The Commissioners for HMRC v Applicants in the Post Prudential Closure Notice Applications Group Litigation & Anor

A taxpayer who returned foreign dividends as taxable but omitted a claim for double taxation relief cannot use error-or-mistake relief to cure that omission. A document asserting that the dividends were exempt cannot ordinarily be construed as a claim for a tax credit, and the EU-law requirement of an effective remedy does not dispense with a valid, timely claim under Income and Corporation Taxes Act 1988.

However, a quantified claim for double taxation relief by reference to withholding tax, where HMRC has opened an enquiry, encompasses the proper credit on that income, including credit at the foreign nominal rate. The extended time limit in section 806(2) applies only where an adjustment to United Kingdom or foreign tax gives rise to the particular claim. It does not arise merely because subsequent authority established the foreign-nominal-rate credit.

Investment funds and an insurance company held portfolio shareholdings in non-UK companies. They sought double taxation relief, or repayment of tax said to have been overpaid, on foreign dividends received between 1991 and 2010 after the United Kingdom’s treatment of such dividends had been held to breach EU law.

The First-tier Tribunal allowed the taxpayers’ applications for closure notices and their appeals against HMRC decisions. HMRC appealed on the issues it had lost. The taxpayers cross-appealed on four issues.

The central questions were whether the taxpayers had made valid and timely statutory claims for relief, whether claims limited to withholding tax extended to foreign-nominal-rate credit, and how the time limits and carry-forward rules operated.

1. HMRC’s appeals were substantially allowed and the taxpayers’ cross-appeals were dismissed. The First-tier Tribunal’s decision was set aside to the extent inconsistent with the Upper Tribunal’s conclusions. The matters were remitted to the First-tier Tribunal to apply those conclusions.

2. A return which treated foreign dividends as taxable, without claiming double taxation relief, contained no mistake for the purposes of paragraph 51 of Schedule 18 to the Finance Act 1998. The dividends were taxable. The error was the omission to make the claim for credit required by section 788(6) of the Income and Corporation Taxes Act 1988.

3. A letter claiming repayment on the footing that foreign dividends were exempt could not reasonably be construed as a claim for double taxation relief. Exemption and a credit are distinct forms of relief. Section 114 of the Taxes Management Act 1970 could not cure that fundamental defect. EU-law principles of effectiveness and effective judicial protection did not require acceptance of the defective claim, since a statutory claim under section 790 was an effective available remedy.

4. Conversely, where a taxpayer claimed credit for withholding tax and HMRC opened an enquiry into the return, the claim was a claim for double taxation relief generally. On closure, HMRC had to give the proper credit, including foreign-nominal-rate credit. The statutory scheme imposed no further requirement to identify separately every form of double taxation relief.

5. Section 806(2) extended time only where an adjustment to United Kingdom or foreign tax rendered a credit excessive or insufficient and gave rise to the particular claim. The later recognition of foreign-nominal-rate credit was not such an adjustment. Nor could an adjustment concerning dividends previously returned as exempt extend time for a claim concerning separately taxable dividends.

6. Foreign-nominal-rate credit was capped at United Kingdom corporation tax on the dividend, after withholding-tax credit. It was not foreign tax actually payable and could not generate eligible unrelieved foreign tax. Unused credit prevented from being used by management expenses could be carried forward only where there had been a valid, timely claim for that relief.

7. On an application under paragraph 33 of Schedule 18, the tribunal could determine an incidental legal issue necessary to decide whether HMRC had reasonable grounds to withhold a closure notice. It had no power to direct HMRC how to formulate a closure notice.

• Upper Tribunal (Tax and Chancery Chamber): HMRC’s appeals were substantially allowed and the taxpayers’ cross-appeals dismissed. The proceedings were remitted to the First-tier Tribunal.
• First-tier Tribunal: The Decision, released on 8 December 2021, had allowed the taxpayers’ appeals and closure-notice applications in full.