Test Claimants In the FII Group Litigation v HM Revenue & Customs

A member state may use different systems to relieve economic double taxation of domestic and foreign dividends, but foreign dividends must not receive less favourable treatment. The comparison includes the practical effect of effective tax rates and available reliefs, not merely statutory rates.

Restitution for unlawfully levied tax extends to the tax paid and directly associated loss of use, but not every consequential loss. A mistake-based restitution claim does not support a general “but for” recovery of consequential loss. A change-of-position defence may be available to mistake-based claims, but not to claims founded on unlawfully demanded tax.

The proceedings arose from the FII Group Litigation concerning the taxation of dividends received by UK-resident parent companies from foreign subsidiaries. The European Court of Justice had determined several questions concerning Articles 43 and 56 EC, including the compatibility of the Case V, ACT and FID regimes, and had left issues of fact, remedies and certain corporate-tree questions to the national court.

The claimants sought restitution, damages and related relief for tax and advance corporation tax paid or allegedly rendered unavailable under the UK system. The central issues included the compatibility of the UK rules with Community law, the classification and scope of available remedies, change of position, sufficiently serious breach, limitation and the effect of statutory repayment provisions.

1. Case V charge. The UK system infringed Article 43 EC in relation to dividends received from subsidiaries resident in other member states. Although domestic dividends were exempt and foreign dividends were taxed under a credit system, the relevant comparison had to take account of effective tax rates and reliefs. UK companies commonly paid corporation tax at an effective rate below the nominal rate. The benefit of that lower effective rate could be passed through under the exemption system for domestic dividends but not under the credit system for foreign dividends.
2. Third-country dividends. Article 56 EC could apply to third-country dividends where the national legislation applied irrespective of the extent of the holding. However, the basic exclusion of foreign dividends from the domestic exemption had existed continuously since 31 December 1993. Article 57(1) therefore preserved the restriction. The later EUFT rules did not alter that conclusion.
3. ACT and FID regimes. The ECJ’s ruling established infringement in the stated circumstances, including where the immediate foreign distributing company had paid foreign corporation tax and the UK recipient incurred ACT. The wider corporate-tree questions and the availability of ACT relief against foreign profits required further reference. The appropriate domestic technique was to treat relevant foreign dividends as carrying a tax credit and generating FII. The FID regime infringed Articles 43 and 56, including in relation to third-country FIDs, because the absence of shareholder tax credits and the timing of ACT repayment created a disadvantage. Article 57(1) did not preserve that new restriction.
4. Restitution. The San Giorgio principle required effective domestic remedies for repayment of unlawfully levied tax and directly associated interest or loss of use. Under English law, mistake-based restitution was available alongside the Woolwich claim. It was confined to repayment of tax paid by mistake and directly associated benefits retained by the Revenue. A general “but for” test could not convert restitution into compensation for consequential loss.
5. FID enhancements and other losses. The FID enhancements were not restitutionary or San Giorgio claims. They resulted from commercial decisions by the claimants and were not an inevitable consequence of the tax-credit disadvantage. The evidence established that their primary purpose was to compensate exempt shareholders, although the decision to use the FID regime was primarily motivated by the opportunity to use surplus ACT. Other consequential losses sounded, if at all, in damages.
6. Defences and limitation. Change of position was available in principle to the Revenue against mistake-based restitution claims, and would likely succeed where tax receipts had been spent in good faith as part of public expenditure. It was unavailable against Woolwich claims. The claimants failed to establish a sufficiently serious breach for Factortame damages. Sections 320 of the Finance Act 2004 and 107 of the Finance Act 2007 could not be relied upon against San Giorgio mistake claims because they curtailed the limitation period without adequate transitional arrangements. Section 33 of the Taxes Management Act 1970 was exclusive where applicable, but yielded where Community law required an effective San Giorgio remedy.