(11) When and to what extent unlawfully charged ACT should be regarded as surrendered (paras 223–232).

(12) Summary and conclusions (paras 233–234).

1. General Introduction

The FII Group Litigation was established by the FII Group Litigation Order (“the FII GLO”) made on 8 October 2003. Since then the Group Litigation has been conducted against the backdrop of perhaps unprecedented developments in the law both domestically and on the plane of the law of the European Union, some of which have been the product of this group litigation.


Under the FII GLO certain claims were selected as test claims and the remaining claims were stayed. The questions which arise in these appeals concern the claims made by various members of the British American Tobacco group (“BAT”), which have been the test claimants for many of the claims in the FII Group litigation. A question also arises in relation to an application by seven claimants enrolled in the FII Group Litigation for summary judgment for the restitution of unlawfully levied tax which we discuss in paras 50–51 below. There is also a question which relates to a claim by FCE Bank plc (“FCE”), a UK registered company which was and is part of the worldwide group of companies ultimately owned by the Ford Motor Company of Michigan, United States of America.


The questions concern now-repealed provisions of the Income and Corporation Taxes Act 1988 (“ ICTA”) which provided for the system of advance corporation tax (“ACT”) under section 14 and Part VI (“the ACT provisions”) and the taxation of dividend income from non-resident sources under section 18 (Schedule D, Case V) (“the DV provisions”). 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.


The principal claims in the FII GLO which are the subject of these appeals are claims for the repayment of tax insofar as it was unlawful under EU law. The test claimants claim that the differences in their tax treatment and that of wholly UK-resident groups of companies breached the provisions of article 43 (freedom of establishment) and article 56 (free movement of capital) of the EC Treaty (“EC”) and their predecessor articles (now articles 49 and 63 of the Treaty on the Functioning of the European Union (“TFEU”)). In this judgment we refer to the provisions of the TFEU, which should be read as including the predecessor provisions. The claims date back to the accession of the UK to the EU in January 1973 and the introduction of ACT in April of that year. As in our judgment of November 2020 we use expressions such as “the EU” and “EU law” anachronistically to include earlier incarnations of what is now known as the EU. We also refer to judgments on references as being made by the Court of Justice of the European Union (“CJEU”) whether it or its predecessor court, the European Court of Justice, handed down those judgments. The test claimants also advanced a claim for damages in accordance with the principles of EU law established in Francovich v Italy (Case C-479/93) [1995] ECR I-3843, given effect in our domestic law in R v Secretary of State for Transport, Ex p Factortame (No 5) [2000] 1 AC 524. As we record below, the damages claim failed at first instance. It forms no part of this appeal.


As this court explained more fully in its recent judgment ( Test Claimants in the Franked Investment Income Group Litigation v Revenue and Customs Comrs [2020] UKSC 47; [2020] 3 WLR 1369) there have been several other sets of proceedings that have raised issues which also arise in the FII Group Litigation. The ACT Group Litigation addresses UK legislation which prevented UK-resident subsidiaries of foreign parent companies from making group income elections, obliging them to pay ACT when they paid dividends to their foreign parents. The Controlled Foreign Companies (“CFC”) and Dividend Group Litigation concerns claims that the treatment of dividends paid by foreign subsidiaries to UK-resident companies was contrary to EU law, which are similar to those in the FII GLO, but relate to “portfolio” holdings of less than 10% of the shares of the relevant companies (“the portfolio dividends GLO”). The Foreign Income Dividends (“FID”) Group Litigation concerns claims by pension funds or life companies that the absence of a tax credit in respect of foreign income dividends, in contrast to domestic dividends, is contrary to EU law. There are also the Littlewoods proceedings concerning claims to restitution based on the payment of VAT which was paid under a mistaken understanding of EU law. Huge amounts of money have been at stake and have resulted in every arguable point being taken. There has as a result been a very protracted series of related proceedings which have driven the development of both English law and EU law.


Among the developments of English law was the decision of the House of Lords in Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Inland Revenue Comrs [2007] UKHL 34; [2008] AC 561 (“ Sempra Metals”). This decision, which was reached in the ACT Group Litigation, was to the effect that compound interest was payable on the amounts awarded by the court, whether in damages or in restitution. More recently, this court has refined its approach to restitutionary claims. The first case was Investment Trust Companies v Revenue and Customs Comrs [2017] UKSC 29; [2018] AC 275, a test case concerned with the restitution of VAT charged incompatibly with EU law. Thereafter, in Littlewoods Ltd v Revenue and Customs Comrs [2017] UKSC 70; [2018] AC 869, this court held that common law claims to restitution of VAT, together with any right to compound interest based on Sempra Metals, had been effectively excluded by the statutory provisions governing the recovery of VAT. Significantly, this court also held that the CJEU had recognised that an award of compound interest was not necessary in order to comply with the EU principle of effectiveness. In 2018, this court, having regard to Investment Trust Companies, held that Sempra Metals had been incorrectly decided in that it required compound interest to be paid on restitutionary awards, and departed from it: Prudential Assurance Co Ltd v Revenue and Customs Comrs [2018] UKSC 39; [2019] AC 929 (“ Prudential”). In that case this court held (para 73) that no claim arose in unjust enrichment for the time value of money to the restitution of which the claimant was legally entitled: “[t]here is no right to interest on the basis of unjust enrichment: failure to pay a sum which is legally due is not a transfer of value, and does not give rise to an additional cause of action based on unjust enrichment.” Prudential was a case in the portfolio dividends GLO. We will return to the decisions in Sempra Metals and Prudential, and the consequences of the latter decision for the FII Group Litigation, in section 6 of this judgment.


Before addressing the substantive questions of law raised in this appeal it may be helpful to give a brief...

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