The Trustees of the BT Pension Scheme v The Commissioners for HM Revenue and Customs (Respondents/Appellants)

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLord Justice Patten
Judgment Date09 July 2015
Neutral Citation[2015] EWCA Civ 713
Date09 July 2015
Docket NumberCase No: A3/2013/1211

[2015] EWCA Civ 713



Mr Justice Warren and Upper Tribunal Judge Timothy Herrington

[2013] UKUT 0105 (TCC)

Royal Courts of Justice

Strand, London, WC2A 2LL


Lord Justice Patten

Lord Justice Briggs


Sir Colin Rimer

Case No: A3/2013/1211


The Trustees of the BT Pension Scheme
The Commissioners for Her Majesty's Revenue and Customs

Mr Malcolm Gammie QC and Mr Conrad McDonnell (instructed by Pinsent Masons LLP) for the Trustees

Mr Rupert Baldry QC and Mr James Rivett (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Revenue

Hearing dates: 10, 11, 12, 16 and 17 June 2015

Lord Justice Patten



This is the judgment of the Court, to which all its members have contributed. It determines a series of related appeals and cross-appeals from the decision of the Upper Tribunal (Tax and Chancery Chamber) (Warren J and Judge Herrington) [2013] UKUT 0105 (TCC) which in turn dismissed appeals and cross-appeals from a decision of the Tax Chamber of the First-tiribunal (Sir Stephen Oliver QC and Julian Ghosh QC) [2011] UKFTT 392 (TC) which, with one exception, dismissed appeals by the Trustees of the BT Pension Scheme ("the Trustees") against decisions of HM Revenue & Customs ("HMRC") to disallow claims for payment of tax credits made by the Trustees in respect of tax years 1990/1991 through to 1997/1998 inclusive ("the relevant period").


The BT Pension Scheme ("the Scheme") is, and has at all material times been, an exempt approved scheme with UK resident trustees, with the consequence that it is exempt from tax on its investment income.


All the Trustees' claims for tax credits relate to dividend income received by the Scheme during the relevant period. Subject to one important exception, dividends received by UK taxpayers from UK resident companies gave rise to tax credits under a system of partial imputation designed to mitigate what would otherwise have been the double taxation of corporate profits, first by way of corporation tax in the hands of the company and secondly by way of income tax on the company's distribution of dividends to its shareholders. For the purposes of this introduction it is sufficient to summarise the essential features of this imputation scheme in the barest outline, by adopting the summary provided by Lewison LJ when determining a preliminary issue in these appeals in this Court (sitting with Longmore and Briggs LJJ) [2014] EWCA Civ 23, at paragraph 7:

"When a UK-resident company paid a dividend to its shareholders it had to pay an amount of advance corporation tax ("ACT") to the Revenue. The rate of ACT was initially linked to the basic rate of income tax, and subsequently the lower rate. Thus, when the basic rate of income tax was 25%, the ACT rate was 25/ 75 (or 1/3) of the amount of the distribution. The company which paid the ACT was in due course entitled to set that ACT against its corporation tax liability for its annual accounting period. Individual shareholders were liable to income tax on dividends received. Their liability arose under Schedule F (that is, section 20 of ICTA). The ACT paid by the company was "imputed" to the shareholders. What this meant was that the measure of the shareholder's income for tax purposes was the aggregate of the dividend plus the ACT which the company had paid to the Revenue. However, the shareholder was entitled to a tax credit for the amount of the ACT that had been imputed to him in this way; and that tax credit went to reduce his own liability to tax. In some cases the procedure might result in the Revenue making a payment to the claimant. The overall objective was to prevent double taxation: once in the hands of the company and once again in the hands of the shareholder."


The most important aspect of these arrangements from the perspective of exempt pension schemes was that, to the extent that such tax credits exceeded their own income tax liability (which it usually did because such pension schemes had minimal, if any, taxable income) they were entitled to payments of the tax credits by HMRC or its predecessor the Commissioners of Inland Revenue (collectively "the Revenue"), so that the credits formed an important part of the income of such schemes. The credits were, in the jargon used by counsel on this appeal, "payable tax credits". The right to payment of the excess of such tax credits over the Trustees' income tax liability was conferred by s. 231 of the Income and Corporation Tax Act 1988 (" ICTA"), in the following terms:

"(1) Subject to sections 247 and 441A, where a company resident in the United Kingdom makes a qualifying distribution and the person receiving the distribution is another such company or a person resident in the United Kingdom, not being a company, the recipient of the distribution shall be entitled to a tax credit equal to such proportion of the amount or value of the distribution as corresponds to the rate of advance corporation tax in force for the financial year in which the distribution is made.


(3) A person not being a company resident in the United Kingdom, who is entitled to a tax credit in respect of a distribution may claim to have the credit set against the income tax chargeable to his income under section 3 or on his total income for the year of assessment in which the distribution is made and, subject to subsections (3A) to (3D) below, where the credit exceeds that income tax, to have the excess paid to him."


During the relevant period, the Trustees regularly claimed and received payable tax credits in respect of the dividend income of the Scheme, subject to two important exceptions. The first is implicit in the requirement in s. 231(1) that the company paying the dividend be resident in the United Kingdom. No such tax credits were payable in relation to the dividend income received from foreign companies. Nonetheless, since such income was investment income of the Trustees, they incurred no income tax liability in relation to it.


The second important exception related to what are called "foreign income dividends" ("FIDs"), namely dividends paid by an English resident company which it elected to attribute to income received by it from foreign subsidiaries. The FIDs regime was introduced by amendment to ICTA with effect from July 1994. We will have to explain its purpose and effect in a little more detail in due course but, for the purposes of this introduction, it is sufficient to say only that the receipt of a FID by a shareholder in a UK resident parent company did not entitle the shareholder to a tax credit to which s. 231(1) and (3) applied. Rather, the shareholder was merely entitled to treat that income as already having borne tax at the lower rate. The practical result was that shareholders with sufficient income tax liability to absorb that credit by way of set-off were no worse off in relation to FIDs than in relation to other dividend income from UK resident companies, but exempt shareholders such as the Trustees were worse off because they were not entitled to receive payable tax credits.


Both the ACT imputation regime and the FIDs regime were abolished in relation to distributions made on or after 6 th April 1999. At no time prior to their abolition was it perceived that the exceptions for foreign dividends and FIDs might offend against any principles, rights or freedoms conferred by what we will loosely refer to as EU law. But since the end of the relevant period, developments in the jurisprudence of the Court of Justice of the European Union ("the ECJ") have given rise to claims that those exceptions offend against two fundamental freedoms established by the EC Treaty ("the Treaty") and in force during the relevant period, namely the freedom of establishment (conferred by Article 43) and the right to free movement of capital, originally conferred by the Directive (88/361/EEC) and re-conferred by Article 56. Taking the two exceptions in the order in which the jurisprudence of the ECJ first focussed upon them, the denial of tax credits in relation to foreign dividend income was identified as potentially incompatible with the free movement of capital in Proceedings brought by Manninen ( Case C-319/02) [2005] Ch 236 (" Manninen"), in September 2004. The potential incompatibility with free movement of capital constituted by the FIDs regime was first identified by the ECJ in December 2006 in Test Claimants in the FII Group Litigation v Inland Revenue Commissioners ( Case C-446/04) [2007] STC 326 (" FII (GLO) ECJ").


The Manninen case was brought by a fully taxable (i.e. not exempt) Finnish taxpayer, and related to the difference in his tax treatment in Finland upon dividends paid to him by companies respectively in Finland and Sweden. The FII case was brought by UK resident parent companies making FIDs elections in respect of dividends attributable to income from foreign subsidiaries, of which the test claimant was British American Tobacco ("BAT"). The FII case was, therefore, unlike the Manninen case, specifically about the UK tax legislation in issue on these appeals.


By the time when these decisions became public knowledge, the period during which the UK's tax treatment of dividend income had been actually or potentially in conflict with EU rights and freedoms had long since ended. Furthermore the six-year limitation period for bringing claims for relief from tax (running, subject to irrelevant exceptions, from the end of the tax year in...

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