This stage of the Franked Investment Income litigation concerned how to put right the effects of an earlier UK tax regime on overseas dividends. Recovering tax that should never have been charged is different from compensating a company for paying tax before it was due. That difference mattered both to the available interest remedy and to the treatment of tax credits.
What the claims were about
The 2020 judgment on limitation explains when companies could reasonably have discovered their mistake and brought a repayment claim.
The Franked Investment Income Group Litigation was established by a group litigation order of 8 October 2003. The test claims were brought by members of the British American Tobacco group. A related claim was brought by FCE Bank plc, a UK company in the Ford group, and a separate summary-judgment application concerned advance corporation tax paid on foreign income dividends.
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Under the Income and Corporation Taxes Act 1988, a UK company paying a dividend had to pay advance corporation tax, calculated by reference to the distribution, and could later set it against mainstream corporation tax. Dividends from another UK company were not charged to mainstream corporation tax and carried a tax credit; the two together were franked investment income. Dividends from non-resident companies were taxed under Schedule D, Case V, and the credit for foreign tax could not be used in the same way against advance corporation tax. Advance corporation tax was abolished for distributions on or after 5 April 1999, and the Case V provisions were repealed for dividend income received on or after 1 April 2009. The claimants said this less favourable treatment breached EU freedom of establishment and free movement of capital. A separate claim for EU damages had failed at first instance and was not part of the appeal.
Interest for tax paid too early
Where unlawful advance corporation tax was later set against lawful mainstream corporation tax, or repaid under the foreign income dividend regime, the tax had been paid before it was lawfully due. That interval was the period of prematurity. Earlier courts, applying the House of Lords decision in Sempra Metals, had awarded compound interest for that period. In Prudential this court departed from that approach: failure to pay a sum that is legally due is not itself a further transfer of value, and does not create an additional claim in unjust enrichment.
The claimants said the Revenue were barred from withdrawing their concession of compound interest, by cause of action estoppel, issue estoppel, abuse of process or want of jurisdiction. Lord Reed and Lord Hodge, with whom the other Justices agreed, rejected those arguments. The first phase had decided questions of principle at a high level of generality and had left the measure of restitution, including whether interest should be simple or compound, to the later phase. After Prudential the Revenue were given permission to withdraw the concession. Because domestic and EU law were still developing across this and related litigation, raising the point was not an abuse. There was also no jurisdictional bar merely because the point had not been pressed in the Court of Appeal: permission to appeal Henderson J’s declaration had been granted, and section 54(4) of the Access to Justice Act 1999 did not stop a party taking a new point on a further appeal.
EU law requires an effective remedy for the time value of money during the period of prematurity, but it does not prescribe compound interest or a limitation period longer than six years. Section 35A of the Senior Courts Act 1981 could not be read as covering interest where the tax had already been set off or repaid before proceedings, because it applies only in proceedings for the recovery of a debt or damages. Sections 85 and 86 of the Finance Act 2019 supplied the remedy: simple interest on relevant unlawful advance corporation tax for the period of prematurity, confined to tax paid on or after 1 January 1996 or within six years before proceedings began. The British American Tobacco proceedings, begun in 2003, could not use that section to reach tax paid since 1973. The interest claim was not itself a claim for relief from the consequences of a mistake, so section 32(1)(c) of the Limitation Act 1980 did not extend time. The claimants correctly conceded that interest after set-off or repayment, and interest on tax that was never set off, is simple interest under section 35A.
Unused foreign tax credits
Management expenses and group relief were applied in calculating profits before double taxation relief was set against tax. Before the Eligible Unrelieved Foreign Tax rules, a credit for particular foreign income could be used only against United Kingdom tax on that same income, so unused credit could not be carried forward and was lost. Tax could then be paid in a later year which would not have been paid if the credit had remained available. Relying on the Court of Justice decision in Salinen, the court held that legislation preventing unused credits from being carried forward breached article 63 of the TFEU, with the same reasoning applying to freedom of establishment. The incompatibility was in the double taxation rules, not in the rules on management expenses or group relief.
The domestic limit was to be disapplied so far as it blocked carry-forward, and unused credits, calculated at the higher of the foreign nominal rate and the foreign tax actually paid, were to be carried forward against later tax. Where tax had already been paid because the credit could not be carried forward, that tax was unlawfully levied and recoverable in restitution, with interest, subject to limitation. The same credits could not also be kept for future use. Where no such tax had been paid, the unused credits remained available. The facts had not yet been found; the court decided the point in principle.
Shareholder credits and the Ford treaty credit
The Revenue argued that advance corporation tax paid by the claimants was matched by tax credits given to shareholders under section 231, so the Revenue were not enriched. The court disagreed. The duty to pay advance corporation tax and the shareholder’s right to a section 231 credit were independent provisions. The credit was not conditional on advance corporation tax having been paid or being payable. Pirelli did not decide otherwise: it concerned double taxation conventions and the deemed effect of a group income election. EU law also required a section 231 credit for foreign-sourced dividends so that they were not treated less favourably than domestic dividends. Shareholder credits therefore did not reduce the restitution due.
The same reasoning applied to FCE Bank plc. About 78 per cent of its shares were held by Ford companies resident in the United States, which received a credit under the UK–US double taxation convention. That credit took effect in domestic law as a section 231 credit and was not conditional on a liability to pay advance corporation tax. It could not be deducted from the restitution of overcharged advance corporation tax. The UK–German convention gave no equivalent credit, so dividends paid to the German parent were outside this issue.
The standstill provision
Article 64(1) of the TFEU preserves certain restrictions on capital movements involving third countries that existed on 31 December 1993. The Case V charge existed then. In 2001 the Eligible Unrelieved Foreign Tax rules replaced the previous source-by-source credit and offshore mixing with a mixer cap and new onshore-pooling procedures. Henderson J had found that those rules established new procedures and would have increased the British American Tobacco group’s United Kingdom tax by about £60 million a year if the group had not restructured. Following the Court of Justice approach, the Supreme Court held that the standstill ceased to apply from 31 March 2001, when the new rules came into operation.
Surrender to subsidiaries
A parent could surrender surplus advance corporation tax to a chosen subsidiary under section 240. The claimants argued that unlawful tax should be treated as surrendered first to subsidiaries with unlawful mainstream corporation tax. The court refused. Section 240 deemed the chosen subsidiary to have paid the surrendered sum; it did not pool the group’s tax. Historical surrenders of a mixture of lawful and unlawful advance corporation tax are to be treated as lawful and unlawful pro rata.
Verdict: The Revenue succeeded on interest for premature payment: section 85 of the Finance Act 2019 provided simple interest. The related Evonik summary judgment was recalled. The claimants’ procedural objections failed, but they succeeded on unused credits, the treatment of shareholder and treaty credits, and the post-2001 standstill issue. Their argument on surrender of advance corporation tax to subsidiaries failed. The Court also gave effect to agreed points and did not quantify individual recoveries.
