The Supreme Court held by a majority that, under section 32(1)(c) of the Limitation Act 1980, a mistake of law is discoverable when the claimant knows or could with reasonable diligence know, with sufficient confidence to justify the preliminaries to a claim, that a worthwhile claim arises. This departed from the view in Deutsche Morgan Grenfell that discoverability requires a final judicial decision establishing the mistake. The court adhered to Kleinwort Benson in holding that the section applies to mistakes of law and remitted the date of discoverability for determination on the evidence.
The Court dealt separately with the interest and tax credit issues in its 2021 judgment.
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The Franked Investment Income Group Litigation concerns claims by companies for repayment of advance corporation tax and corporation tax charged on dividends received from non-resident subsidiaries. The claimants contend that the difference in treatment compared with wholly UK-resident groups breached EU rules on freedom of establishment and free movement of capital. Payments in issue go back in some cases to 1973. Restitutionary claims are ordinarily subject to a six-year limitation period under the Limitation Act 1980. The claimants relied on section 32(1)(c), which postpones the start of that period for an action for relief from the consequences of a mistake until the claimant has discovered the mistake or could with reasonable diligence have discovered it.
Two earlier House of Lords decisions framed the argument. Kleinwort Benson Ltd v Lincoln City Council held that money paid under a mistake of law is recoverable and that such a claim falls within section 32(1)(c). Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners held that a mistake as to the compatibility of United Kingdom tax legislation with EU law is discoverable only when a final court has authoritatively established the true legal position.
Whether the new argument could be raised
The Revenue sought to contend that both decisions were wrong on limitation, so that much of the tax paid before the claims were issued was time-barred. The claimants argued that earlier concessions, the course of the group litigation and the absence of any appeal against a declaration recording that the test claimants’ claims were in time prevented the Revenue from taking the point, whether by cause of action estoppel, issue estoppel or abuse of process. The majority held that there was no such bar. The concessions concerned a limitation defence, not the existence of the cause of action itself. The wider argument could be advanced only in the Supreme Court, and raising it at this stage was not an abuse given the novel and developing character of the claims, the way the common issues had been case-managed, and the failure of earlier statutory attempts to curtail the claims on EU-law grounds. The court also permitted the Revenue to withdraw the earlier admissions. Although the point was raised late and success would significantly reduce the value of the claims, the legal question was of importance to these and other high-value tax litigations, and any costs prejudice could be addressed by costs orders.
Discoverability of a mistake of law
On the substance, the majority (Lord Reed and Lord Hodge, with whom Lord Lloyd-Jones and Lord Hamblen agreed) held that Deutsche Morgan Grenfell was wrong on the meaning of discoverability. Treating a mistake of law as undiscoverable until a final court has declared the true position produces paradoxical results: a claimant who has correctly pleaded the mistake and issued proceedings is treated as unable to discover it until the claim succeeds, and a limitation period governing the commencement of proceedings does not begin until those proceedings have ended. That defeats the purpose of a limitation statute. It is also inconsistent with the treatment of fraud under section 32, where time runs once the claimant has sufficient material to recognise a worthwhile claim, and with analogous provisions of the 1980 Act under which knowledge means sufficient confidence to justify embarking on the preliminaries to a claim, not certainty that the claim will succeed.
The limitation period therefore begins when the claimant knows, or could with reasonable diligence know, with sufficient confidence to justify submitting a claim, taking advice and collecting evidence, that a mistake was made which gives rise to a worthwhile claim. Reasonable diligence is assessed objectively by reference to a person carrying on a business of the relevant kind, with adequate but not unlimited resources, motivated by a reasonable but not excessive sense of urgency, and wishing to know whether a mistake had been made. The burden of showing that the claim is in time rests on the claimant. The relevant date is not fixed mechanically by the date of a judgment; it depends on evidence of when a well-advised person in the claimant’s position could have recognised a worthwhile claim.
The majority held that Kleinwort Benson was nevertheless correct to treat section 32(1)(c) as applying to mistakes of law. Although, when the predecessor provision was enacted in 1939, the only recognised claims of this kind concerned mistakes of fact, the ordinary meaning of the words and the purpose of the provision—to stop time running while the claimant could not reasonably know of the circumstances giving rise to the claim—support its application to mistakes of law. The risk of reopening old transactions is substantially reduced if discoverability is assessed in the way just described, and Parliament has not reversed the position generally. Applying the 1966 Practice Statement, the court therefore departed from Deutsche Morgan Grenfell on discoverability, because that decision frustrated the statutory purpose and produced incoherence, but it adhered to Kleinwort Benson on the scope of the section.
The dissent
Lord Briggs and Lord Sales, with whom Lord Carnwath agreed, considered that Kleinwort Benson was wrong on the limitation point. In their view, section 32(1)(c), reflecting the 1939 Act and the recommendations that preceded it, was intended only for mistakes of fact. Extending it to mistakes of law, including mistakes deemed to arise retrospectively when a later judicial decision changes previously settled law, undermines the central aim of limitation statutes to secure finality, and the majority’s revised test of discoverability does not adequately cure that difficulty. They would have overruled Kleinwort Benson so far as it applied the section to mistakes of law. They agreed that, if the section does apply to mistakes of law, the court should depart from Deutsche Morgan Grenfell in favour of the discoverability approach adopted by the majority.
Verdict: The Court allowed HMRC’s appeal on Issue 28 and remitted it to the High Court. Under the majority’s test, a claimant could discover a mistake of law once it could recognise that it had a worthwhile claim, without waiting for a definitive judicial ruling. The Supreme Court did not fix the discovery date for these claimants.
