Franked Investment Income Group, Non-Test Claimants In the Litigation v Inland Revenue & Anor

For an evidential claim to a foreign tax credit, the claimant must prove on the balance of probabilities that the relevant dividend was sourced from profits capable of attracting credit. The court applies the ordinary rules of evidence. A low effective tax rate does not by itself defeat the claim where the evidence supports the existence of taxable profits reduced by exemptions, reliefs or allowances. Conversely, substantial uncertainty about whether a dividend was paid from profits or capital may defeat the claim.

For pleading purposes, material facts must be stated, but individual transactions may be particulars rather than essential facts where the claim concerns an objectively ascertainable category. Non-exhaustive schedules do not necessarily limit a broadly pleaded claim.

The judgment determined two preliminary issues arising in claims by non-test claimants in the Franked Investment Income Group Litigation. Issue 2 concerned whether four dividends received by the EMI group should be treated as carrying credit at the foreign nominal rate, despite limited evidence following the destruction of archival records.

Issue 5 concerned whether Chemetall’s pleaded claim was confined to dividends and advance corporation tax arising in accounting periods ending in 1992 onwards, or extended to the wider period stated in its pleading from 1973 onwards. The court also considered whether an amendment was necessary.

1. Issue 2. The burden lay on EMI to establish, on the balance of probabilities and by the ordinary rules of evidence, that the dividends were sourced from profits which should attract credit at the foreign nominal rate. Dividend A was paid after a restructuring involving a Dutch fiscal unity. The court found that the relevant company was outside the fiscal unity and that the transaction was linked to the disposal of the lighting business and a contemplated liquidation loss. Dividend A therefore qualified. The court also found that dividend B was probably sourced from operating profits, with the low tax rate most likely explained by reliefs and allowances; the absence of a withholding-tax credit did not establish a return of capital. Dividends C and D did not qualify because the evidence did not demonstrate that they were paid from taxable profits rather than capital reserves.
2. The court recorded, without deciding, HMRC’s reserved point concerning whether profits exempt under the Dutch participation exemption were properly treated as profits attracting credit. It noted the decision in Six Continents Ltd v HMRC [2016] EWHC 2426 (Ch); [2017] STC 1228, where that issue had been decided for the taxpayer.
3. Issue 5. Under Civil Procedure Rules 1998, pleadings must state the concise material facts on which the claimant relies. Applying Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners [2006] Ch 243, Savings and Investment Bank Ltd v Fincken [2001] EWCA Civ 1639 and McPhilemy v Times Newspapers Ltd [1999] 3 All ER 775, the court held that Chemetall’s 2005 pleading covered all dividends received from non-UK subsidiaries, and onward dividends sourced from them, in accounting periods ending 30 September 1973 and subsequently. The details in the schedules were particulars and did not restrict the scope of the claim.
4. The claim was therefore not limited to periods ending in 1992 onwards. It was unnecessary to determine the scope of the 2009 claim or the amendment application, although a clarificatory amendment could be made under the procedure established by the earlier order.