Sempra Metals Limited (formerly Metallgesellschaft Limited) (Respondents) v. Her Majesty's Commissioners of Inland Revenue and another (Appellants)

A claimant may recover proved interest losses caused by late payment as damages, including compound interest, subject to the ordinary rules of remoteness, mitigation and proof. Compound interest is also available where the time value of money is itself the measure of restitution for unjust enrichment.

The prima facie value of a defendant’s use of money is the reasonable cost of borrowing it for the relevant period. That value ordinarily reflects compound interest. The defendant may establish that the benefit was worth less in its particular circumstances. Where government received tax prematurely, the appropriate conventional measure was the government’s own market borrowing cost.

A United Kingdom subsidiary paid advance corporation tax because the statutory group income election was unavailable where its parent company was resident in another member state. The European Court of Justice held that this restriction contravened article 52 of the EC Treaty and required an effective domestic remedy for the financial consequences of premature payment.

Park J held that the award should be calculated using compound interest: [2004] EWHC 2387 (Ch); [2004] STC 1178. The Court of Appeal dismissed the Revenue’s appeal: [2005] EWCA Civ 389; [2005] STC 687.

The principal issue before the House was whether compound interest could measure either the taxpayer’s compensatory loss or the Revenue’s unjust enrichment. A related issue concerned the rate by which the restitutionary benefit should be valued.

1. Disposition. The House dismissed the Revenue’s appeal by a majority on the restitutionary issue. It varied the order so that the compound-interest rate for restitution was calculated by reference to the government’s market borrowing rates and terms. Lord Hope, Lord Nicholls and Lord Walker supported that result. Lord Scott would have allowed the appeal on restitution, while Lord Mance would have remitted the assessment of the Revenue’s actual benefit.
2. Damages for interest losses. Lord Nicholls gave the leading analysis, with which all members agreed in substance. A claimant may plead and prove actual interest losses caused by late payment. Such losses are recoverable under the ordinary principles governing contractual or tortious damages, including remoteness and mitigation. They may include compound borrowing costs or compound investment losses. An unparticularised and unproved claim for general interest remains outside the common-law remedy. The restrictive analysis in President of India v La Pintada Compania Navigacion SA [1985] 1 AC 104 was departed from accordingly.
3. Restitution of the time value of money. Lord Nicholls and Lord Hope held that unjust enrichment encompassed both the money transferred and the opportunity to use it. Complete restitution therefore required payment for the use or time value of the money during the period of premature receipt. Compound interest was available as substantive restitution at common law and was not merely ancillary interest under section 35A of the Supreme Court Act 1981. Lord Walker agreed that compound interest should be awarded, although he preferred to rest the jurisdiction in equity.
4. Valuation. Lord Nicholls, Lord Hope and Lord Walker treated the prima facie measure as the reasonable price of obtaining the money, namely the recipient’s reasonable borrowing cost. The measure could be reduced where its objective market value overstated the benefit to the particular recipient. On the evidence, receipt conferred a benefit on the Revenue, although its precise value was difficult to quantify. The applicable conventional rate was therefore the government’s cost of borrowing, compounded at appropriate rests.
5. Minority reasoning. Lord Scott and Lord Mance considered that restitution for an innocent recipient should be confined to an actual benefit proved to have been obtained. Lord Scott found no evidence of such a benefit. Lord Mance would have recognised a discretionary equitable remedy and remitted the matter to determine any actual benefit.
6. European Union law. The choice between simple and compound interest was governed by domestic law, provided the remedies satisfied equivalence and effectiveness. English law supplied an effective remedy, so no further reference to the European Court of Justice was required.

1. House of Lords: The Revenue’s appeal was dismissed by a majority on the restitutionary issue. The order was varied so that the conventional compound-interest rate reflected government borrowing terms: [2007] UKHL 34 .
2. Court of Appeal: The Revenue’s appeal was dismissed. The court clarified that interest should be compounded at the same periodic rests as those used to fix the applicable rate: [2005] EWCA Civ 389 ; [2005] STC 687 .
3. High Court, Chancery Division: Park J held that compensation or restitution for premature payment should be calculated on a compound basis at a conventional rate: [2004] EWHC 2387 (Ch) ; [2004] STC 1178 .