The Prudential Assurance Company Ltd & Anor v Revenue and Customs

Where domestic tax legislation treats foreign dividends less favourably than domestic dividends, it must be construed, so far as possible, to comply with Article 63 TFEU. For portfolio dividends, equivalent treatment may require credit for the foreign nominal corporation-tax rate, subject to the domestic tax cap, in addition to any credit for underlying tax actually paid. The taxpayer must still prove actual underlying tax where that credit is claimed. A dual-credit construction was available under the relevant tax legislation, so disapplication was unnecessary. The same approach applied to ACT and life-assurance provisions. EU law excluded a change-of-position defence to restitutionary claims for unlawfully levied tax. Compound interest formed part of full restitution, including for overpaid corporation tax and utilised or unutilised ACT.

The claimants were test claimants in the Portfolio Dividend Group Litigation. Their claims concerned corporation tax and ACT imposed on portfolio dividends received from companies resident in EU, EEA and third countries, together with technical issues arising under the life-assurance tax regime. The proceedings had been adjourned after earlier domestic decisions and references to the ECJ. The ECJ subsequently decided FII (ECJ) II, [2013] STC 612, and the resumed trial addressed the domestic consequences of that decision, including conforming construction, tax credits, restitution, interest, limitation and the appropriate forum. The central questions were whether the UK legislation infringed Article 63 TFEU and, if so, how the claimants’ rights were to be made effective.

1. Portfolio corporation tax. The Case V charge on foreign portfolio dividends infringed Article 63 TFEU. The defects included the absence of credit for underlying foreign tax and the failure to reflect the foreign nominal tax rate. The exemption of domestic dividends was treated, in principle, as equivalent to a credit at the relevant domestic nominal rate. Foreign dividends therefore required a credit based on the foreign nominal rate, subject to the UK rate and withholding-tax cap, alongside credit for actual underlying tax where proved.
2. Conforming construction. Section 790 of the Income and Corporation Taxes Act 1988 could be construed to provide the necessary credit. The construction was consistent with the grain and machinery of the legislation and did not require disapplication. The claimants had not proved the actual underlying tax for thousands of dividends, but that did not prevent the nominal-rate credit.
3. ACT and insurance provisions. Section 231 of the Income and Corporation Taxes Act 1988 was likewise to be construed to provide a limited credit for foreign portfolio dividends. Section 89 of the Finance Act 1989 was remedied by credit rather than by excluding the dividends from the computation. The restriction of the section 438(6) election to UK FII unlawfully disadvantaged foreign dividends, but the remedy was again a conforming credit. The section 242 claim for additional UK tax credits failed because the proper remedy did not alter the computation of surplus FII and the claim was not restitutionary.
4. Third countries and remedies. Article 63 applied to dividends from all third countries for the nominal-rate credit, since the necessary information could be established from the source country and rate. Unlawfully levied tax was recoverable under Woolwich or mistake-based restitutionary claims. Under Lady & Kid, [2012] STC 854, direct passing-on was the sole substantive EU-law exception; change of position was unavailable. In any event HMRC had adduced no evidence to establish it.
5. Interest and procedure. Compound interest formed part of the restitutionary principal under Sempra Metals Ltd v IRC, [2007] UKHL 34, for overpaid corporation tax, ACT and post-utilisation periods. The common issues could properly be determined in the High Court, with statutory appeal machinery used where appropriate at the implementation stage.

The judgment records earlier decisions and ECJ references in related group litigation, including [2010] EWHC 2811 (Ch), the Court of Appeal decision in FII (CA), the Supreme Court decision in [2012] UKSC 19, and the ECJ decision in Case C-35/11. This was a resumed first-instance trial in the High Court.