The Test Claimants in the Franked Investment Income Group Litigation v The Commissioners of HM Revenue and Customs

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLord Justice Underhill
Judgment Date24 November 2016
Neutral Citation[2016] EWCA Civ 1180
Docket NumberCase Nos: A3/2015/0774 & A3/2016/0575

[2016] EWCA Civ 1180

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT

CHANCERY DIVISION

Mr Justice Henderson

HC03C02223 and others

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

THE CHANCELLOR OF THE HIGH COURT

( Lord Justice Vos)

Lord Justice Underhill

and

Lord Justice David Richards

Case Nos: A3/2015/0774 & A3/2016/0575

Between:
The Test Claimants in the Franked Investment Income Group Litigation
Appellants
and
The Commissioners of her Majesty's Revenue and Customs
Respondents
And Between
Evonik Degussa UK Holdings Limited and Others
Appellants
and
The Commissioners of Her Majesty's Revenue and Customs
Respondents

Mr David Ewart QC, Mr Rupert Baldry QC, Mr Andrew Burrows QC (Hon), and Ms Barbara Belgrano (instructed by the Solicitor's Office, HM Revenue & Customs) for Her Majesty's Revenue and Customs

Mr Graham Aaronson QC, Mr Tom Beazley QC, and Mr Jonathan Bremner (instructed by Joseph Hage Aaronson LLP) for The Test Claimants and Evonik Degussa

Hearing dates: 15–16, 20–23, 27–30 June 2016

Approved Judgment

INDEX

Para Number

PART I: INTRODUCTION AND BACKGROUND

(A) General Introduction

1–6

(B) Procedural History

7–27

(C) The Shape of this Judgment

28–32

PART II: THE TAXATION ISSUES

(A) The Corporation Tax Regime

33–44

(B) The Case V Tax Issues

45–130

Issue 1

45–87

Issue 2

88–115

Issue 3

116–125

Issue 4

126–130

(C) The Advance Corporation Tax Issues

Issue 5

131

Issue 6

132

Issue 7

133–134

Issue 9

135–166

Issue 10

167–192

PART III: THE REMEDIES ISSUES

Preliminaries

193–195

(A) Introduction to the Remedies Debate

196–227

(B) The Enrichment Issues

228–273

Set-Off

Issue 15

231–242

Issue 17

243–255

"Actual Benefit"

Issue 22

264–266

Issue 23

267–273

(C) Change of Position

274–312

Issue 19

274–285

Issue 20

286–312

(D) Effect of EU Law

313–356

Issues 18, 21 and 24

313–356

(E) Conclusion on Remedies Issues

337–345

PART IV: THE DISCOVERABILITY ISSUE

Issue 28

346–377

CONCLUSION

378

Lord Justice Underhill (giving the judgment of the Court):

I: INTRODUCTION AND BACKGROUND

(A) GENERAL INTRODUCTION

1

The present appeal and cross-appeal (with two associated applications for permission to appeal) are the most recent stage in the long-running Franked Investment Income ("FII") group litigation. The litigation arises out of the way in which, under the regime in force until 5 April 1999, advance corporation tax ("ACT") and corporation tax under Schedule D Case V were charged on dividends received by UK-resident companies from non-resident subsidiaries. The original test Claimants in the litigation are all UK-resident companies in the British American Tobacco ("BAT") group; but they have since been joined, in respect of specific issues, by companies in the Ford and GKN groups. We will refer to them simply as "the Claimants". The Respondents are the Commissioners for Her Majesty's Revenue and Customs ("HMRC").

2

The Claimants' case in the litigation is, in bare outline:

(a) that the way in which ACT and corporation tax V were charged on such dividends was in breach of EU law – specifically of article 49 (formerly article 43) and article 63 (formerly article 56) of the Treaty on the Functioning of the European Union (for convenience, we refer in this judgment to articles 49 and 63 to cover both the original and replacement articles);

(b) that as a result they are entitled as a matter of EU law to a remedy, including but not limited to the repayment by HMRC of the amount of the tax wrongly paid, under the principles established by the decision of the European Court of Justice 1 in Amministrazione delle Finanze dello Stato v SpA San Giorgio ( Case 199/82) [1983] ECR 3595 (" San Giorgio");

(c) that as a matter of domestic law such a remedy can be afforded not only by a claim based on the fact that the tax was not due (a so-called " Woolwich claim" – see Woolwich Equitable Building Society v Commissioners of Inland Revenue [1993] AC 70) but also by a claim based on the fact that the tax was paid in the mistaken belief that it was due (a "mistake-based claim" – see Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners [2006] UKHL 49, [2007] 1 AC 558 (" DMG")), with the result that they can take advantage of the extended limitation period under section 32 (1) (c) of the Limitation Act 1980.

3

All those points have been authoritatively decided in the Claimants' favour at the previous stages of this litigation. The result is that they are in principle entitled to repayment and associated relief in relation to payments made by them as far back as the commencement of the ACT regime in 1973. The issues before us are concerned partly with certain specific defences which HMRC wish to invoke in relation to all or part of the claims and partly with their quantification.

4

The procedural history is complicated and has already involved two decisions of this Court, a decision of the Supreme Court, and no fewer than three decisions of the CJEU. We give a bare summary below, but the story is further complicated by the existence of other litigation – the so-called Portfolio Dividends group litigation and a claim brought by the Littlewoods group of companies – which raises overlapping issues. In all three cases the assigned judge has most recently been Henderson J, and it is against a judgment of his that this appeal lies.

5

The amounts at stake in the litigation are very large. As appears below, the outcome of the test claims is that HMRC have been ordered to pay the BAT Claimants over £1.184 billion. It is not yet known what amounts will be payable, subject to this appeal, in the other FII cases; but at an earlier stage in the litigation Henderson J recorded that the total amount potentially payable was some £5 billion.

6

HMRC were represented by Mr David Ewart QC, Mr Rupert Baldry QC, Mr Andrew Burrows QC and Ms Barbara Belgrano. The Claimants were represented by Mr Graham Aaronson QC, Mr Tom Beazley QC, and Mr Jonathan Bremner.

( B) THE PROCEDURAL HISTORY

(1) The Test Claims

7

The procedural history has been elaborately explained in earlier decisions. For present purposes all we need do is set out the bare minimum necessary to explain how the issues which we have to decide arise.

8

BAT commenced proceedings on 18 June 2003. A group litigation order was made for the FII cases on 8 October 2003.

9

On 11 October 2004 Park J made an order for the reference of certain questions raised by the FII litigation to the CJEU ("the first CJEU reference"). The Grand Chamber gave its judgment on 12 December 2006 ( case C-446/04), [2006] ECR I-11753, (" FII CJEU1"). It followed from its judgment that the ACT regime did indeed contravene EU law in some respects and that the Claimants were entitled to a remedy in accordance with the principles established in the San Giorgio decision. But the judgment left a number of points affecting both liability and remedy for resolution by the domestic court.

10

On 5 July 2007 Rimer J directed a trial of "all … issues raised by the test claims, including liability for restitution, save in so far as those issues concern causation or quantification of the Claimants' claims", on the basis that the excluded issues would be determined so far as necessary at a second hearing. That split has been labelled by way of shorthand as being between "liability" and "quantification"; but that is not quite accurate in as much as the "liability trial" would consider issues of principle affecting remedy.

11

The liability trial took place before Henderson J in July 2008. His judgment was handed down on 27 November 2008 – [2008] EWHC 2893 (Ch), [2009] STC 254 (" FII HC1"). We need not attempt to summarise his decision here. Broadly speaking, he decided most, but not all, of the various issues in favour of the Claimants. On two issues he held that a further reference to the CJEU was necessary.

12

HMRC appealed to the Court of Appeal. The Claimants cross-appealed on the issues on which it had lost. The appeal was heard by Arden, Stanley Burnton and Etherton LJJ in October 2009. 23 issues were identified – ten relating to liability and thirteen to remedy. The Court's judgment was handed down on 23 February 2010 – [2010] EWCA Civ 103, [2010] STC 1251 2 (" FII CA1"). Again, it is unnecessary to attempt a summary of its decision. It dismissed most of the challenges to Henderson J's decision, but it allowed HMRC's appeal on four points. In particular, it held that the Claimants could not advance a mistake-based claim in addition to a Woolwich claim: this had the result that the ordinary six-year limitation period would apply. On one further point relating to liability it held that a reference to the CJEU was required.

13

Both parties appealed to the Supreme Court. On 8 November 2010 the Court refused permission to appeal against the Court of Appeal's decision as regards the reference to the CJEU, and it identified a further liability issue on which a reference was required. It extended time for appealing as regards the remainder of the liability issues until after the Court of Appeal's decision following the reference. The Claimants were given permission to appeal on some of the remedy issues. Those issues included an issue as to the effect of legislation – specifically, section 320 of the Finance Act 2004 and section 107 of the Finance Act 2007 – which was designed to limit or preclude recovery on the...

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