Test Claimants In the Franked Investment Group Litigation v Commissioners of the Inland Revenue & Anor (Rev 2)

Restitution under the Woolwich principle extends to tax unlawfully exacted through compulsory self-assessment. A formal demand is unnecessary. Community law requires repayment of unlawful tax, directly related payments and premature-payment losses. It also protects advance corporation tax applied against an unlawful corporation tax charge. Discretionary use of group relief and management expenses does not attract the same restitutionary protection.

Where that remedy adequately protects Community rights, Community law permits statutory restrictions on the additional domestic remedy for mistake. Section 32(1)(c) of the Limitation Act 1980 requires mistake to be an essential ingredient of the claim. Applicable statutory repayment machinery provides an exclusive remedy, construed consistently with Community law. Unresolved questions concerning dividend taxation and advance corporation tax required further preliminary references.

The test claimants were companies, principally belonging to the British American Tobacco group, challenging the United Kingdom taxation of dividends received from foreign subsidiaries. Domestic dividends were exempt from corporation tax and generated credits against advance corporation tax. Foreign dividends attracted corporation tax with foreign-tax credits and could generate surplus advance corporation tax. The later foreign income dividend regime permitted recovery of some advance corporation tax but denied shareholders tax credits.

Following a preliminary ruling from the European Court of Justice, Henderson J determined liability and remedy issues in [2008] EWHC 2893 (Ch). He found relevant taxation provisions incompatible with Community law, allowed restitution of unlawfully charged tax and rejected damages. Both the claimants and the Revenue appealed. The issues included the meaning of the preliminary ruling, third-country dividends, further references, restitution for utilised reliefs, sufficiently serious breach, limitation and the exclusivity of statutory repayment procedures.

The appeals were allowed in part. Further preliminary references were required on the dividend-taxation question and unresolved advance corporation tax and foreign income dividend questions.

1. The court could not safely resolve whether the earlier preliminary ruling required equality of nominal or effective tax rates. Arden and Stanley Burnton LJJ favoured nominal rates; Etherton LJ favoured effective rates. All agreed that clarification was required. Questions about underlying tax paid further down a foreign corporate chain, advance corporation tax paid by an upstream parent and surrender against foreign tax likewise required references.

2. Article 56 could apply to dividends from wholly owned third-country subsidiaries where the legislation neither targeted nor predominantly concerned establishment. The Case V charge satisfied that condition. Assuming an infringement, article 57(1) preserved the pre-existing exclusion of foreign dividends from the domestic exemption. The eligible unrelieved foreign tax rules changed credit calculations rather than that restriction. The foreign income dividend regime introduced a new restriction because shareholders could lose their credit even where the company could not recover advance corporation tax.

3. Section 231 of the Income and Corporation Taxes Act 1988 could be read as extending credits to persons entitled under Community law, to the extent of that entitlement. Conforming interpretation did not justify credits for all foreign dividends. Evidential difficulties under the effectiveness principle should be addressed when individual claims were determined.

4. Community law protected recovery of unlawful tax, related interest and penalties, premature-payment losses and advance corporation tax set against unlawful Case V tax. Group relief and management expenses reflected discretionary decisions and fell outside that protection. English restitution likewise measured the Revenue’s gain. Later lawful tax payments were not recoverable merely because earlier reliefs had been consumed; the connection was also too remote. Continuing availability of reliefs belonged to the specialist tax tribunal.

5. A Woolwich claim required unlawful exaction, including compulsory self-assessment, rather than a formal demand. It therefore provided an effective remedy for the protected repayment claims. Change of position required no determination. The uncertainty of the applicable Community law defeated the allegation of sufficiently serious breach; the admitted fresh evidence did not justify reopening that conclusion.

6. Section 320 of the Finance Act 2004 and section 107 of the Finance Act 2007 could restrict mistake claims because the effective Woolwich remedy remained available. Section 32(1)(c) of the Limitation Act 1980 applied only where mistake was an essential ingredient of the claim. Subject to the assumptions and questions expressly left open, section 33 of the Taxes Management Act 1970 supplied an exclusive remedy where subsection (1) applied. Its restrictions and discretion were to be construed consistently with Community obligations.

The court provisionally considered that the Chancery Division should make the references and apply the answers. Submissions were invited on that course and its timing.

• Court of Appeal: [2010] EWCA Civ 103 . Allowed the appeal on issues 1, 6, 12, 20 and 23. Dismissed it on issues 2–5, 7–11, 13, 14, 18, 19, 21 and 22. Issues 15–17 did not arise. Further preliminary references were required; the mechanism and timing remained subject to submissions.
• High Court, Chancery Division: Henderson J, [2008] EWHC 2893 (Ch) , determined liability and remedy issues after the preliminary ruling. He found relevant taxation provisions incompatible with Community law, recognised restitutionary claims and rejected damages. He provisionally proposed further references.
• European Court of Justice: Case C-446/04, [2006] ECR I-11753, answered questions approved by Park J concerning dividend taxation, advance corporation tax, foreign income dividends and remedies.