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

This appeal concerns whether aspects of the United Kingdom corporation tax and Advance Corporation Tax (ACT) regimes were incompatible with Community law (Articles 43 and 56 of the EC Treaty) and the remedies available where domestic law proved incompatible. The Court of Appeal answered the agreed list of issues: it concluded that the ECJ’s prior ruling required clarification as to whether the ECJ meant nominal tax rates or effective tax burdens when assessing an exemption/credit dual system for dividends (a reference back to the ECJ was ordered on that point). The court rejected other attacks on the ECJ’s approach, held that Article 56 can apply to dividends from Third Country subsidiaries (subject to Article 57(1)), and decided that changes such as the EUFT regime did not remove the Article 57(1) “standstill” protection.

The Court held that UK law should, so far as possible, be read compatibly with Community law (conforming interpretation): for example, ICTA s.231 should be read to allow credits to persons entitled under Community law. The Court held that Community law requires an effective restitutionary remedy (San Giorgio) for unlawfully levied tax and that the Woolwich principle (repayment of unlawfully exacted tax) provides an effective domestic remedy for San Giorgio claims; consequently certain domestic limitation rules and statutory bars did not displace San Giorgio restitution. The court dismissed the claim in damages for 'sufficiently serious' breach on the facts and refused other extensions of the restitutionary remedy (for example, the court excluded from San Giorgio relief waiver-based tax-planning consequences and certain FID ‘enhancement’ claims).

Background and nature of proceedings. This is a Group Litigation Order lead appeal from Henderson J ([2008] EWHC 2893 (Ch)). The test claimants (predominantly BAT group companies) challenged the UK corporation tax and ACT/FID regimes as incompatible with Articles 43 (freedom of establishment) and 56 (free movement of capital) of the EC Treaty and sought remedies (repayment of tax, related reliefs and, alternatively, damages). The case followed an earlier reference to the ECJ (Case C-446/04) and the ECJ’s decision and Advocate General’s opinion were central to the issues on appeal.

Relief sought. The claimants sought (inter alia) repayment of corporation tax and ACT levied in breach of Community law, restitution for reliefs used to offset that tax (group relief, management expenses, surrendered ACT), consequential interest and, alternatively, damages for sufficiently serious breaches.

Issues framed by the court. The parties agreed a comprehensive list of issues divided into liability (compatibility of Case V Schedule D, ACT and FID rules with Articles 43/56; scope of Article 57(1) standstill; corporate-tree/‘upstream’/‘downstream’ issues) and remedies (San Giorgio restitution, availability of Woolwich and mistake-based restitution, change-of-position defence, state liability/damages and applicable limitation/statutory bars including Finance Act 2004 s.320, Finance Act 2007 s.107, Limitation Act 1980 s.32(1)(c) and TMA s.33).

Court’s reasoning — liability. The Court analysed the Advocate General’s opinion and the ECJ’s judgment and concluded there was genuine uncertainty about whether the ECJ intended comparison of nominal tax rates or effective tax burdens when upholding a mixed exemption/credit system. Because the sums at stake and the legal consequences were large, the Court referred that specific point back to the ECJ for clarification. It held Article 56 can apply to dividends from Third Country subsidiaries unless the legislation is aimed exclusively at establishment, and that Article 57(1) preserved the pre‑1994 position so that subsequent changes (for example the EUFT rules) did not necessarily create a new restriction that destroyed the Article 57(1) protection. On ACT and FID corporate-tree questions the Court considered some points required further reference to the ECJ (for example whether tax paid lower in the corporate tree must be taken into account for ACT purposes and the surrender/transferability of ACT to non‑resident companies) and therefore dismissed the appeal on those issues for further ECJ reference.

Court’s reasoning — remedies and domestic law interpretation. The Court reaffirmed the San Giorgio principle and held that the Woolwich restitutionary cause of action (repayment of tax unlawfully exacted) provides an effective domestic remedy for San Giorgio claims and is not confined to cases where a formal demand was made; therefore Woolwich (not only mistake-based recovery) can be used to implement Community restitution. The Court allowed a conforming interpretation of ICTA s.231 to the extent that persons entitled under Community law can be treated as within its ambit. The ECJ had excluded many claims arising from voluntary tax-planning decisions (waiver of reliefs, FID enhancements) as not inevitable consequences of the breach and therefore not San Giorgio recoverable; the Court followed that approach. The Claimants failed to establish state liability in damages because the breach was not sufficiently serious on the material facts.

Practical consequences. The judgment orders targeted references to the ECJ on key legal points, clarifies domestic interpretive obligations (conforming interpretation), confirms Woolwich as delivering the effective national remedy for San Giorgio claims, and limits the scope of restitution to direct and inevitable consequences of unlawful taxation (excluding discretionary planning outcomes).

Appeal allowed in part and dismissed in part. The court concluded that the ECJ’s prior ruling required clarification on whether comparison of tax treatment requires comparison of nominal rates or effective tax burdens and ordered a further reference to the ECJ on that point. The court rejected several other challenges, directed conforming interpretation of ICTA s.231 to include persons entitled under Community law, held Woolwich provides an effective domestic remedy for San Giorgio repayment claims (and that a formal demand is not essential), found many consequential tax‑planning losses to be too remote for San Giorgio restitution, and held no liability in damages for a sufficiently serious breach on the facts.

This is an appeal from Henderson J in the High Court of Justice (Chancery Division) ([2008] EWHC 2893 (Ch)). The Court of Appeal heard the appeal and cross‑appeals and gave this judgment on 23 February 2010, ordering further references to the Court of Justice of the European Communities (now the Court of Justice of the European Union) on specified questions arising from the ECJ’s earlier ruling in Case C-446/04 (Test Claimants in the FII Group Litigation v IRC) and resolving numerous domestic law questions of interpretation and remedy.