Boake Allen Ltd & Ors v Revenue and Customs Rev 1

A non-discrimination article in a double taxation convention was infringed where a United Kingdom subsidiary of a foreign parent could not make a group income election and thereby avoid advance corporation tax, while a subsidiary of a United Kingdom parent could do so. However, section 788(3) of the Income and Corporation Taxes Act 1988 gave domestic effect only to specified convention provisions. Its reference to corporation tax in respect of income or chargeable gains covered mainstream corporation tax, not advance corporation tax.

A restitutionary claim for tax could therefore succeed only under the statutory regime or where tax had been paid pursuant to an unlawful demand. Self-assessed advance corporation tax paid without a group income election was not paid pursuant to such a demand.

United Kingdom subsidiaries of parent companies resident in Japan or the United States paid advance corporation tax when distributing dividends. A United Kingdom subsidiary of a United Kingdom parent could instead make a group income election and defer that liability. The claimants sought restitution or damages, alleging discrimination contrary to the relevant double taxation conventions and restrictions contrary to articles 56 and 57 of the EC Treaty.

Park J held that the tax regime infringed the conventions' non-discrimination articles, but that those provisions had not been incorporated into domestic law in relation to advance corporation tax. He also declined to refer the EC Treaty questions to the European Court of Justice. The taxpayers appealed. The Revenue cross-appealed against rulings that amended restitution, mistake and EC Treaty claims arose from substantially the same facts as the original claims.

The central issues were the conventions' domestic effect, the need for an EC reference, the availability of restitutionary remedies and the effective date of the amended claims.

Appeal dismissed; Revenue's cross-appeal allowed.

1. Per Lloyd LJ, with whom Sedley and Mummery LJJ agreed, the inability of a United Kingdom subsidiary of a Japanese or United States parent to make a group income election subjected it to more burdensome taxation than a comparable subsidiary of a United Kingdom corporate parent. The relevant comparator had to share the actual enterprise's characteristic of being a subsidiary. The parent's own fiscal position was an illegitimate element in the comparison. The advance corporation tax provisions therefore infringed the relevant non-discrimination articles.

2. Nevertheless, section 788(3) of the Income and Corporation Taxes Act 1988 incorporated only specified parts of double taxation conventions. The phrase “corporation tax in respect of income or chargeable gains” in section 788(3)(a) referred to mainstream corporation tax. Although advance corporation tax was corporation tax, it was imposed by reference to qualifying distributions rather than income or chargeable gains. Convention provisions concerning advance corporation tax took direct effect only to the extent specified in section 788(3)(d), concerning tax credits. The appellants consequently had no domestic remedy founded on the conventions.

3. The questions whether the regime restricted capital movements or payments under article 56, and whether article 57(1) preserved the restriction, were not sufficiently clear to exclude a reference in principle. A reference should nevertheless await the outcome of any application to appeal to the House of Lords, because the nature of any restriction under domestic law depended on unresolved domestic issues. If the litigation did not proceed further domestically, a reference should be made.

4. Per Mummery LJ, with whom Lloyd and Sedley LJJ agreed, the amended allegations of an unlawful demand, mistake of law, an unmade group income election and an article 56 restriction introduced new claims founded on new material facts. They did not arise from the same or substantially the same facts as the original claims. They were therefore treated as commenced when added in July 2003.

5. The court was bound by Deutsche Morgan Grenfell Group plc v IRC [2005] EWCA Civ 78. Tax was recoverable at common law only under the Woolwich principle, where paid pursuant to an unlawful demand, or through the relevant statutory regime. The companies had accounted for advance corporation tax under the statutory machinery without assessments or demands. In the absence of a group income election, the tax was lawfully payable. No unlawful demand had been made.

Mummery LJ considered, obiter, that if an unlawful demand had been established, restitution could include the Revenue's benefit from the premature use of the money. Lloyd LJ regarded that conclusion as difficult to reconcile with the interest authorities, while Sedley LJ considered a freestanding time-value claim highly problematical.

1. Court of Appeal (Civil Division): The taxpayers' appeal was dismissed. The Revenue's cross-appeal on the amended pleadings was allowed. A decision on referring the articles 56 and 57 questions to the European Court of Justice was deferred pending the outcome of any application to appeal to the House of Lords.
2. High Court, Chancery Division: Park J held that the advance corporation tax regime infringed the relevant double taxation conventions, but that their non-discrimination provisions were not incorporated into domestic law in relation to advance corporation tax. He declined to make an EC reference and dismissed the claims. No neutral citation for that judgment is stated.