Franked Investment Income Group Litigation, The Test Claimants In v Revenue And Customs

EU law requires equivalent treatment of domestic and foreign dividends. Where domestic dividends are exempt and foreign dividends are taxed under an imputation system, the credit must reflect the higher of the actual underlying tax and the relevant foreign nominal rate, subject to the UK nominal-rate cap. Domestic legislation must be interpreted to secure that result, but the court cannot create a wholly different statutory scheme. Foreign dividends must be linked into the ACT and FII system at the UK water’s edge. In restitution claims, set-off, actual benefit and change of position are distinct issues. Where domestic law provides both Woolwich and mistake-based remedies, both must remain effective for EU-law purposes. A mistake actively litigated becomes discoverable when the legal issue is authoritatively resolved.

The appeals arose from the long-running Franked Investment Income group litigation concerning ACT and Schedule D Case V corporation tax charged on dividends received by UK companies from foreign subsidiaries. The Claimants sought repayment and related relief under EU law, together with domestic restitutionary remedies.

Henderson J determined the remaining taxation, remedies and limitation issues in FII HC2 ([2014] EWHC 4302 (Ch); [2015] STC 1471). In a related application, he granted summary judgment to Evonik Degussa and other claimants concerning ACT paid under the FID regime ([2016] EWHC 86 (Ch)). The appeals concerned the correct calculation of tax credits, the linkage of foreign income to ACT, FIDs, restitutionary set-off and defences, the effect of EU law, and when the relevant mistakes became discoverable.

1. Taxation issues. The court dismissed HMRC’s challenges to the tax-credit rules. EU law required credit for the higher of actual underlying foreign tax and the applicable foreign nominal rate, capped at the UK nominal rate. In mixer-company cases, the domestic court had to implement that result through a conforming interpretation of the existing legislation. The interpretation had to go with the grain of the statutory scheme and could not introduce HMRC’s wholly new tracing methodology. Foreign dividends were to be treated as entering the ACT system at the UK water’s edge, with the associated credit assimilated to FII. The court also upheld the conclusions on the special cases, withholding-tax credits and the FID regime.
2. Restitutionary set-off. HMRC could credit against FCE’s recovery the double-taxation treaty credits paid to FCE’s US parents, because those credits would not have arisen had the unlawful ACT not been paid. The separate legal personalities of the companies did not prevent that conclusion. By contrast, shareholder tax credits were the reciprocal of the foreign corporation tax which EU law required to be recognised. HMRC were therefore enriched by the full ACT payments for the purpose of issue 17.
3. Actual benefit and change of position. It was legally open to HMRC to argue that their actual benefit from prematurely paid ACT was less than its objective use value. The argument failed on the facts. The evidence did not establish the necessary causal connection between the particular tax payments and government expenditure. The change-of-position issue was res judicata as a matter of principle, and the defence also failed on the facts.
4. Effect of EU law. The principles of equivalence and effectiveness required both available domestic remedies to vindicate the San Giorgio right. EU law therefore precluded HMRC from relying on the issue 17 set-off argument, reducing restitution by an alleged lower actual benefit, or raising change of position against the mistake-based claims.
5. Discoverability and orders. Applying DMG, the mistakes were discoverable only when the relevant legal issues were authoritatively resolved. For these claims that date was 12 December 2006, when the CJEU gave judgment in FII CJEU1, not 8 March 2001. HMRC’s appeals were allowed on issues 15 and 22 and otherwise dismissed. The Claimants’ cross-appeal on issue 28 was allowed. Permission was granted in the Evonik applications, but those appeals were dismissed.

1. Court of Appeal (Civil Division) — The present court allowed HMRC’s appeals on issues 15 and 22, allowed the Claimants’ cross-appeal on issue 28, dismissed the remaining appeals and cross-appeals, and dismissed the Evonik appeals after granting permission.
2. High Court, Chancery Division — Henderson J determined the remaining FII issues in FII HC2 ([2014] EWHC 4302 (Ch); [2015] STC 1471). In the Evonik Degussa applications he granted summary judgment for the claimants ( [2016] EWHC 86 (Ch)).