Deutsche Morgan Grenfell Group Plc v Inland Revenue & Anor

A claim in restitution for money paid under a mistake of law may be brought in respect of tax payments. The fact that tax was payable under domestic law when paid does not prevent a mistake where the payer failed to appreciate that a lawful election could have prevented the liability. Under section 32(1)(c) of the Limitation Act 1980, time begins when the mistake is discovered, or could with reasonable diligence have been discovered. Knowledge that another taxpayer is challenging the law does not itself amount to discovery of the payer’s mistake.

The claimant, a United Kingdom subsidiary within a German-headed group, paid advance corporation tax on dividends because the statutory group income election provisions appeared to exclude a parent resident outside the United Kingdom. Following Metallgesellschaft/Hoechst, the European court held that the restriction contravened Community law and that affected companies could pursue compensation or restitution.

The claimant sought restitution for payments made more than six years before proceedings, relying on mistake of law and section 32(1)(c) of the Limitation Act 1980. The issues were whether restitution for tax paid under mistake of law was available, whether the payments were made under such a mistake, and when limitation began.

1. Claim succeeded. Judgment was given for the claimant. Its restitutionary claims for the relevant advance corporation tax payments were not time-barred.

2. Following the majority decision in Kleinwort Benson v Lincoln City Council [1999] 2 AC 349, English law recognises restitution for money paid under a mistake of law. The observations concerning tax payments in Lord Goff’s speech did not establish that such a cause of action was unavailable for tax. They left open, at most, whether a settled-law defence might later be developed or enacted.

3. The payment of advance corporation tax was legally required at the time because no group income election was in force. The relevant mistake was instead the failure to appreciate that group income elections could be made with a parent company resident in another Member State. If that mistake had not been made, elections would have been submitted and the tax would not have been paid.

4. Knowledge from mid-1995 that another company was challenging the residence restriction did not amount to discovery of the claimant’s mistake. It disclosed only the existence of a disputed argument. The claimant still did not know that the elections were legally available. The third payment was also made under mistake, despite that knowledge, because the Revenue would have rejected any election at the time.

5. Section 32(1)(c) postponed limitation until discovery of the mistake. On the judge’s analysis, discovery occurred when the European court gave its decision, after proceedings had begun. Even on the alternative assumption that the mistake was discovered earlier, the original particulars claimed relief for all relevant payments; later schedule amendments supplied further detail and did not introduce new causes of action.

6. The suggested day-to-day accrual of limitation for interest-based relief was left undecided because it did not arise on the facts.

First-instance decision. The judgment records related Group Litigation Order proceedings and earlier test litigation, but no appeal from the present claim.