Test Claimants In the Act Group Litigation (Class 4) & Anor v Revenue & Customs

Article 49 required equal access to a group income election where its denial disadvantaged a UK subsidiary paying dividends to an EU-resident parent. The remedy depended on the counterfactual: the claimant had to prove, on the balance of probabilities, that it would have made the election.

Where a double taxation convention imposed UK tax on an outgoing dividend, a partial treaty credit was sufficient if it neutralised that charge. Article 49 did not require repayment of ACT net of the credit, a full credit matching ACT, or a tailored ACT rate. The 5 per cent charge therefore required no separate refund.

Companies in the Pirelli, Huhtamaki and Volvo groups appealed from Henderson J’s decision in [2010] STC 1078. Their UK subsidiaries had paid ACT on dividends to parent companies resident in Italy or the Netherlands.

The claimants challenged the rejection of claims for repayment of ACT, repayment of the 5 per cent income-tax charge under the relevant double taxation conventions, and the finding that they would not have made group income elections had they been available. The central issues were whether Article 49 required a full or tailored credit and whether the hypothetical election had to be proved or assumed.

The Master of the Rolls gave the leading judgment. Patten LJ and Black LJ agreed. The appeal was dismissed and Henderson J’s decision was upheld in its entirety.

1. ACT and treaty credits. The reasoning in ACT Class IV, [2006] ECR I-11673, showed that the relevant comparison depended on whether the United Kingdom imposed tax on dividends paid to non-resident shareholders. Where the United Kingdom imposed income tax under the relevant double taxation conventions, the non-resident parent became comparable to a resident shareholder for the purpose of preventing or mitigating a series of tax charges.
2. The United Kingdom complied with Article 49 by granting a partial credit which neutralised the 5 per cent charge. The credit was 12.5 per cent before the treaty charge and 6.875 per cent net. Article 49 did not require a full credit equal to the ACT paid, or an ACT charge tailored to the net credit. The credit could serve more than one function, including discharging the treaty income-tax liability and mitigating underlying double taxation. The claimants therefore had no right to recover ACT net of the credit or to reclaim the 5 per cent tax separately.
3. The reformulated claims were inconsistent with the reasoning in Hoechst, [2001] ECR I-1727, and ACT Class IV. A further reference was unnecessary: the point was acte clair, and the national court was responsible for determining whether the Article 49 obligation had been met.
4. The remitted election issue. The House of Lords’ order required the court to determine what the claimant groups would actually have done if a group income election had been available. The claimants therefore had to prove the counterfactual on the balance of probabilities. Fleming, [2008] UKHL 2, concerned retrospective limitation and transitional periods, not a complex economic election involving competing financial advantages.
5. The Judge was entitled to assess the likelihood of prompt ACT set-off against mainstream corporation tax and the funding cost of ACT compared with the treaty credit. His conclusion that none of the 19 disputed Pirelli dividends would have been paid under a group income election was supported by the evidence. The ACT was therefore lawfully levied, and the other claimant groups accepted that outcome.

• Court of Appeal (Civil Division) — [2010] EWCA Civ 1480: appeal dismissed and Henderson J’s decision upheld.
• High Court, Chancery Division — Henderson J, [2010] STC 1078: rejected the claims for full or tailored ACT relief, repayment of the treaty income-tax charge, and compensation on the basis that group income elections would have been made.
• House of Lords — Pirelli I, [2006] UKHL 4: remitted the factual question whether the claimant group would have made group income elections and directed that compensation be assessed accordingly.