Sempra Metals Ltd v Commissioners of Inland Revenue

The House considered whether an award measured by the time value of money payable to a taxpayer who had paid advance corporation tax (ACT) prematurely should be calculated by simple or compound interest. The court held that domestic law can provide an effective remedy under EU law for the premature levy of ACT and that, in principle, an award measuring the defendant's benefit (the time value of money) should be capable of being made on a compound basis. The decision addressed (i) the availability of compound interest in restitutionary claims for money paid under a mistake of law (recognising the common-law restitutionary cause of action recognised in Kleinwort Benson and Deutsche Morgan Grenfell), (ii) the relationship between restitution and damages remedies following the ECJ decision in Metallgesellschaft (Hoechst) and (iii) the domestic statutory scheme for ancillary interest (section 35A of the Supreme Court Act 1981). The House concluded that compound interest is an appropriate measure for the restitutionary award in this context and that, for the GLO test cases, compound interest should be calculated at a conventional rate derived from the rates and terms applicable to Government borrowing during the relevant periods.

This appeal arose from claims by Sempra (formerly Metallgesellschaft) for reimbursement or reparation in respect of ACT which was held by the ECJ to have been levied prematurely contrary to article 52 (now article 43) of the EC Treaty (Metallgesellschaft). The claims were brought under alternative domestic heads: damages for breach of statutory duty, restitution for tax paid pursuant to an unlawful demand (Woolwich), and restitution for money paid under a mistake of law (Kleinwort Benson / Deutsche Morgan Grenfell). The central issue before the House was whether the measure of the award for the time value of the sums paid prematurely should be simple or compound interest.

The House examined: (i) the ECJ's guidance that a domestic remedy must be effective and need not be given a particular legal label but must vindicate the claimant's right to reparation for the loss of use of money (Metallgesellschaft); (ii) historical and statutory rules in English law about awards of interest, including section 35A of the Supreme Court Act 1981; and (iii) the distinctions between restitutionary relief (gain-based) and compensatory damages (loss-based).

Issues framed and resolved:

• Availability of compound interest: the court held that an award measured by the time value of money can, in principle, be calculated on a compound basis where restitution or damages require that full measure of reparation; equity or the common law restitutionary jurisdiction can support compound interest in appropriate cases.
• Measure of the award: where it is impracticable to quantify the actual benefit obtained by the recipient, a conventional market-based rate is appropriate; applying unjust enrichment principles the conventional rate should normally reflect the circumstances of the enrichee — in the case of the Revenue, the rate at which the Government could borrow in the market (i.e. government borrowing terms) was appropriate.
• Limitation and choice of remedy: the court recognised that plaintiffs may choose between remedies (damages or restitution) and that the limitation consequences of choosing mistake-based restitution under section 32(1)(c) Limitation Act 1980 are material, but that the ECJ did not require a particular domestic classification.

The House therefore confirmed that compound interest could be an appropriate measure, directed that in the test case compound interest be awarded and that it be calculated by reference to conventional rates applicable to government borrowing during the relevant periods, and otherwise dismissed the Revenue's appeal.

Appeal dismissed (with variation). The House held that English law can provide an effective remedy for the premature levy of ACT as required by Community law, that restitutionary awards measuring the time value of money may be assessed by compound interest in principle, and that for the test case compound interest should be calculated by reference to conventional rates appropriate to the enrichee (the Government's borrowing rates) for the period prior to set-off. The court varied aspects of the lower courts' orders to reflect that the conventional rate should reflect the Revenue's borrowing circumstances and otherwise dismissed the appeal.

First instance: Park J, [2004] EWHC 2387 (Ch), [2004] STC 1178 (judge ordered compound interest on a conventional basis). Court of Appeal: [2005] EWCA Civ 389; [2005] STC 687 (appeal by Revenue dismissed). House of Lords: appeal heard and judgment given [2007] UKHL 34 (this decision).