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

This appeal raises multiple legal questions arising from the tax treatment of dividends paid by non-resident subsidiaries to UK-resident parent companies under the former ACT (advance corporation tax) and the Case V (DV) provisions of the Income and Corporation Taxes Act 1988 (ICTA). The court applied EU law principles (notably the San Giorgio line of authority and the CJEU’s subsequent clarifications) and recent domestic authorities (in particular Prudential) to determine the remedies available for tax levied in breach of EU law.

• Measure of remedy for unlawfully levied ACT: Prudential was applied so that restitutionary awards of interest founded on unjust enrichment are largely unavailable; interest after set-off or repayment is to be simple interest under section 35A Senior Courts Act 1981. The revenue’s appeal on the question whether compound interest is payable for the period of prematurity (payments made and then set off) succeeds.
• Set-off and group relief / management expenses: where inability to carry forward unused double taxation relief (DTR) caused tax to be paid in a later year, that tax is recoverable by way of San Giorgio restitution; unused DTR credits that have not resulted in a payment remain available for use.
• Enrichment and shareholder credits: credits afforded under section 231 ICTA (or by a conforming interpretation required by EU law) are not to be deducted from the Revenue’s enrichment for restitutionary purposes; EU law and the statutory framework show that shareholder credits are not conditional on ACT having been paid.
• Effect of non-resident parent receiving treaty credits: where a non-resident parent received treaty credits (eg under a double taxation treaty), those credits are not to be set off against the amount repayable to the UK-resident subsidiary, because the credits arise under separate treaty/domestic rules and are not conditional on ACT being lawfully payable.
• Standstill/Article 64(1) TFEU: the Eligible Unrelieved Foreign Tax (EUFT) rules introduced in 2001 altered the pre-1993 regime materially and therefore the DV (Case V) provisions were no longer protected by the Article 64(1) standstill once those rules were brought into effect.
• Surrenders of ACT within groups: where a parent actually surrendered ACT to particular subsidiaries under section 240 ICTA, the surrendered sums should be treated pro rata as lawful and unlawful ACT; they are not to be attributed so as to allocate unlawful ACT preferentially to unlawful MCT in subsidiaries.

The FII Group Litigation concerns claims by UK companies (including large corporate groups led by BAT and a Ford group company, FCE) for repayment of tax levied under ICTA (principally ACT and the Case V/DV provisions) which the claimants contend was incompatible with EU law (freedom of establishment and free movement of capital). The litigation has proceeded through multiple stages: High Court trials, references to the Court of Justice of the European Union (CJEU), two earlier appeals to this court and several Court of Appeal decisions. The present judgment resolves a diverse set of issues in the second-phase (quantification and remedies) litigation.

The principal factual and legal context:

• ACT (section 14 and Part VI ICTA) operated until April 1999 and produced a system in which ACT could be carried back, carried forward or surrendered only to UK-resident subsidiaries; domestic dividends between UK companies generated tax credits under section 231 and were treated as franked investment income (FII); dividends from non-resident subsidiaries were taxed under the DV/Case V rules, with different reliefs and timing.
• Claimants asserted that differential treatment of foreign-sourced dividends breached EU law (San Giorgio, freedom of establishment and capital movement) and sought restitution of unlawfully levied tax and interest; a damages claim under Francovich principles had failed at first instance and is not part of this appeal.

Procedural posture and prior steps:

• Group Litigation Order made in 2003; BAT was a lead test claimant; multiple common issues were tried in a first phase (liability/principle) and reserved issues (including measure of remedy and quantification) were tried in a second phase; there were references to the CJEU (notably to clarify scope and effect of EU remedies and to address limitation-period cut-offs).
• This court had previously decided on related points in separate appeals (including Prudential and Littlewoods) and those decisions influenced the permitted scope of remedy and whether compound interest could be awarded as restitution.

Issues framed and court’s reasoning (concise):

• Whether claimants are barred from challenging the revenue’s withdrawal of an earlier concession that compound interest was payable: rejected — res judicata, issue estoppel and abuse of process did not preclude reconsideration given the evolving law and the distinct first and second-phase issues.
• Whether compound interest is payable for the period of prematurity (ACT paid then set off): Prudential was applied; the court concluded there is no independent restitutionary claim to compound interest under unjust enrichment for that period. Section 35A Senior Courts Act 1981 can award simple interest in proceedings to recover a debt, but the statutory scheme in many prematurity cases (where tax was repaid or set off automatically) meant the conventional section 35A route did not always fit; Parliament’s remedial response in sections 85–86 Finance Act 2019 provides a statutory ‘interest‑like’ remedy for specified historic claims. The revenue’s appeal succeeds on the compound interest point; summary judgments awarding compound interest in related FID claims must be revisited.
• Remedy for loss of use of set-offs such as group relief/management expenses and the inability to carry forward unused double taxation relief (DTR): in line with the CJEU’s Salinen decision, where inability to carry forward unused DTR caused tax to be paid in later years that would not otherwise have been payable, those taxes are recoverable under San Giorgio as unlawful; if no tax was paid the unused credits must remain available for future use. Domestic provisions conflicting with this EU rule must be disapplied so far as necessary to give effect to directly effective EU law.
• Whether revenue’s enrichment must be reduced by shareholder credits under section 231 ICTA or by treaty credits granted to non-resident parents: the court held section 231 credits are not conditioned upon ACT having been paid and EU law requires the conforming treatment that produces equivalent relief; therefore such credits are not to be deducted from the Revenue’s enrichment. Similarly, treaty credits granted to a non-resident parent in the factual scenario (FCE) were not deductible from the repayment due to the UK resident subsidiary.
• Whether the DV/Case V provisions remained protected by the Article 64(1) standstill after the EUFT rules (2001): the court followed CJEU guidance that materially different legislative approaches or procedures introduced after accession do not fall within the standstill; the EUFT rules changed the regime sufficiently that the standstill protection was lost once those rules were brought into operation.
• Computation where parent surrenders ACT to subsidiaries (section 240): actual surrenders are to be treated as comprised pro rata of lawful and unlawful ACT; the claim that unlawful ACT should be regarded as having been allotted first to unlawful MCT within subsidiaries was rejected.

Relief sought:

• (i) Repayment/restitution of unlawfully levied tax and (ii) interest/compensation for time value of money and other consequential remedies. The court allowed some claims and rejected or limited others according to the legal reasoning summarised above.

The appeals were allowed in part. The court: (a) upheld the revenue’s appeal on the question whether compound interest can be awarded as a restitutionary remedy for the period of prematurity (following Prudential) and allowed the revenue to withdraw their earlier concession; (b) allowed the claimants’ appeals that where inability to carry forward unused DTR caused tax to be paid the tax is recoverable under San Giorgio and that unused credits which have not led to payments remain available; (c) rejected the revenue’s submission that repayment should be reduced by shareholder credits under section 231 or by treaty credits in the FCE factual context; (d) held the EUFT rules introduced in 2001 altered the pre-1993 regime so that the Article 64(1) standstill no longer protected the DV provisions; and (e) determined that actual surrenders of ACT to subsidiaries are to be treated pro rata as lawful and unlawful. These decisions rest on the interaction of EU law principles (San Giorgio and CJEU authorities), the domestic statutory framework (ICTA, Limitation Act and Senior Courts Act), and the court’s prior reasoning in Prudential and related cases.

The litigation began in the High Court (Chancery) with multi-stage group proceedings under the FII Group Litigation Order (GLO, 2003). There were references to the CJEU (Case C-446/04; Case C-35/11; Case C-362/12) and appeals to the Court of Appeal ([2010] EWCA Civ 103; [2016] EWCA Civ 1180). This judgment is the third appeal to the Supreme Court in the FII Group Litigation, disposing of a range of second-phase remedial and quantification issues; the cover records appeals from [2010] EWCA Civ 103 and [2016] EWCA Civ 1180.