Test Claimants In the Act Group Litigation (Classes 4 & 2) v Revenue and Customs

A source state which taxes dividends paid to non-resident shareholders must provide equivalent relief for the tax charge imposed within its own jurisdiction. It need not replicate all relief available to resident shareholders or match the amount of advance corporation tax to a partial treaty credit. A partial credit may sufficiently neutralise the source-state charge.

Abuse of process is a broad, merits-based assessment of all the circumstances. A new point is not automatically abusive merely because it could have been raised earlier. In a restitution claim, whether an election would have been made is a factual causation question determined on the balance of probabilities and without hindsight.

The claimants were test claimants in group litigation concerning advance corporation tax, treaty tax credits and freedom of establishment. Following the decisions in Hoechst and Pirelli I, they advanced new arguments that the United Kingdom had breached Community law by charging advance corporation tax at the full domestic rate while granting only partial treaty credits, and by imposing income tax on the dividends.

The court also considered whether those arguments were an abuse of process and determined the factual question remitted after Pirelli I: whether the Pirelli group would have made group income elections if they had been available.

New Community-law issues. The claims failed on the merits. The relevant double taxation conventions imposed a limited United Kingdom income-tax charge on dividends paid to non-resident parent companies and provided a partial credit. Under the principles in ACT Class IV, the United Kingdom had to prevent or mitigate the series of charges resulting from the tax imposed within its jurisdiction. It was not required to provide the same relief in every respect as was available to a domestic group.

1. The obligation of the source state was limited to the consequences of its own exercise of tax jurisdiction. The partial credit was sufficient to neutralise the relevant 5% income-tax charge. There was no requirement to grant a full credit or to tailor the advance corporation tax charge to the net treaty credit.
2. The requirement to pay advance corporation tax at the full domestic rate was compatible with Community law. The claimants had no right to restitution of the excess, repayment of the income-tax charge, or a full tax credit. A further reference to the ECJ was unnecessary.
3. The court rejected an issue-estoppel argument. The earlier orders had not decided the new points. Applying Johnson v Gore Wood & Co, abuse of process required a broad, merits-based assessment of all the circumstances. Although the points could have been raised earlier and group litigation required procedural discipline, their narrow legal scope, lack of real prejudice, and the later development of the relevant ECJ principles justified allowing them to be argued.
4. The consequential questions concerning remedies, mistake and limitation did not arise and were left unanswered.
5. The remitted causation issue required the court to determine what the group would actually have done at the relevant time, on the balance of probabilities and without hindsight. The evidence showed that the group would have expected the advance corporation tax to be recovered against mainstream corporation tax and would have preferred the treaty credits. None of the disputed dividends would therefore have been paid under a group income election. The advance corporation tax was lawful and that part of the claim was dismissed.