The Test Claimants in the FII Group Litigation v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Henderson |
| Judgment Date | 18 December 2014 |
| Neutral Citation | [2014] EWHC 4302 (Ch) |
| Docket Number | Case No: HC03C02223 & Others |
| Court | Chancery Division |
| Date | 18 December 2014 |
[2014] EWHC 4302 (Ch)
Mr Justice Henderson
Case No: HC03C02223 & Others
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Rolls Building,
Royal Courts of Justice
Fetter Lane, London, EC4A 1NL
Mr Graham Aaronson QC, Mr Tom BeazleyQC andMr Jonathan Bremner (instructed by Joseph Hage Aaronson LLP) for the Claimants
Mr David Ewart QC, Mr Rupert BaldryQC, Professor Andrew BurrowsQC (Hon), Ms Kelyn BaconQC, Mr Oliver ConollyandMs Barbara Belgrano (instructed by the General Counsel and Solicitor to HMRC) for the Defendants
Hearing dates: 6–9, 13, 14, 16, 19, 22, 23 May, 3–6, 11, 12 June 2014
| Topic | Para |
| I. Introduction | 1–10 |
| II. The factual and legal background | 11–19 |
| III. Calculation of the unlawful Schedule D Case V tax | 20–115 |
| (1) Issue 1: in what respects was the Case V charge unlawful under EU law? | 20–40 |
| (2) Issue 2: what is the appropriate Foreign Nominal Rate ("FNR")? | 41–58 |
| (3) The relevant FNRs: issues of fact | 59–62 |
| (4) Issue 3: special cases | 63–102 |
| (a) Participation exemptions, and the GKN test claim | 64–74 |
| (b) The Henri Wintermans sale | 75–80 |
| (c) Belgian co-ordination centres | 81–90 |
| (d) German "silent partnership" profits | 91–98 |
| (e) Arenson Group Plc | 99–102 |
| (5) Issue 4: how should the lawful Case V charge be computed? | 103–115 |
| (a) Grossing up | 104–108 |
| (b) At what stage should credit be given for withholding tax? | 109–115 |
| IV. Calculation of the unlawful ACT | 116–214 |
| (1) Introduction | 116–121 |
| (2) Issue 5: does EU law require a credit to be given within the ACT computation for underlying tax as well as for tax at the FNR? | 122–124 |
| (3) Issue 6: does EU law require credit also to be given against ACT for withholding tax? | 125–128 |
| (4) Issue 7: how is the lawful ACT to be calculated? | 129–139 |
| (5) Issue 8: how is the FNR in respect of which credit must be given to be determined? | 140 |
| (6) Issue 9: how should ACT paid by UK companies be linked with EU-source income to give effect to the judgments in FII (ECJ) I and FII (ECJ) II? | 141–171 |
| The "CT61" method | 151–155 |
| The "FID" method | 156–163 |
| The Revenue's method | 164–171 |
| (7) Issue 10: FIDs | 172–190 |
| (8) Issue 11: utilisation of unlawful ACT | 191–206 |
| (9) Issue 12: carry-back of excess FII in a single accounting period ("AP") | 207–211 |
| (10) Issue 13: under the CT61 method, how are EU section 231 credits received in an AP to be attributed to quarterly ACT payments made in that AP? | 212–214 |
| V. Other issues of principle | 215–245 |
| (1) Issue 14: must credit for foreign corporation tax incurred upon the profits of foreign branches be given against ACT? | 215–225 |
| (2) Issue 15: does it make any difference that the UK group had a non-resident parent which received double taxation treaty credits? | 226–241 |
| (3) Issue 16: do any further adjustments need to be made to the claimants' calculations? | 242–245 |
| VI. Remedies | 246–471 |
| (1) Introduction | 246–251 |
| (2) The restitution required by EU law | 252–263 |
| (3) Issue 17: taking into account the interaction of ACT with shareholder tax credits, were the Revenue enriched as a matter of English law and, if so, to what extent? | 264–287 |
| (4) Issue 18: is the Revenue's argument that they were not enriched by reason of the interaction between ACT and shareholder tax credits precluded by EU law? | 288–289 |
| (5) Change of position: introduction | 290–308 |
| (6) Why is change of position not available in English law as a defence to Woolwich claims? | 309–315 |
| (7) Issue 19: is a change of position defence available to the Revenue as a matter of principle under English law in respect of the claimants' mistake claims? | 316–341 |
| (8) Issue 20: have the Revenue made out a defence of change of position on the facts? | 342–399 |
| (9) Issue 21: are the Revenue precluded from relying on a change of position defence by EU law? | 400–407 |
| (10) Actual benefit: introduction | 408–415 |
| (11) Issue 22: is the Revenue's "actual benefit" argument available to them in respect of the claimants' mistake claims under the English law of unjust enrichment? | 416–420 |
| (12) Issue 23: if it is available, is the "actual benefit" argument made out on the facts? | 421–424 |
| (13) Issue 24: is the "actual benefit" argument permitted by EU law? | 425–430 |
| (14) Issue 25: what is the measure of restitution due to the claimants? | 431–435 |
| (15) Issue 26(a): simple or compound interest? | 436–448 |
| (16) Issue 26(b): what interest rates and rests are to be applied? | 449–450 |
| (17) Issue 27: in respect of which periods do the claimants have valid Woolwich claims? | 451 |
| (18) Issue 28: when did the claimants discover (or when could they with reasonable diligence have discovered) their mistake? | 452–470 |
| (19) Issue 29: what is the quantum of restitution to which the BAT claimants are entitled? | 471 |
I. Introduction
The trial of the test claims of UK-resident companies in the British American Tobacco ("BAT") group, within the litigation proceeding under the Franked Investment Income ("FII") group litigation order ("GLO") originally made in the Chancery Division of the High Court on 8 October 2003, embarked on its Odyssey over ten years ago when, in June 2004, Park J directed that a reference be made to the European Court of Justice ("the ECJ"). The order for reference was dated 13 October 2004, and the Grand Chamber of the ECJ gave its judgment on 12 December 2006 (" FII (ECJ) I", Case C-446/04, [2006] ECR I-11753, [2012] 2 AC 436 (Note), [2007] STC 326).
With the benefit of the guidance given by the ECJ, the resumed trial of all issues relating to liability (but not causation or quantification) in the BAT test claims took place before me in July 2008. I had meanwhile succeeded Rimer J, who had himself succeeded Park J, as the designated managing judge of the FII GLO. The trial lasted for 13 days, most of which were devoted to complex legal argument, although I also heard factual and/or expert evidence on some important issues, including the defence of change of position (to the claimants' restitutionary claims) and the question whether a sufficiently serious breach of EU law by the UK had been established to ground liability for damages in accordance with the Factortame criteria. I handed down my judgment, to which I will refer as "FII (High Court) I", on 27 November 2008: see Test Claimants in the FII Group Litigation v HMRC [2008] EWHC 2893 (Ch), [2009] STC 254. The judgment was unavoidably lengthy, running to 450 paragraphs. The order giving effect to it was dated 12 December 2008.
Since then, there have been the following main developments in the FII group litigation.
(1) The appeals and cross-appeals from my judgment and order were heard by the Court of Appeal over nine days in October 2009. The court delivered its judgment on 23 February 2010 (" FII (CA)", [2010] EWCA Civ 103, [2010] STC 1251). The judgment of the court (Arden, Stanley Burnton and Etherton LJJ) ran to 270 paragraphs, with four annexes. The Court of Appeal's order was dated 19 March 2010. The schedule to it helpfully lists the 23 issues of law which had been raised in the appeals.
(2) As a result of the Court of Appeal's judgment, and directions given by the Supreme Court in October 2010 when considering applications by both sides for permission to appeal from the decision of the Court of Appeal, a further reference was made to the Court of Justice of the European Union (as the ECJ had by then become; but I will continue to use the abbreviation "ECJ" to refer to the Court both before and after the entry into force of the Treaty of Lisbon on 1 December 2009). The order for reference was made on 20 December 2010, and the Grand Chamber delivered its judgment on 13 November 2012 (" FII (ECJ) II", Case C-35/11, [2013] Ch 431, [2013] STC 612). The main purpose of this second reference to the ECJ was to clarify certain aspects of the guidance which the Court had given on the first reference.
(3) Meanwhile, in February 2012 the Supreme Court heard argument over 6 days on a number of issues relating to remedies on which it had granted permission to appeal. The Supreme Court delivered its judgment on 23 May 2012 (" FII (SC)", [2012] UKSC 19, [2012] 2 AC 337). The issues considered by the Supreme Court raised complex and important questions of both EU and domestic law, to which a helpful introduction may be found in the judgments of Lord Hope of Craighead at [9] to [10] and Lord Walker of Gestingthorpe at [34] to [41].
(4) A crucial issue of EU law on which the Supreme Court was divided concerned the extent, if at all, to which EU law protected the test claimants' mistake-based claims, and the related question whether the limitation period for bringing such claims had been validly curtailed by section 320 of the Finance Act 2004. In view of this disagreement, all members of the court were agreed that a further (third) reference needed to be made to the ECJ. The order for reference was duly made on 25 July 2012, and the Third Chamber of the Court delivered its judgment on 12 December 2013 (" FII (ECJ) III", Case C-362/12, [2014] AC 1161, [2014] STC 638).
(5) The result of this judgment was to make it clear beyond argument that section 320 of the 2004 Act was invalid, at least in so far as it had purported to curtail the limitation period for the test claimants' mistake-based claims to recover corporation tax and advance corporation tax ("ACT") levied contrary to EU law. Since the Supreme Court had already held that the further curtailment of such claims introduced by section 107 of the Finance Act 2007 was invalid under EU law because...
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