Test Claimants in the Franked Investment Income Group Litigation v Commissioners for Her Majesty’s Revenue and Customs

Where tax paid prematurely is later set off against lawful tax or repaid, the time-value claim is not a separate restitutionary claim in unjust enrichment. Section 35A of the Senior Courts Act 1981 does not create a standalone interest claim after the underlying tax debt has been extinguished. The statutory remedy in section 85 of the Finance Act 2019 provides an effective EU-law remedy.

EU law required unused foreign-tax credits, calculated on the required basis, to be carried forward. Tax paid because domestic law prevented that carry-forward was unlawfully levied and recoverable in restitution. A standstill derogation ceased to protect a foreign-dividend regime once materially different procedures were introduced. Actual surrenders of mixed lawful and unlawful ACT to subsidiaries must be allocated pro rata.

The appeals arose from the long-running Franked Investment Income Group Litigation. UK-resident companies had received dividends from non-resident subsidiaries and were subject to a less favourable tax regime than groups receiving domestic dividends.

The appeals were from decisions of the Court of Appeal in [2010] EWCA Civ 103 and [2016] EWCA Civ 1180. They concerned the remedy for prematurely paid ACT, unused double-taxation relief, the calculation of restitution where shareholder or treaty credits had been paid, the TFEU standstill provision, and the treatment of ACT surrendered within a corporate group.

The central questions were whether EU law required remedies beyond those provided by domestic legislation, and how restitution should be calculated for tax levied contrary to EU law.

1. The appeals were allowed in part. The Revenue’s appeal on compound interest for the period of prematurity succeeded. The claimants’ arguments based on cause of action estoppel, issue estoppel, abuse of process and absence of jurisdiction failed. The earlier stages of the group litigation had decided only the availability of compensation at a high level of generality. They had not determined the measure of compensation or whether interest should be simple or compound.

2. Following Prudential Assurance Co Ltd v Revenue and Customs Comrs [2018] UKSC 39, there was no restitutionary claim in unjust enrichment for the time value of unlawfully paid ACT after it had been set off against lawful MCT or repaid. Senior Courts Act 1981 section 35A could not be construed to grant interest where no proceedings for recovery of the underlying debt existed. Sections 85 and 86 of the Finance Act 2019 supplied an effective statutory remedy. The summary judgment concerning FID claims was set aside and remitted to the High Court.

3. The claimants succeeded on unused double-taxation relief. EU law required unused credits, calculated at the higher of the foreign nominal rate and foreign tax paid, to remain available for later use. Domestic rules preventing carry-forward had to be disapplied. If tax had already been paid because the credits could not be carried forward, that tax was unlawfully levied and recoverable in restitution with interest. If no tax had been paid, the unused credits remained available, but not in addition to restitution for tax already recovered.

4. The Revenue could not reduce its enrichment by shareholder tax credits. Under Income and Corporation Taxes Act 1988 section 231, entitlement to a tax credit followed the valid qualifying distribution. It was not conditional on payment of, or liability for, ACT. The same conclusion applied to the treaty credit paid to FCE’s United States parent.

5. The claimants also succeeded on the TFEU standstill issue. The relevant inquiry was whether the legislative regime creating the restriction had continued from 31 December 1993. The EUFT rules introduced materially different procedures and did not reduce the restriction. The standstill protection therefore ceased when those rules came into force.

6. The claimants failed on ACT surrenders. Section 240 treated the recipient subsidiary as having paid the ACT actually surrendered to it; it did not pool the parent’s ACT across the group. Each surrender of a mixed fund of lawful and unlawful ACT had to be treated pro rata.

• United Kingdom Supreme Court: Allowed the Revenue’s appeal on interest for prematurely paid ACT, and allowed the claimants’ appeals on unused double-taxation relief, shareholder and treaty credits, and the TFEU standstill issue. Dismissed the claimants’ appeal on ACT surrenders.
• Court of Appeal: Appeals from [2010] EWCA Civ 103 and [2016] EWCA Civ 1180.
• High Court: The litigation included decisions reported at [2008] EWHC 2893 (Ch) and [2014] EWHC 4302 (Ch).