Taxpayers’ Supreme Court Victory in Long-running “FII GLO” Tax Case Brings Prospect of £5bn Tax Refunds from HM Treasury Closer
Taxpayers in the Franked Investment income (“FII”) Group Litigation today won in the UK Supreme Court in the latest round of this long-running litigation, but a decision to make a further reference to the Court of Justice of the European Union (“CJEU”) means that a conclusive victory remains elusive.
The majority of the Supreme Court supported the taxpayers’ arguments that their right to recover any tax wrongly paid should extend back to 1973, but a lack of consensus among the panel has lead to a further reference being made to the CJEU – already considering the substantive issues in the case. More positively for the taxpayers, the Supreme Court has unanimously rejected HMRC’s arguments that retrospective blocking legislation introduced in Finance Act 2007 prevented certain of the taxpayers’ claims from being brought.
Chris Morgan, Head of EU Tax at KPMG said, “This is good news for taxpayers and brings the prospect of £5bn of tax refunds from HM Treasury closer. However, the final decision rests with the CJEU.
“However tough today’s Supreme Court ruling sounds in the current economic climate, it is the right decision legally. The old ACT rules meant that the claimants had effectively made an interest free loan to the Government with no repayment date. This decision means the ‘loans’ may eventually be repaid.”
The UK rules governing claims for overpaid corporation tax were changed with effect from 1 April 2010, broadly limiting the period in which claims could be made to 4 years. This means that for many companies today’s decision will only be of historic interest – although the significant sums of tax at stake are certain to attract attention.
Claims to recover non-direct tax (for example, stamp duty reserve tax) may be affected by the final decision on these points, however, and companies with such claims will follow the progress of the case back to Europe with interest.
This long running litigation concerns the compatibility with European law of certain aspects of the UK tax regime for company distributions. The key areas of dispute surround the levying of advance corporation tax (“ACT”) and the taxation of non-UK dividends received by UK resident companies.
Although already considered once by the CJEU in 2006 many of the substantive issues were subsequently referred back to the CJEU by the UK courts. A decision on these aspects of the case is expected to be released in June this year.
In parallel to the reference to the CJEU, however, the UK courts have been considering a number of points of procedure and remedies under UK domestic law. These points primarily relate to the time limits for claims to be brought, with the taxpayer arguing that it is open to them to claim back any tax unlawfully deducted since 1973. Ultimate success on this point would increase the estimated aggregate potential value of the claims from well under £1 bn to around £5 bn. Whilst ancillary to the substantive questions of the compatibility of the UK’s tax rules with European law, the points are therefore highly significant to the parties.
The limitation period
Member states are required to provide an effective restitutionary remedy for the repayment of charges levied in breach of European law. Such claims are typically referred to as “San Giorgio” claims.
It has been common ground between the parties that under UK common law there are two types of restitutionary claim potentially relevant to the case. The first is a claim for restitution of tax unlawfully demanded, that is a claim made under the principle established by the House of Lords in Woolwich Equitable Building Society v IRC (referred to as a “Woolwich” claim). The second is a restitutionary claim for tax wrongly paid under a mistake of law.
The latter form of claim is potentially much more attractive to a taxpayer it is (or was as the law stood) subject to an extended time limit for bringing the claim. It is this extended time limit that gives the possibility of claiming back all tax unlawfully levied since 1973; a Woolwich claim in contrast only allows for recovery of tax levied within the previous 6 years.
In Finance Act 2004 and Finance Act 2007 the then UK Government introduced legislation effectively blocking taxpayers from taking advantage of the extended time limits when seeking to recover tax wrongly paid under a mistake of law. In order to avoid this outcome the taxpayers have sought to establish two points:
- Firstly, that an ordinary Woolwich claim does not itself provide a sufficient remedy under European law (i.e. does not in isolation fulfil the requirement for the taxpayers to have a San Giorgio claim available) and that a “mistake” claim must also therefore be available.
- Secondly, that in restricting the ability to make a “mistake” claim without any transitional period, the UK Government has restricted the taxpayers’ EU right in a way which is itself in breach of European law, and that the restrictions are therefore ineffective.
The High Court held that a Woolwich claim was not a sufficient remedy and that the restrictions on “mistake” claims were therefore unlawful, opening the door to claims running back to 1973. The Court of Appeal closed this door, deciding that a Woolwich claim did provide a sufficient remedy and that the restrictions on “mistake” claims were therefore lawful.
The majority of the Supreme Court agreed with the taxpayers that both forms of claim were necessary, but as it was not possible to reach a unanimous decision the Court has determined that a further reference to the CJEU will be required.
The taxpayers will take comfort from the fact that the majority of Supreme Court accepted their arguments, although the decision to refer the point to the CJEU means that victory remains uncertain. More positively, however, the Supreme Court unanimously agreed that the legislation included in Finance Act 2007 retrospectively preventing the extended time limits applying to “mistake” claims brought before 8 September 2003 could not lawfully be applied to block these claims.
Effect of statutory “error or mistake” claims
For an overpayment of tax “by reason of some error or mistake in a return” a statutory mechanism exists to allow relief to be claimed. Both the High Court and the Court of Appeal accepted that for the purposes of UK domestic law this was intended to provide an exclusive regime. In other words, if the claim was of a type dealt with by this statutory mechanism then it was not generally possible for the taxpayer to instead seek a common law remedy, whether for tax paid under a mistake of law or on Woolwich principles.
In the periods to which the claims relate, this statutory mechanism applied only to tax “paid under an assessment”. It was agreed that ACT was not “paid under an assessment” and that therefore a statutory “error or mistake” claim could only have been made for the tax which the taxpayers argued had wrongly been imposed on dividends received from outside the UK.
HMRC sought to establish that in respect of this aspect of the claim, the only remedy available to the taxpayers was that offered by the legislation and that the claims for a common law remedy must therefore fail.
In the High Court this argument was rejected, on the basis that the remedy offered by a statutory claim fell short of what was required for a San Giorgio claim. The Court of Appeal, however, concluded that it was possible to give a conforming interpretation to the rules governing the statutory “error or mistake” claim, such that these rules would (exclusively) apply to the relevant aspects of the taxpayers’ claims.
On this issue the Supreme Court has sided with the taxpayers, rejecting the possibility of giving a conforming interpretation to the UK rules and instead concluding that these simply cannot apply to the taxpayers’ claims. Accordingly the taxpayers remain able to pursue common law remedies for all aspects of their claims.