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

The Supreme Court considered complex tax and remedies issues arising from alleged unlawful features of the United Kingdom corporation tax regime (primarily ACT and FID rules) and whether domestic limitation and recovery provisions could lawfully curtail claims for restitution or damages arising from breaches of EU law. Key legal principles examined were the Woolwich restitutionary cause of action for unlawful public exactions, the availability of a restitutionary remedy for payments made under a mistake of law following Deutsche Morgan Grenfell (DMG), and the application of the EU principles of effectiveness, equivalence and protection of legitimate expectations to national limitation rules (notably section 32(1)(c) Limitation Act 1980 and the statutory cut-off provisions in Finance Act 2004 s.320 and Finance Act 2007 s.107).

The court upheld the Court of Appeal's construction of section 32(1)(c) Limitation Act 1980 (that the extended discovery rule applies to causes of action founded on a mistake and not to all causes of action which merely involve a historical mistake) and its conclusion that Woolwich is not confined to recoveries made only in response to a formal demand: payments made pursuant to an apparent statutory obligation may be recovered under Woolwich. The court held that section 33 Taxes Management Act 1970 could not be read as excluding common law restitution claims for tax charged contrary to EU law and allowed the appeal on that point. The court was divided on whether EU law requires both the Woolwich and the DMG (mistake) remedies to be concurrently available; because of this division the compatibility of Finance Act 2004 s.320 (which curtailed the extended limitation period for mistake claims) with EU law was not regarded as acte clair and a preliminary reference to the Court of Justice was directed. The court concluded that Finance Act 2007 s.107 (which retrospectively cancelled mistake-based claims in certain circumstances) was incompatible with EU law.

This appeal arose from group litigation about the tax treatment of dividends received by UK-resident parent companies from non-resident subsidiaries, with issues generated by the former advance corporation tax (ACT) and foreign income dividends (FID) systems and the DV provisions of the Income and Corporation Taxes Act 1988. The test claimants (large UK groups including BAT and Aegis subsidiaries) contended that differences in tax treatment breached the EC Treaty freedoms and sought restitution and other remedies for tax paid that they say was levied contrary to EU law.

Procedural posture: The litigation began under a group litigation order; substantial findings were made by Henderson J in the High Court ([2008] EWHC 2893 (Ch)). The Court of Appeal ([2010] EWCA Civ 103) agreed with much of the judge’s liability analysis but differed on several remedy issues. Permission to appeal to the Supreme Court was granted on selected remedy issues and an additional point on limitation (issue 22).

Nature of the claims and relief sought:

• Restitutionary repayment of corporation tax and related amounts allegedly unlawfully exacted due to breaches of EU law;
• Alternative restitution claims based on payments made under a mistake of law (the DMG line of authority);
• Issues as to availability of damages under state liability principles were also raised but were subsidiary.

Issues the Court framed:

1. Whether Parliament could lawfully curtail, without notice, the extended limitation period under section 32(1)(c) Limitation Act 1980 by Finance Act 2004 s.320, and whether Finance Act 2007 s.107 unlawfully cancelled existing mistake claims (issues of EU law: effectiveness, equivalence, legitimate expectations).
2. Whether a Woolwich restitution remedy suffices for taxpayers seeking repayment of tax levied contrary to EU law, or whether the mistake remedy is also required by EU law.
3. Whether Woolwich requires an official demand or covers self-assessed taxes and payments made pursuant to a perceived statutory obligation.
4. Whether section 33 Taxes Management Act 1970 provided an exclusive statutory code for recovery, ousting common law restitutionary claims.

Court’s reasoning (concise):

• The court analysed the domestic law position: Woolwich supplies a restitutionary remedy for taxes exacted without lawful authority and is not confined to cases where a formal demand was made; section 32(1)(c) is to be given the narrower construction that it applies where the mistake is a necessary ingredient of the cause of action.
• Applying EU jurisprudence (San Giorgio, Rewe, Marks & Spencer and related authorities), the court examined whether member states must maintain every domestic remedy or only an effective and non‑discriminatory remedy for enforcing EU rights. The principles of effectiveness and equivalence require remedies to be as favourable and as effective as domestic counterparts.
• The court split on whether EU law requires that both domestic remedies (Woolwich and the mistake-based DMG remedy) must remain concurrently available so that claimants may choose the most advantageous remedy. Because of the division, the compatibility of Finance Act 2004 s.320 with EU law (the DMG remedy/section 320 issue) was referred to the Court of Justice under article 267 TFEU as not acte clair.
• On section 107 Finance Act 2007, a majority concluded that retrospective cancellation of mistake-based claims defeated legitimate expectations and contravened EU law; that provision was incompatible with EU law.
• Section 33 TMA was held not to exclude common law restitutionary claims for tax levied contrary to EU law and the appeal succeeded on that point.

Wider context and implications: The court emphasised the significance of the remedy questions for very large sums at stake (estimates given below in the judgment). It noted the rarity and seriousness of the step of referring the remedies/limitation point to the Court of Justice and invited the parties to prepare draft reference questions.

Appeal allowed in part. The Supreme Court (majority) upheld the Court of Appeal on the construction of section 32(1)(c) Limitation Act 1980 and on the scope of Woolwich (Woolwich need not depend on a formal demand). The court held that section 33 Taxes Management Act 1970 does not exclude common law restitutionary claims for tax charged contrary to EU law and allowed the appeal on that point. The court concluded that Finance Act 2007 s.107 (retrospective cancellation) was incompatible with EU law. Because the court was divided as to whether EU law requires both the Woolwich and the mistake (DMG) remedies to be concurrently available, the compatibility of Finance Act 2004 s.320 with EU law (the DMG/section 320 issue) was referred to the Court of Justice under article 267 TFEU for a preliminary ruling.

On appeal from the Court of Appeal [2010] EWCA Civ 103, following first instance judgment of Henderson J in the High Court [2008] EWHC 2893 (Ch). Earlier reference to the Court of Justice in Case C-446/04 (Test Claimants in the FII Group Litigation v Inland Revenue Comrs) is recorded in the judgments below.