Sempra Metals Ltd v Inland Revenue & Anor

Where tax has been paid prematurely in breach of Community law, the national court must provide full compensation for the resulting loss of use of the money. Domestic rules cannot restrict or exclude the effective remedy required by Community law.

If compensation is calculated using a commercial borrowing rate fixed on the assumption that interest is paid or accrued periodically, the interest must be compounded at the corresponding periodic rests. Applying that rate as simple interest would disregard an inherent feature of the rate and ordinarily undervalue the loss. The same principle applies whether the prematurely paid tax was subsequently utilised or remained unutilised.

The Revenue appealed from an order made by Park J on 16 June 2004 in a test case under a group litigation order. The proceedings followed a ruling of the Court of Justice that the United Kingdom's advance corporation tax regime infringed article 52 of the EC Treaty by denying a group income election where a United Kingdom subsidiary's parent was established in another member state.

The claimant had paid advance corporation tax which was subsequently set off against mainstream corporation tax. Park J held that compensation for the loss of use of the money during the premature tax payment period should be calculated using compound interest. The Revenue challenged that conclusion but did not challenge the award of simple interest for the later post-utilisation period.

The central issue was whether full compensation, calculated conventionally by reference to a common market borrowing rate, required simple or compound interest.

1. Appeal dismissed, subject to a variation of the order. Chadwick LJ, with whom Laws LJ and Jonathan Parker LJ agreed, held that Community law required full compensation for the loss caused by premature payment of advance corporation tax. The measure was the interest accrued during the premature tax payment period.

2. The national court had to restore the taxpayer to the position it would have occupied had the tax not been paid prematurely. It could not deny or curtail that remedy because domestic law would not recognise an equivalent claim. If necessary, Community law required an autonomous remedy. The domestic restrictions associated with [1985] AC 104 and section 35A of the Supreme Court Act 1981 therefore had to yield.

3. The appeal proceeded on the accepted basis that compensation would be calculated using a single conventional rate rather than by investigating each taxpayer's actual circumstances. On that basis, a borrowing rate was appropriate. A lender's rate would inevitably under-compensate taxpayers in cash deficit, whereas any over-compensation of taxpayers in cash surplus was an accepted consequence of using one rate for all claimants.

4. Commercial borrowing rates are set on the assumption that interest is paid or accrued periodically. Using such a rate while calculating only simple interest would disregard that feature and would ordinarily produce an undervalue. Full compensation consequently required compounding whenever the selected rate was fixed by reference to periodic payment or compounding.

5. The decisions in Marshall (No 2) and Corus did not establish that simple interest necessarily provided full compensation. Marshall had not considered the sufficiency of simple rather than compound interest. Corus had actually awarded an amount calculated by quarterly compounding, and no general principle favouring simple interest could be extracted from it.

6. Paragraph 1 of Park J's order was varied to declare that interest during the premature tax payment period should be compounded at the same periodic rests as those by reference to which the applicable rate was fixed. Subject to that variation, the Revenue's appeal was dismissed.

1. Court of Appeal (Civil Division): The Revenue's appeal was dismissed, subject to variation of the declaration so that interest was compounded at the same periodic rests as those used to fix the applicable rate.

2. High Court, Chancery Division: Park J ordered on 16 June 2004 that compensation or restitution for the premature tax payment period should be calculated using compound interest. He ordered simple interest for the post-utilisation period, which was not challenged on appeal.

3. Court of Justice of the European Communities: On a reference made in these proceedings, the Court held that the advance corporation tax regime infringed article 52 of the EC Treaty and required an effective remedy for the resulting financial loss.