Sempra Metals Ltd. v Inland Revenue & Anor

Restitution or compensation required by Community law for the premature payment of corporation tax must provide full restoration of the loss of use of the money. Where the remedy is measured by a conventional market interest rate, compound interest is required over the period between payment and utilisation of the tax. The calculation should generally use the same conventional rate for claimants rather than their individual investment returns or borrowing costs. Interest after utilisation is a separate, ancillary claim under domestic law. Under Supreme Court Act 1981, s.35A, that interest is simple interest.

The claimant, a United Kingdom subsidiary of a German parent, had paid advance corporation tax on dividends because domestic law prevented a group income election for groups with non-United Kingdom parents. The Court of Justice had held that this breached the freedom of establishment and that an effective remedy, including compensation for the loss of use of the money, had to be available. The High Court was asked to determine two issues of principle: whether the remedy for the premature tax payment period should be calculated using simple or compound interest, and whether interest from utilisation of the tax until judgment should also be compounded.

1. Remedy for premature payment. The entitlement to restitution or compensation arose from Community law. The interest-equivalent amount for the period between payment of advance corporation tax and its set-off against mainstream corporation tax represented the claimant’s primary loss, rather than ancillary interest. Domestic rules that would prevent recovery of interest without an outstanding principal debt could not defeat the remedy.
2. Conventional basis. The amount should be calculated by reference to prevailing market interest rates on a conventional basis. It should not ordinarily depend on evidence of the particular claimant’s profitability, investment returns or borrowing arrangements. The same conventional rate should in principle be used for claimants collectively, although the appropriate rate and compounding intervals remained to be resolved.
3. Compound interest. Full restoration of equal treatment required compound interest over the premature tax payment period. Simple interest would leave the company that had paid tax prematurely in a worse position than a comparable company that had retained the money until its corporation tax became due. This conclusion applied irrespective of whether the claimant had been in surplus or borrowing, and was not altered by subsequent changes in its ordinary business financing.
4. Unutilised tax. The fact that interest on repaid unutilised advance corporation tax might be governed by the simple-interest provision in s.35A did not justify applying that domestic rule to utilised tax. The court also expressed doubt whether the entitlement in unutilised-tax cases was governed solely by s.35A.
5. Post-utilisation interest. Interest from the date when the cause of action crystallised on utilisation of the tax until judgment was ancillary interest under domestic law. It therefore fell within s.35A of the Supreme Court Act 1981 and could only be simple interest.