Case Comment: Test Claimants in the Franked Investment Income Group Litigation v Commissioners of Inland Revenue & Anor  UKSC 19
30 Monday Jul 2012
The Supreme Court handed down its judgment in the appeal of Franked Investment Income Group Litigation v Commissioners of Inland Revenue & Anor  UKSC 19 on 23 May 2012. The Supreme Court dismissed two points of appeal, allowed one and referred another to the Court of Justice of the European Union.
The case concerned the tax treatment of dividends received by UK resident companies from their non-UK resident subsidiaries. The decision of the Supreme Court is by no means the end of this long-running saga, which has already seen two separate references to the CJEU.
However, the decision contains some helpful guidance on the interaction of EU principles and the domestic remedies available for breach of EU law.
The Court considered four questions:
- whether Parliament could lawfully curtail the extended limitation period provided by the Limitation Act 1980, s 32(1)(c) in relation to claims for tax levied under a mistake of law. This also led the court to consider if a Woolwich remedy alone would be sufficient, or if all domestic remedies available in respect of wrongly levied taxes should also be available to a claim founded on EU law;
- whether the Taxes Management Act 1970, s 33 excluded the appellants’ claims for restitution and damages;
- whether s 32(1)(c) of the 1980 Act applied to a claim for a Woolwich restitution remedy; and
- whether a Woolwich remedy only applied to tax demanded by the Revenue, and not tax payable by way of return such as advance corporation tax (“ACT“).
Although the Court provided extensive commentary on the first issue, it was referred to the CJEU for a definitive ruling. The appeal on the second point was allowed; the court held that s 33 of the 1970 Act only applied to taxes assessed by the Revenue and so did not exclude remedies available at common law. However, the sums that had been levied under the 1970 Act were insignificant in this context.
The appeals on the third and fourth points were dismissed: s 32(1)(c) of the 1980 Act could not be read so widely as to extend the limitation period for a Woolwich claim and the Woolwich remedy applied in any case where there was a compulsion for the taxpayer to account for sums to the Revenue.
The judgment may have a significant bearing on cases concerning the interaction ofUKand EU law on restitution and damages. Of course, much depends on the outcome at the CJEU.
Supreme Court Decision
There are two well established causes of action of restitution for incorrectly levied taxes which were potentially available to the appellants. The first was a claim for restitution of unlawfully demanded tax as established in Woolwich Equitable Building Society v Inland Revenue Comrs  AC 1970 (the “Woolwich remedy“). The second was a claim for restitution of tax wrongly paid under a mistake of law, first recognised in Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs  UKHL 49 (“DMG“).
The appellants took the unusual step of arguing that they could not bring a Woolwich claim, because, if this was correct, then a more favourable time limit applied to their DMG claim. They therefore argued that a Woolwich remedy only applied to taxes demanded by the Revenue, rather than self assessed taxes such as ACT.
The court unanimously rejected that proposition. Lord Walker stated at paragraph 79 that the Woolwich principle should be construed, “as to cover all sums paid to a public authority in response to (and sufficiently causally connected with) an apparent statutory requirement to pay tax which (in fact and in law) is not lawfully due.” This appears an unequivocal definition of the boundaries of the Woolwich remedy, which may prove instructive in future cases.
The appellants pleaded an alternative ground for restitution, this time relying on the Woolwich remedy and seeking to broaden the interpretation of s 32(1)(c) of the 1980 Act. That s provides that the time limit for a claim founded on a mistake, fraud or concealment will not commence until the date the mistake, fraud or concealment which gives rise to the claim is discovered. Though the Finance Act 2003 and the Finance Act 2007 altered the effect of that section in relation to a DMG claim (see below), the appellants sought to broaden the meaning of “mistake” in s 32(2)(c) to allow for restitution on Woolwich principles.
However, the Court dismissed that argument. It held that the language in s 32(1)(c) of the 1980 Act had been carefully chosen to cover only a certain category of mistakes into which an unlawful demand of tax could not be forced.
With no effective remedy apparent, the court assessed if a Marleasing reading could establish one. It was thought that including an unlawful demand for tax within s 32(1)(c) of the 1980 Act would fundamentally alter its intended meaning. As such, the extended limitation period provided by that section could not apply to a Woolwich claim.
The Court was divided as to whether EU law required only that a member state provide an adequate remedy, fulfilling the principles of effectiveness and equivalence, or make every remedy recognised in domestic law available for a breach of EU law.
As the DMG claim was time barred by both the Finance Act 2004, s 320 and the Finance Act 2007, s 107 (“section 107“) (see below), the Court considered whether a Woolwich remedy alone would provide an adequate remedy as per the case of Amministrazione delle Finanze dello Stato v SpA San Giorgio (Case 199/82)  ECR 3595. The majority (Lord Sumption and Lord Brown dissenting) thought it would not, though the issue was referred to the CJEU as the matter was not acte clair.
The CJEU’s decision on the above point may have far reaching implications for the restitutionary remedies available where EU law is breached.
As stated above, s 32(1)(c) of the 1980 Act provides that the limitation period for claims founded upon a mistake run from the point in time the mistake is discovered by the party affected. It was only at the date of the judgment of the House of Lords in DMG (25 October 2006) that it was clear that recovery was possible where tax had been levied in mistake of law. As such, that was the date the limitation period for the appellants’ claims under DMG should have commenced. If that had been the case, the appellants would have had until 25 October 2012 to bring claims for restitution.
However, both s 320 and s 107 restricted claims for restitution based on DMG. Section 320 had been included in the Finance Bill 2004 after Park J’s decision at first instance in the DMG case. It excluded s 32(1)(c) of the 1980 Act from application to a DMG cause of action brought on or after 8 September 2003. Only one group of companies, British American Tobacco, had brought claims before that date.
S 107 was introduced after the House of Lords’ decision in DMG and retrospectively excluded s 32(1)(c) of the 1980 Act from application to a DMG cause of action brought before 8 September 2003.
The Court considered to what extent both s 320 and s 107 frustrated principles of effectiveness and legitimate expectation. S 320 divided the Court: a majority thought it frustrated the principle of effectiveness, but noted it was well established that curtailing the recovery for sums levied in breach of EU law was not incompatible with EU law.
It is an established principle that a right to repayment should remain effective notwithstanding such curtailment. Lord Walker explained that the absence of transitional provisions in respect of both ss 320 and 107, and the retroactive application of s 107 precluded an effective right to repayment.
The Court’s comments on the interaction of ss 320 and 107 and legitimate expectation may prove more significant still. Five judges held that s 320 did infringe legitimate expectation. Under s 32(1)(c) of the 1980 Act, companies adversely affected by the provisions on foreign income dividends would have had until 25 October 2012 to bring their claims. Such companies may have had a legitimate expectation that they could wait until that date to bring such claims. S 320 frustrated that legitimate expectation.
The Court was clear that a person could have a legitimate expectation that his rights would not be retroactively abridged. S 107 did just that, so frustrating that legitimate expectation. Lord Reed did note that legitimate expectation was not an absolute principle: retroactive measures could be justified by their being in the public interest. The facts of this case did not give rise to any such compelling public interest however, and legitimate expectation had been unjustifiably infringed.
BAT, which brought claims before 8 September 2003, has stated it may be able to recover up to £1.2 billion as a result of this judgment. Bearing in mind BAT was one of a number of claimants, clearly the monetary impact of the decision may be huge.
Much will hinge on the outcome of the reference to the CJEU, as it will affect whether or not companies that brought claims after 8 September 2003 (the date after which s 320 excluded s 32(1)(c) of the 1980 Act from applying to DMG claims) may recover under DMG. If, as widely believed, the CJEU agrees with the majority on s 320, that will be the difference for some appellants between being able to claim for two years of incorrectly levied ACT and 25 years ACT.
The Court’s comments on the principles governing effectiveness and legitimate expectation may also prove instructive in future. It is interesting that Lord Reed was careful to note that legitimate expectation was not an absolute principle of EU law and could justifiably be frustrated if it were in the public interest. The way was left open to allow Parliament to restrict legitimate expectation on different facts.