The Test Claimants in the FII Group Litigation v HM Revenue and Customs

EU law required a dual credit when calculating corporation tax on qualifying dividends from EU-resident subsidiaries: credit for underlying foreign tax and, where higher, tax at the relevant foreign nominal rate, subject to the UK cap. The relevant nominal rate was generally that of the jurisdiction in which the distributed profits were actually taxed. The credit was to be integrated with the existing UK imputation system, including its treatment of withholding tax and franked investment income.

For advance corporation tax, the appropriate method was to introduce modified section 231 credits at the UK water’s edge and trace them through the existing FII system. Unlawful ACT was generally treated as a pro rata part of the ACT actually utilised. Restitution included principal and compound interest. The Revenue failed to establish change of position or actual benefit defences.

The judgment concerned resumed test claims in the FII group litigation, principally involving BAT, with supplementary Ford and GKN claims. Earlier proceedings had included references to the Court of Justice and decisions of the High Court, Court of Appeal, Supreme Court and Court of Justice. The present trial addressed remaining issues of quantification, special categories of income, the linking of ACT with EU-source dividends, restitution, limitation and defences.

The central questions were how the unlawful Case V corporation tax and ACT should be calculated, how FIDs and foreign branch profits should be treated, whether shareholder tax credits affected restitution, and whether the Revenue could rely on change of position or actual benefit arguments.

1. Case V tax. EU law required a dual credit for EU-source dividends: credit for actual underlying tax and a credit at the relevant foreign nominal rate, taking the higher amount subject to the UK corporation tax cap. The appropriate nominal rate was generally the rate in the jurisdiction where the distributed profits were actually taxed. For blended dividends, the section 801 machinery and weighted-average approach were preferred to notional disaggregation. Third-country income which had not been taxed in the EU was excluded from the EU-law adjustment.
2. The FNR credit was applied to the Case V income as computed under the existing legislation. The income was not grossed up again at the FNR. Withholding tax had to be included on both sides of the comparison between the actual and notional lawful charge.
3. ACT. The same dual-credit principle applied to ACT. The CT61 method, suitably corrected so that modified EU credits generated equivalent FII, was the appropriate method for linking EU dividends with ACT paid within the group. The FID method was conceptually flawed, and the Revenue’s tracing methodology ignored the domestic FII system and was unsound.
4. Actual FIDs were distinct from ordinary dividends. The whole ACT paid on valid EU and third-country FIDs, subsequently repaid under the FID regime, was recoverable in time-value claims. The interest paid following the re-matching of the 1994 FID was not recoverable.
5. Lawful and unlawful ACT were fungible. Subject to the self-contained FID regime, payments, surrenders and utilisations were to be treated as comprising lawful and unlawful ACT pro rata. The same approach applied to ACT repaid following carry-back of FII and to quarterly ACT payments.
6. Foreign branch profits did not give rise to an equivalent EU claim. The UK tax system treated UK and EU branches alike, while double taxation agreements merely relieved juridical double taxation. Tax credits paid to non-resident US parent companies did not reduce FCE’s restitution.
7. San Giorgio restitution required repayment of unlawful tax, directly related amounts and an adequate indemnity for the claimant’s loss. The proper measure was compound interest, not the Revenue’s supposed actual benefit. The Revenue’s change of position defence failed on the facts, and EU law would in any event preclude it for San Giorgio claims.
8. The claimants’ mistake was discovered, or reasonably discoverable, on 8 March 2001, when the Court of Justice decided Hoechst/Metallgesellschaft. All mistake claims dating from 1973 were therefore in time. Quantification was left for the parties to complete in accordance with the judgment.

The judgment records earlier stages of the same litigation, including the High Court decision at [2008] EWHC 2893 (Ch), the Court of Appeal decision at [2010] EWCA Civ 103, Supreme Court proceedings at [2012] UKSC 19, and successive references to the Court of Justice. This judgment was a first-instance determination of the remaining quantification and remedies issues.