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

A national court should refer a question back to the Court of Justice where the meaning of an earlier ruling is materially uncertain and substantial consequences depend on its interpretation.

Article 56 may apply to tax legislation which is not directed exclusively or primarily at establishment, even where the facts involve a wholly owned subsidiary in a third country. The Article 57(1) standstill protects an existing restriction where later legislation merely changes the detailed operation of relief. A conforming interpretation may extend a statutory tax-credit provision to persons entitled under Community law, but evidential difficulty does not enlarge substantive entitlement.

San Giorgio restitution covers unlawfully levied tax and directly related amounts, including ACT set against unlawful tax. It does not cover discretionary use of group relief or management expenses. A Woolwich remedy does not require a formal demand.

The appeal and related cross-appeals arose from the judgment of Henderson J in the Franked Investment Group Litigation, reported at [2008] EWHC 2893 (Ch). The litigation concerned the compatibility of United Kingdom corporation-tax and advance corporation-tax rules with Articles 43, 56 and 57(1) EC, together with restitutionary, damages, limitation and procedural consequences.

The Court of Justice had previously ruled on a reference concerning the treatment of domestic- and foreign-source dividends. The central questions were the proper meaning of that ruling, the application of Article 56 to third-country subsidiaries, the Article 57(1) standstill, the availability of conforming interpretations and the scope of remedies for unlawfully levied tax.

Disposition. The appeal was allowed in part. The Court allowed the appeal on Issue 1 and directed that the meaning of the earlier Court of Justice ruling be referred back. It also allowed the appeal on Issues 6, 12, 20 and 23. The appeals on Issues 2, 3, 4, 5, 7, 8, 9, 10, 11, 13, 14, 18, 19, 21 and 22 were dismissed. Issues 15 to 17 did not arise for decision.

1. On Issue 1, Arden and Stanley Burnton LJJ considered that the earlier ruling probably did not require comparison of effective tax rates, while Etherton LJ agreed with the judge below that it did. All members considered the ruling insufficiently clear to justify deciding the issue on the assumption that the Court of Justice had misunderstood the submissions. A further reference was therefore the principled course. The Court relied on Pretore di Salo and O'Byrne.
2. Article 56 was capable of applying to the Case V charge on dividends from third-country subsidiaries. The legislation applied to income from overseas generally and was not directed exclusively or primarily at establishment. Article 43 was irrelevant to establishment involving third countries. The Article 57(1) standstill applied because the relevant restriction was the exclusion of third-country dividends from the domestic exemption under Income and Corporation Taxes Act 1988, section 208. The later EUFT regime altered the calculation and use of foreign-tax credit, but did not create a new restriction.
3. Section 231 of Income and Corporation Taxes Act 1988 could be read as extending tax-credit entitlement to other persons entitled under Community law, to the extent of that entitlement. Practical tracing difficulties did not justify conferring an unconditional windfall or altering the substantive interpretation. Effectiveness questions could be addressed when individual claims were made.
4. The FID regime fell within Article 56. Article 57(1) did not protect it because a company could pay ACT, elect for FID treatment and then fail to obtain repayment, while shareholders received no credit. That result was inconsistent with the legislative link between ACT payment and tax-credit entitlement.
5. San Giorgio restitution included unlawful Case V tax, unlawful ACT, interest, penalties and ACT set against the unlawful Case V charge. Group relief and management expenses were discretionary tax-planning choices and were not an inevitable consequence of the unlawful charge. They were therefore not recoverable in restitution.
6. A Woolwich claim covered tax unlawfully exacted through compulsory self-assessment. A formal demand was unnecessary. The Court declined to follow the contrary obiter reasoning in NEC Semi-Conductors. The later payment of lawfully due tax could not be recovered merely because earlier relief had been used against an unlawful charge.
7. The requirement of a sufficiently serious breach was not satisfied. The relevant Community-law rules were developing and insufficiently clear, so the United Kingdom could not be said to have manifestly and gravely disregarded the limits of its discretion.
8. Sections 320 of the Finance Act 2004 and 107 of the Finance Act 2007 did not affect Woolwich claims. Section 32(1)(c) of the Limitation Act 1980 applied only where mistake was an essential ingredient of the cause of action. Where section 33 of the Taxes Management Act 1970 applied, it was the exclusive remedy, but it had to be interpreted consistently with Community law.

• Court of Appeal (Civil Division): appeal allowed in part, with a further reference on Issue 1; [2010] EWCA Civ 103.
• High Court of Justice (Chancery Division): judgment of Henderson J giving preliminary rulings on liability, remedies and limitation; [2008] EWHC 2893 (Ch).