The full version of this article was first published by Tax Journal on 3 September 2021. View the original (behind a paywall) here.
On 23 July 2021, the Supreme Court has handed down its third judgment in the Test Claimants in the Franked Investment Income Group Litigation v HMRC  UKSC 31, which concerns the tax treatment of dividends received by UK resident companies from their non-UK resident subsidiaries. In its latest judgment, the Supreme Court determined, inter alia, a number of issues as a matter of principle relating to issue of liability and quantification of claims, which it is to be hoped will allow for settlement of these long running claims. Given the sums involved however, and if history is any guide to the future, litigation may well ensue because, for example, FNR DTR credit could be available for third-country dividends received after 31 March 2001.
Before turning to the court’s latest decision, it is necessary to set it in context given the significant and, at times, ground-breaking decisions to date.
The FII group litigation concerns the tax treatment of dividends received by UK resident companies from their non-UK resident subsidiaries, as compared with the treatment of dividends paid and received within wholly UK resident groups of companies. More specifically, the FII group litigation concerns now obsolete provisions of the Income and Corporation Taxes Act 1988 (ICTA), which provided for a system of advance corporation tax (ACT) and the taxation of dividend income from non-resident sources (the DV provisions). The ACT regime was abolished in 1999.
The claimants’ claim the differences between their tax treatment and that of wholly UK-resident groups of companies breached the EU treaty provisions, which guarantee freedom of establishment and free movement of capital. As a result, they seek repayment by HMRC of the tax wrongly paid together with interest dating back to the UK’s entry to the EU in 1973. Significant sums of tax are at stake. The amounts are so large – estimated to run into the tens of billions of pounds (exact figures are unknown) – that various legislation has been introduced seeking to curtail potential claims and, in the case of (compound) interest, seeking to tax such awards.
Over almost 18 years, the FII group litigation has reached the Court of Appeal three times, the Court of Justice of the European Union (CJEU) three times and the Supreme Court three times (with the 23 July 2021 decision being its third).
There have been several other separate proceedings concerning the compatibility of the UK’s previous tax regime with EU law, raising issues that also arise in the FII group litigation, such as the law of restitution, entitlement to interest, and limitation. These proceedings have collectively driven the development of both English and EU law.
Supreme Court judgments to date
In its judgment of 23 May 2012 ( UKSC 19), the court tackled several issues. The main issues for determination were:
- whether the availability of claims for the repayment of unlawfully levied tax in accordance with the principle set out in the House of Lords decision in Woolwich Equitable Building Society v IRC  AC 70 was a sufficient remedy, and
- the application of s 32(1)(c) Limitation Act 1980 to a ‘Woolwich claim’ (named after the Woolwich decision referred to above).
Under English law, remedies essentially come under two types of restitutionary claims:
- a Woolwich claim;
- a ‘DMG claim’ (based on the House of Lords decision in Deutsche Morgan Grenfell Group plc v IRC  UKHL 49) (“DMG”).
The first is a claim for restitution of tax unlawfully demanded, whereas the second is a restitutionary claim for tax wrongly paid under a mistake of law. A significant potential difference between the two arose in respect of the applicable limitation period, ie whether, in the case of a Woolwich claim, the six-year limitation period running from the date of the relevant payment applied, or whether the extended limitation period provided by s 32(1)(c), which starts six years from the date when the taxpayer discovered or could with reasonable diligence have been discovered the mistake, could be said to apply.
The court held that both Woolwich and DMG restitutionary claims should be available to claimants seeking repayment of tax paid contrary to EU law. The court decided that Woolwich claims are subject to a six-year limitation period running from the date of the relevant payment and that it could lie in the absence of a demand. However, for a claim to fall within the ambit of s 32(1)(c), a mistake must constitute an essential element of the cause of action and not merely form part of the context. Thus, a Woolwich claim does not benefit from the extended limitation period under s 32(1)(c).
Limitation of actions
In its second judgment of 20 November 2020 ( UKSC 47), the court again focused on the issue of the limitation of actions and, in particular, on the application of s 31(1)(c). Restitutionary claims for the recovery of money are normally subject under English law to a limitation period of six years from the date the cause of action accrued. For the claimants, more than six years had passed between the date the tax was paid (and the right to its recovery therefore accrued) and the date the claims were brought. Therefore, a large element of their claims, together with interest on it over decades, was potentially time-barred.
The only way around that problem was to rely on s 32(1)(c), which applies to an “action for relief from the consequences of a mistake”. This postpones the commencement of the limitation period until a plaintiff claimant has discovered the mistake or could, with reasonable diligence, have discovered it.
Having held that HMRC was not estopped from arguing that s 32(1)(c) should not apply to mistakes of law, the two main questions considered were: whether s 32(1)(c) should apply to mistakes of law and, if so, what is the test of discoverability of the relevant mistake of law?
By a majority of four to three, the court held that s 32(1)(c) does apply to mistakes of law. This was essentially because, while not contemplated at the time, the language of the provision was sufficient to include such actions. To hold otherwise would frustrate the purpose of the provision, which was to relieve a claimant from complying with a limitation period at a time when they could not be reasonably expected to do so.
As to the issue of discoverability, the court unanimously held that it should depart from the decision of the House of Lords in DMG in relation to s 32(1)(c). In the DMG case, the House of Lords held that where a point of law is disputed, a mistake is discovered (or could reasonably be discovered) when a judicial decision authoritatively establishes the true state of the law. The outcome of DMG, for current purposes, was that it effectively allowed ACT claims to be brought for restitution of tax paid as far back as 1973, provided the claim had been issued prior to 8 September 2003.
The court, in overruling the decision of the House of Lords in DMG, held that the limitation period to bring a mistake of law claim under s 32(1)(c) began when the claimants discovered, or with reasonable diligence could have discovered, they had a worthwhile claim. While it can be seen, as the court noted, that this brings the test into line with other existing tests, for example, for fraud, the decision marks a fundamental shift. It is likely to prevent significant difficulties for claimants.
The latest Supreme Court judgment
In this third decision, the court considered a somewhat disparate range of issues involving issues of principle and issues relating to the quantification of the claimants’ claims.
The first two issues concerned the award of interest on a claim for restitution representing the time value of ACT unlawfully charged, which had been subsequently utilised against lawfully charged mainstream corporation tax (MCT).
For this ACT, there was a premature payment of tax lawfully due. These issues were potentially of significant value to the claimants, given the potential for an award of compound interest on claims relating back to 1973. The first issue concerned whether HMRC was barred from contesting that the award of interest should not be on a compound basis. At an earlier stage of the litigation, HMRC had accepted that the restitution should consist of compound interest. It was accepted by the claimants that in the absence of the concession by HMRC, the relevant award of interest would be on a simple and not compound basis.
The claimants argued that HMRC was barred from denying their entitlement to compound interest under various legal principles, such as res judicata (ie, that the claim was precluded as it had already been decided), issue estoppel and abuse of process. Unsurprisingly, the court rejected all these arguments. In line with its decision in Prudential Assurance Company Ltd v HMRC  UKSC 29, it allowed HMRC to withdraw its concession on this point.
In reaching its decision, the court kept in mind the complex and evolving legal backdrop to the litigation and the fact that relevant issues had been decided after HMRC gave the concession.
The second issue concerned whether, as the claimants contended, an award of simple interest should be calculated under s 35A Senior Courts Act 1981 or, as HMRC contended, s85 Finance Act 2019. The importance of this was again related to the issue of limitation, as an award under s85 is subject to a six-year limitation period. While recognising that under EU law, unlike domestic law, an award of interest can give rise to a separate claim, the fundamental problem with the claimants’ position was that, following Prudential, a claim for interest is not restitutionary in nature. As such, the court held that the claimants were limited to an award of interest under s85. This significantly reduces the period over which interest is claimable.
Several other issues were considered and determined by the court. See the full article for an analysis of these.
Where does this leave us?
It is likely that as a result of the court’s third judgment (and those previously), the value of the claimants’ claims have been significantly curtailed, although they will still require the payment of billions of pounds by the Exchequer. It is hoped this is now the beginning of the end, with the parties able to quantify their claims for the purposes of settlement without further recourse to litigation. We expect HMRC to provide updated guidance on settling FII claims in line with the court’s latest judgment. However, given the amounts concerned, and if history is any indicator of the future, who is to say further litigation will not ensue.
Given that the latest Supreme Court judgment dealt primarily with matters of principle and not the logistics of quantification, the judgment may not be the endgame for either the FII group litigation or other taxpayers not part of the FII group. Taxpayers with unresolved issues concerning overseas dividend taxation, including third-country dividends and the use of DTR (and other) relief, should consider, with their advisors, the practical implication of the judgment in respect of their quantifications. This is because, for example, where taxpayers have excess foreign nominal rate (FNR) credits due to the utilisation of reliefs (such as group relief and management expenses), taxpayers could arguably rely upon the free movement of capital in relation to the DV provisions regime. Thus, an FNR DTR credit could be available for third-country dividends received after 31 March 2001.
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