The Prudential Assurance Company Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Henderson |
| Judgment Date | 26 January 2015 |
| Neutral Citation | [2015] EWHC 118 (Ch) |
| Docket Number | Case No: HC-2014-000553 (Formerly: HC03C01346) |
| Court | Chancery Division |
| Date | 26 January 2015 |
[2015] EWHC 118 (Ch)
Mr Justice Henderson
Case No: HC-2014-000553 (Formerly: HC03C01346)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Rolls Building
Royal Courts of Justice
Fetter Lane, London, EC4A 1NL
Mr Jonathan Bremner (instructed by Joseph Hage Aaronson LLP) for the Claimant
Mr David Ewart QC and Ms Barbara Belgrano (instructed by the General Counsel and Solicitor to HMRC) for the Defendants
Hearing dates: 20 and 21 October 2014
Introduction
The purpose of this judgment is to resolve some outstanding questions of principle which have emerged in the working out of the order dated 28 January 2014 ("the January 2014 Order") which I made after hearing argument on consequential matters on that date, following the handing down of my judgment in the present case ("the Main Judgment") on 24 October 2013 after the resumed trial of the action over five days from 15 to 19 July 2013: see Prudential Assurance Co Ltd and Another v HMRC [2013] EWHC 3249 (Ch), [2014] STC 1236.
The present judgment should be read as a sequel to the Main Judgment. I will therefore give no further explanation of the complex subject matter of the case, apart from saying that it concerns issues of liability and quantification arising from the alleged or established invalidity under EU law of various aspects of the UK legislation which governed the taxation of "portfolio dividends" (i.e. dividends derived from holdings of less than 10% of the shares in the companies concerned) paid by companies resident either in the EU, or elsewhere in the world ("third countries"), to corporate shareholders resident in the UK. The issues all arise in the context of the CFC and Dividend Group Litigation. The test claimant is a company in the Prudential Insurance group. The periods in dispute run from 1990 to 2009.
In general, I will use the same definitions and abbreviations in this judgment as I did in the Main Judgment. For the reasons given in the Main Judgment at [2], I there referred to my earlier judgment in the present claims in 2010 as Portfolio Dividends (No.1). For consistency, I have elsewhere referred to the Main Judgment as Portfolio Dividends (No. 2): see, in particular, Littlewoods Retail Ltd and Others v HMRC [2014] EWHC 868 (Ch), [2014] STC 1761, and Test Claimants in the FII Group Litigation v HMRC [2014] EWHC 4302 (Ch), as yet unreported, ("FII (High Court) II") in which I handed down judgment on 18 December 2014. Adopting the same nomenclature, the present judgment will therefore be Portfolio Dividends (No. 3).
In paragraph 7 of the January 2014 Order, I gave directions for the calculation of the quantum and payment of the successful test claim. Pursuant to those directions, the claimant ("Prudential") provided its calculations quantifying the claim on 21 February 2014, together with an Explanatory Note explaining the methodology employed. HMRC then made requests for further information and documentation on 21 March 2014, to which Prudential responded on 4 April 2014, enclosing updated calculations. HMRC then provided their calculations on quantification on 2 May 2014, including a document entitled "Skeleton of Recalculation Methodology" which summarised their approach. Thereafter, the parties continued to discuss the issues both in correspondence and at a meeting held on 8 September 2014. A large measure of agreement was reached in relation to the underlying facts and identification of the outstanding issues, and a draft List of Issues was prepared.
Until shortly before the hearing before me, which took place over two days on 20 and 21 October 2014, the issues still potentially in contention were reflected in sets of rival computations filed by Prudential on 6 October 2014 and by HMRC on 26 September 2014 respectively. The areas of dispute appeared to relate to the following questions of principle:
a) Prudential's entitlement to recover compound interest;
b) the question of jurisdiction (in accordance with Autologic principles) where lawful ACT was utilised against unlawful mainstream corporation tax ("MCT");
c) the 1990 to 1993 accounting periods;
d) calculation of the required credit under section 231 of ICTA 1988;
e) tracing;
f) utilisation of unlawful ACT;
g) late payment interest; and
h) the treatment of excess FII carried back within the same accounting period.
In the light of HMRC's skeleton argument for the hearing, it was apparent that HMRC had decided to concede at least one of the issues (namely (b) above), and that there might also be no real disagreement in relation to issue (a). Further clarification and agreement was then reached on several other points during the hearing itself, with the result that the number of questions which I now have to resolve has been substantially reduced. I asked the parties to prepare an updated List of Issues accordingly, which was provided to me on 3 November 2014. I will use that document ("the List of Issues") as the basis for my judgment, and where the parties have been able to agree how a question should be answered, I will record what the agreed answer is.
Prudential was represented at the hearing by junior counsel alone, Mr Jonathan Bremner, who performed his task with conspicuous ability. HMRC were represented by Mr David Ewart QC and Ms Barbara Belgrano. I am grateful to all counsel, and to those instructing them, for the assistance which I was given.
Issue 1: compound interest
Paragraph 4 of the January 2014 Order states that:
"The amounts of restitution [ of unlawfully exacted tax paid by mistake] are to be calculated on a compound interest basis computed on the conventional government rate for all periods including the period from payment to judgment or from payment to utilisation and therefrom to judgment."
Issue 1 asks whether that order applies to claims for unlawful corporation tax paid in accounting periods which remain open, i.e. which are the subject of an ongoing enquiry by HMRC which has not yet been closed. The accounting periods which remain open are those from and including the period ended 31 December 1994.
It is now common ground that the answer to this question is Yes. In the Main Judgment, I decided that all of the successful restitution claims for unlawfully levied MCT and ACT carry compound interest as part of the restitution to which the claimant is entitled: see [194] to [247]. This entitlement is one of substantive law, and is unaffected by the procedural question whether the accounting period in which the unlawful tax was paid happens to remain open. The relevance of the latter question goes to a different point, namely whether the High Court should give immediate judgment for the restitution claimed (including the compound interest), or whether equivalent relief should be granted in due course (in respect of the open periods) when the relevant proceedings before the Tax Chamber of the First-tier Tribunal are determined. In other words, the question in relation to the open periods is not whether Prudential is entitled to compound interest as part of its successful restitutionary claims, but rather when, and by which court or tribunal, that entitlement should be translated into an order for payment of the relevant amounts.
Until the hearing, Prudential and its advisers appear to have been under the misapprehension that HMRC were in some way seeking to reopen the substantive question of liability to compound interest in respect of the open periods. I can understand how this impression might have been gained from HMRC's skeleton argument, which did not state as explicitly as it might have done that no challenge was made (otherwise than by appeal) to my conclusion that all of the restitutionary claims carried compound interest. The misunderstanding was, however, cleared up at an early stage of the hearing, as a result of which it became common ground (as I have already said) that Issue 1 must be answered in the affirmative.
Issue 2: lawful ACT utilised against unlawful MCT
The agreed formulation of this Issue reads as follows:
"Where lawfully incurred ACT has been utilised against an unlawful corporation tax liability arising in an open accounting period, is the claim to be regarded from the date of purported utilisation to amount to a claim for the recovery of unlawfully levied tax in the form of ACT or corporation tax?"
This is the question which HMRC expressly conceded in their skeleton argument. It is now agreed that the answer to it is that such a claim "is a claim in restitution for the repayment of unlawfully levied tax in the form of ACT". As such, it is a claim which can only be pursued as a restitution claim in the High Court.
Issue 3: accounting periods ending 31 December 1990 to 1993
The only live question under this heading is Issue 3(a), which asks whether the claimants are able to prove from the evidence before the court at trial the foreign nominal rates of tax ("FNRs") applicable during these four accounting periods. Three further questions under Issue 3 were not pursued by Mr Ewart in his oral submissions, and it is now agreed that they do not need to be answered.
In [108] to [111] of the Main Judgment I dealt with the element of the tax credit required by EU law which represents the relevant FNR. I briefly described the work performed by Prudential for this purpose, as set out in the second witness statement of Nicola Hine, who was then a trainee solicitor at Dorsey & Whitney (Europe) LLP, and in the tables appended to her statement. Subject to a few exceptions relating to periods later than those with which I am now concerned, I stated in [109] my understanding that "a nominal rate was … ascertained by her for each relevant country...
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