Test Claimants in the Franked Investment Income Group Litigation v Commissioners of Inland Revenue and another

Tax paid to a public authority pursuant to an apparent statutory obligation, but not lawfully due, is recoverable under the Woolwich principle without any formal demand. The payment must be sufficiently connected with the apparent obligation.

The extended limitation period under section 32(1)(c) of the Limitation Act 1980 applies only where mistake forms the legal basis of the action. A merely causative mistake does not suffice.

A restricted statutory repayment procedure cannot exclude common-law recovery of tax levied contrary to EU law. Retrospective legislation cancelling pending mistake claims infringed legitimate expectations. Whether Parliament could prospectively curtail the extended limitation period without notice or transitional protection required a preliminary ruling from the Court of Justice.

The test claimants were UK-parented corporate groups which had received dividends from foreign subsidiaries. They sought restitution and damages arising from corporation tax measures, including advance corporation tax, which had infringed EU rights of establishment and free movement of capital.

Henderson J held that mistake-based restitution was available and that sections 320 and 107 of the Finance Acts 2004 and 2007 could not curtail the extended limitation period consistently with EU law: [2008] EWHC 2893 (Ch); [2009] STC 254. The Court of Appeal reversed him on several remedial issues: [2010] EWCA Civ 103; [2010] STC 1251.

The Supreme Court considered the scope of the Woolwich restitutionary remedy, section 32(1)(c) of the Limitation Act 1980, section 33 of the Taxes Management Act 1970, and the compatibility of the statutory cut-off provisions with EU principles of effectiveness, equivalence, legal certainty and legitimate expectations.

1. Appeal allowed in part. The court unanimously upheld the Court of Appeal on the domestic-law questions concerning section 32(1)(c) of the Limitation Act 1980 and the scope of the Woolwich remedy. It allowed the appeal concerning section 33 of the Taxes Management Act 1970 and section 107 of the Finance Act 2007. The section 320 issue required a reference to the Court of Justice.

2. Per Lord Walker and Lord Sumption, with the agreement of the court, section 32(1)(c) covers the relatively narrow class of actions in which mistake is the legal basis of the claim and the relief removes or mitigates its consequences. It does not extend to every claim in which a mistake was causally relevant. A Woolwich claim therefore does not acquire the extended limitation period merely because the taxpayer was mistaken.

3. Per Lord Walker and Lord Sumption, with the agreement of the court, a formal demand is not an ingredient of a Woolwich claim. The remedy covers sums paid to a public authority in response to, and sufficiently connected with, an apparent statutory requirement to pay tax which was not lawfully due. The mechanism by which the obligation was communicated was immaterial. A later conforming construction of the legislation did not remove the unlawfulness of tax collected under the non-conforming interpretation administered at the time.

4. Section 33 of the Taxes Management Act 1970 was not an exclusive code for recovery of tax charged contrary to EU law. An implication excluding common-law actions could not be made where it would defeat the overriding EU requirement for an effective right of recovery. The Court of Appeal's more radical reconstruction of the provision was unnecessary.

5. All members of the court agreed that section 107 of the Finance Act 2007 could not defeat mistake claims begun before 8 September 2003. By 2006 those claimants had acquired a legitimate expectation, reinforced by the earlier legislation, that their pending proceedings would be adjudicated under the existing law. Retrospective cancellation without notice or transitional protection infringed EU law.

6. A provisional five-member majority—Lord Hope, Lord Walker, Lord Clarke, Lord Dyson and Lord Reed—considered section 320 of the Finance Act 2004 incompatible with EU law. Their routes differed, but they regarded its unannounced, retroactive removal of the extended period from arguable mistake claims as inconsistent with effectiveness, and in some judgments equivalence or legitimate expectations. Lord Brown and Lord Sumption would have held it lawful because the unaffected Woolwich remedy was effective and no reasonable expectation of the extended mistake remedy then existed. The division showed that the answer was not acte clair; a preliminary ruling was therefore required.

1. United Kingdom Supreme Court: In Test Claimants in the Franked Investment Income Group Litigation v Commissioners of Inland Revenue and another [2012] UKSC 19, the appeal was allowed on section 33 of the Taxes Management Act 1970 and section 107 of the Finance Act 2007. The Court of Appeal was upheld on section 32(1)(c) of the Limitation Act 1980 and the scope of the Woolwich remedy. The section 320 question was to be referred to the Court of Justice.
2. Court of Appeal: [2010] EWCA Civ 103; [2010] STC 1251. The Revenue's appeal was allowed on four remedial issues. The court held that the Woolwich remedy was sufficient under EU law, that sections 320 and 107 did not affect it, that section 32(1)(c) did not extend its limitation period, and that section 33 could receive a conforming interpretation.
3. High Court, Chancery Division: [2008] EWHC 2893 (Ch); [2009] STC 254. Henderson J held that mistake-based restitution was available, that sections 320 and 107 could not curtail the extended limitation period consistently with EU law, and that no sufficiently serious breach supporting damages had been established.
4. Court of Justice: On an earlier reference in the same litigation, Case C-446/04, the Grand Chamber addressed the tax infringements and confirmed that domestic procedural rules governing repayment must satisfy equivalence and effectiveness.