On appeal from: [2016] EWCA Civ 376

This appeal considered whether a non-discriminatory treatment of foreign sourced dividends under EU law requires a tax credit to be set at the effective or nominal rate of tax; the appropriate methodology to quantify how much ACT was unlawful; and whether lawful ACT may be set against unlawful corporation tax. A number of cross-appeal issues were also considered including whether Prudential can rely on the nominal rate of the jurisdiction of the dividend paying company or evidence of the underlying tax paid in the consolidated accounts of the non-resident company, and what conforming construction should apply to the subject provisions to give effect to the answers in relation to the appropriate DV tax credit.

The Supreme Court unanimously dismissed HMRC’s appeal on Issue I, allowed HMRC’s appeal on Issues II and III, and allowed PAC’s cross-appeal on Issue V.

On Issue I, the Court considered that EU law does not require the tax credit to be set by reference to the overseas tax actually paid, but rather by reference to the foreign nominal tax rate. This is because the CJEU jurisprudence, particularly Case C-35/11 “FII ECJ II”, clearly establishes that the credit for foreign dividends should be by reference to the foreign nominal tax rate, rather than by reference to the actual or effective tax incurred overseas.

On Issue II, the Court held that the respondent is not entitled to compound interest in respect of tax which was levied in breach of EU law, on the basis that HMRC was not unjustly enriched by the opportunity to use the money in question.

On Issue III, the Supreme Court considered that a claim in restitution does not lie to recover lawful advance corporation tax which was set against unlawful mainstream corporation tax. This was because, when the lawful advance corporation tax was set against unlawful mainstream corporation tax, HMRC did not receive unlawfully levied tax, as required for a “San Giorgio” claim.

On Issue IV, the Court concluded that unlawful advance corporation tax is treated as set first against unlawful mainstream corporation tax and because unlawful mainstream corporation tax is a nullity, the unlawful advance corporation tax is recoverable unless it has been set against a lawful mainstream corporation tax charge. It also held that franked investment income which is carried back to an earlier quarter is to be regarded as having been applied to relieve only lawful advance corporation tax.

For judgment, please download: [2018] UKSC 39
For Court’s Press Summary, please download: Court’s Press Summary
For a non-PDF version of the judgment, please visit: BAILII

To watch the hearing, please visit: Supreme Court Website (20 Feb 2018 morning session) (20 Feb 2018 afternoon session) (21 Feb 2018 morning session) (21 Feb 2018 afternoon session)