Deutsche Morgan Grenfell Group Plc v. Her Majesty's Commissioners of Inland Revenue and another

The House of Lords held that English law recognises a restitutionary cause of action to recover tax paid under a mistake of law (applying Kleinwort Benson Ltd v Lincoln City Council) and that such a claim can attract the extended limitation period in section 32(1)(c) of the Limitation Act 1980. The claimant (DMG) paid advance corporation tax (ACT) on dividends because, following the domestic statutory scheme (notably s.247 ICTA 1988), it believed it could not make a group income election; the European Court of Justice in Metallgesellschaft/Hoechst later held that the UK regime unlawfully discriminated against groups with non‑resident parents. The House concluded that (i) a restitutionary remedy founded on mistake of law is available in tax cases, (ii) DMG had acted under a mistake of law in relation to the three ACT payments, and (iii) the mistake was not reasonably discoverable until the ECJ judgment of 8 March 2001 so as to postpone the start of the limitation period under s.32(1)(c). The appeal was therefore allowed and Park J's judgment restored.

Background and parties:

Deutsche Morgan Grenfell Group plc (DMG) sought compensation or restitution for ACT it paid on dividends to its (non-UK) parent between 1993 and 1996. DMG argued that, had it been entitled to make a group income election under domestic law it would have avoided the ACT; the Court of Justice in Metallgesellschaft/Hoechst (8 March 2001) held that the UK tax regime unlawfully discriminated against subsidiaries with non‑resident parents and required effective remedies in national courts.

Procedural path:

• Proceedings issued 18 October 2000 (test case in group litigation).
• Park J (Chancery Division) held for DMG, concluding s.32(1)(c) applied and time did not run until 8 March 2001.
• Court of Appeal allowed the Revenue's appeal.
• House of Lords allowed DMG's appeal and restored Park J.

Nature of the claim:

DMG sought restitution/compensation for the loss of use of sums paid as ACT. The claimant relied on unjust enrichment/restution for payment made under a mistake of law and on remedies required by EU law following Metallgesellschaft/Hoechst. The specific statutory and doctrinal provisions in issue included s.247 Income and Corporation Taxes Act 1988 (group income elections), s.32(1)(c) Limitation Act 1980 (mistake discovery), and the remedies principles in Woolwich and Kleinwort Benson.

Issues framed by the court:

1. Whether English law recognises a restitutionary claim for tax paid under a mistake of law;
2. Whether DMG in fact paid under a mistake of law;
3. When DMG discovered or could with reasonable diligence have discovered the mistake (for limitation purposes);
4. Whether any defence of "settled law" or statutory regime precluded a common‑law mistake claim;
5. Pleading and limitation consequences for specific payments.

Court's reasoning (concise):

• The House read Kleinwort Benson as recognising a general restitutionary right for payments under a mistake of law; Lord Goff's speeches in Woolwich and Kleinwort Benson do not establish a rule excluding mistake claims in tax cases.
• Parliamentary/statutory remedies (eg section 33 TMA) do not exhaustively exclude common‑law restitution where the statutory regime does not apply; the court rejected a broad statutory‑exclusion argument.
• DMG's payments were causally linked to a mistake of law (the belief that group election relief was unavailable) and the true legal position only crystallised on the ECJ judgment; the mistake was not reasonably discoverable before 8 March 2001; accordingly s.32(1)(c) postponed the start of limitation.
• The House allowed the appeal, restoring Park J's order; the majority rejected the narrower view that all tax overpayments must be confined to Woolwich remedies and a six‑year limitation run.

Wider context:

The Lords noted this area raises difficult policy and limitation questions; Parliament later amended the law for future taxation claims (Finance Act 2004 s.320), but that change did not determine the outcome of DMG's claims arising before that date.

Appeal allowed. The House held that: (1) English law recognises a restitutionary claim to recover tax paid under a mistake of law (following Kleinwort Benson) and the existence of statutory remedies or Woolwich-type remedies did not exclude the common-law mistake cause of action where the statute did not apply; (2) DMG paid the ACT under a mistaken belief (that group election relief was not available); and (3) for limitation purposes under s.32(1)(c) Limitation Act 1980 the mistake was not reasonably discoverable until the ECJ judgment of 8 March 2001, so the extended limitation period applied. For those reasons Park J's judgment was restored.

Appeal from the Court of Appeal [2005] EWCA Civ 78 which had allowed the Revenue's appeal against Park J (first instance judgment reported at [2003] 4 All ER 645). The House of Lords allowed DMG's appeal and restored Park J's order.