The Prudential Assurance Company Ltd v HM Revenue and Customs

Restitution for unlawfully levied corporation tax includes compound interest as a matter of substantive law, whether or not the relevant accounting period remains open. A claim arising when lawful ACT is used against unlawful corporation tax remains a restitution claim for unlawfully levied ACT.

Credits under section 231 of the Income and Corporation Taxes Act 1988 are treated like domestically generated FII. They are not reduced by identifying particular income in later distributions. Where lawful and unlawful ACT and corporation tax are utilised together, attribution is generally pro rata, subject to adjustment where that approach produces over-compensation.

This was a sequel to the court’s Main Judgment concerning restitution and quantification following the invalidity under EU law of aspects of the taxation of portfolio dividends. The claimant sought resolution of outstanding questions arising from the January 2014 Order, including compound interest, section 231 credits, attribution of lawful and unlawful ACT, late-payment interest and the carry-back of excess FII.

Several questions were agreed or conceded. The court determined the remaining issues, including whether HMRC could require tracing of EU-source income through later distributions, how mixed ACT and corporation tax should be attributed, and how lawful FII carried back within an accounting period should affect repayment.

1. Compound interest. The entitlement to compound interest on successful restitution claims was substantive and was unaffected by an accounting period remaining open. The issue for open periods concerned timing and forum for payment, not entitlement.
2. Lawful ACT used against unlawful MCT. The resulting claim was for restitution of unlawfully levied tax in the form of ACT and could be pursued only in the High Court.
3. Foreign nominal rates. The existing evidence, including the historical statutory-rate table in exhibit NJH 19, adequately supported the rates for 1990 to 1993. Declaration 1(F) in the January 2014 Order was to be read accordingly.
4. Section 231 credit. Foreign tax was to be calculated by applying the foreign nominal rate to the gross dividend, including recoverable and irrecoverable withholding tax.
5. Tracing. HMRC could not require identification of EU income within later distributions. On the conforming construction of section 231 of the Income and Corporation Taxes Act 1988, the credit was to be treated like domestically generated FII. The proposed methodology was inconsistent with the domestic statutory scheme and was raised too late.
6. Utilisation and carry-back. Pro rata attribution of mixed lawful and unlawful ACT and MCT was the ordinary approach. Here it produced an anomaly and over-compensation, so unlawful ACT was treated as utilised first against unlawful MCT. Excess FII carried back within the same accounting period was treated, so far as possible, as repaying lawful ACT.
7. Further matters. The court inferred that statutory interest on late-paid ACT had been paid and was recoverable. Interest under section 17 of the Judgments Act 1838 ran from the date of this judgment, as agreed.

This was a further High Court judgment implementing and clarifying the court’s earlier decision in the same proceedings, identified as [2013] EWHC 3249 (Ch). The present judgment resolved outstanding consequential and quantification issues arising from the January 2014 Order.