Test Claimants In the Franked Investment Group Litigation v Commissioners of the Inland Revenue & Anor (Rev 2) [2010] EWCA Civ 103

“Is it contrary to Article 43 or 56 EC for a member state to keep in force and apply measures which exempt from corporation tax dividends received by a company resident in that member state (“the resident company”) from other resident companies and which subject dividends received by the resident company from companies resident in other member states (“non-resident companies”) to corporation tax (after giving double taxation relief for any withholding tax payable on the dividend and, under certain conditions, for the underlying tax paid by the non-resident companies on their profits in their country of residence)?”

“[2] Prior to setting out the relevant provisions of the UK tax regime at issue, it is important to outline the broader framework for taxation of distributed company profits (dividends) within the EU, which forms the legal and economic backdrop to the case. In principle, two levels of taxation can arise when taxing the distribution of company profits. The first is at the company level, in the form of corporation tax on the company’s profits. The levying of corporation tax at company level is common to all member states. The second is at the shareholder level which can take the form of either income taxation on the receipt of the dividends by the shareholder (a method used by most member states), and/or withholding tax to be withheld by the company upon distribution. [3] The existence of these two possible levels of taxation may lead, on the one hand, to economic double taxation (taxation of the same income twice, in the hands of two different taxpayers) and, on the other hand, juridical double taxation (taxation of the same income twice in the hands of the same taxpayer). Economic double taxation, when, for example, the same profits are taxed first in the hands of the company as corporation tax, and second in the hands of the shareholder as income tax. Juridical double taxation, when, for example, a shareholder suffers first withholding tax and then income tax, levied by different States, on the same profits. [4] The present case concerns the legality under Community law of a system set up by the UK with the principal aim and effect of providing a measure of relief for shareholders from economic double taxation. [5] In deciding whether and how to achieve such an aim, there are essentially four systems open to member states, which may be termed the “classical”, “schedular”, “exemption” and “imputation” systems. States with a classical system of dividend taxation tax have chosen not to relieve economic double taxation: company profits are subjected to corporation tax, and distributed profit is taxed once again at the shareholder level as income tax. In contrast, schedular, exemption and imputation systems aim at fully or partially relieving economic double taxation. States with schedular systems (of which various forms exist) choose to subject company profits to corporation tax, but tax dividends as a separate category of income. Those with exemption systems choose to exempt dividend income from income taxation. Finally, under imputation systems, corporation tax at company level is fully or partially imputed onto the income tax due on the dividends at shareholder level, such that the corporation tax serves as a pre-payment for (part of) this income tax. Thus, shareholders receive an imputation credit for all or part of the corporation tax attributable to the profits out of which the dividends were paid, which credit can be set against the income tax due on these dividends. [6] At the time relevant to the present case, the UK used a partial imputation system of dividend taxation.”

“[45]….. (1) Although direct taxation falls within the competence of member states, the ECJ has consistently held that they must exercise that competence consistently with Community law. This includes the obligation to comply with Article 43, which prohibits restrictions on the setting up of agencies, branches or subsidiaries by nationals of any member state established in the territory of any member state (para 37). (2) Article 43 will be infringed where there is a difference in the tax treatment by a member state of cross-border and purely internal situations, if the difference in treatment involves restrictions on freedom of establishment “that go beyond those resulting inevitably from the fact that tax systems are national, unless these restrictions are justified and proportionate” (para 38). (3) Where a member state chooses to include foreign-source income of its residents in its tax base, it must not discriminate between foreign-source and domestic income, and in particular its legislation should not treat foreign-source income less favourably than domestic-source income (para 40). (4) In principle, the choice of whether and how to relieve economic double taxation of dividends lies purely with member states, and provided that the system chosen is applied in the same way to foreign-source and domestic-source dividend income, each of the four systems identified by the Advocate General in paragraph 5 of his opinion is perfectly compatible with Article 43 (para 43). (5) So, for example, the application by the UK of a credit-based system for relieving economic double taxation on foreign-source dividends would not be objectionable, even if the foreign tax for which credit was given was levied at a higher rate than UK corporation tax, with the result that some of the foreign tax would be unrelieved (because the UK gives credit only up to the UK corporation tax rate) and the foreign-source dividends would therefore bear a higher aggregate tax burden in the two states concerned in comparison with dividends paid by UK subsidiaries to a UK parent (para 43, where the Advocate General described this as “a good example of a restriction flowing purely from disparities between national tax systems, with which Article 43 EC is not concerned”). (6) There is accordingly no problem in principle under Article 43 with the application of a credit system of relieving double economic taxation (para 46). (7) The answer to the question whether Article 43 permits a member state to apply an exemption system for domestic-source dividends and a credit system for foreign-source dividends “depends on whether this distinction has the effect that the UK treats foreign-source dividends less favourably than domestic-source dividends”.”

“[48] In this regard, the UK and the Commission argue that, in a domestic context, the effect of exemption and credit systems of economic double taxation relief would be precisely the same. The adoption of a credit system for domestic-source income, however, would mean pointless extra administration costs, while an exemption system, which leads to the same result, is far simpler and less costly to run. Similarly, the effect of the regime for domestic-source dividends (exemption) and foreign-source dividends (credit) is the same: in each case, economic double taxation is relieved. [49] The Test Claimants dispute this conclusion. They argue that a difference exists between the exemption and credit systems in cases where the UK distributing subsidiary has, pursuant to particular UK corporation tax exemptions and benefits (e.g. for investment or Research & Development), in fact paid a lower net rate of corporation tax than the standard UK rate. Under an exemption system, this is “passed on” to the recipient parent company – i.e. the dividends distributed will ultimately thus have borne a tax rate lower than the standard UK corporation tax rate. Under a credit system applied in a domestic context, however, in a case where a lower effective corporation tax rate had been originally borne by the profits pursuant to exemptions and allowances, this rate would always be “topped up” to the standard UK corporation [tax] rate upon distribution to the parent company. Similarly, in the case of foreign-source dividends, the effect of a credit system is that the UK in all cases tops up the effective foreign corporation tax paid to the standard UK rate, without taking account of underlying corporation tax allowances granted at subsidiary level. [50] It would seem, therefore, that the application of a credit system by the UK for the relief of double economic taxation on foreign-source dividends can in certain cases have less favourable effects than the pure exemption system applied to domestic-source dividends. While, under an exemption system, the benefits of underlying corporation tax exemptions and allowances may be passed on to the parent company receiving the dividends, under a credit system these benefits cannot be passed on as the tax borne by the dividends is topped up to the standard UK corporation tax rate. In such cases, the effect of this could be seen as the application by the UK of a different (lower) tax rate to domestic-source dividends than to foreign-source dividends. [51] A further question arises as to whether such discriminatory treatment can be justified. [The Advocate General then considers an argument based on the principle of fiscal cohesion]. While the UK’s arguments certainly show that, as I observed above, in principle the application of a credit system can be perfectly in accordance with Article 43 EC, they do not go towards justification of the possible difference in treatment, discussed above, between foreign-source and domestic-source income as regards the potential ability to pass on the benefit of underlying tax allowances to recipient parent companies. [52] In the absence of a mechanism enabling such tax allowances to be taken into account in a similar way for foreign-source dividends as for domestic-source dividends, therefore – the presence of which has not been contended in the present case – it is my view that the UK taxation rules for non-portfolio dividends infringe Article 43 EC.”

“[148]…. It is contrary to Articles 43 and 56 EC for a member state to keep in force and apply measures such as those at issue in the present case, which exempt from corporation tax dividends received by a company resident in that member state from other resident companies and which subject dividends received by the resident company from companies resident in other member states to corporation tax, after giving double taxation relief for any withholding tax payable on the dividend and, under certain conditions, for the underlying tax paid by the non-resident companies on their profits in their country of residence.”

“The first point, the taxation of dividends point, is perhaps the simplest to explain. The problem is essentially this: Where a UK parent company receives dividends from a domestic subsidiary or company, it is exempt from corporation tax on the dividends. Where it receives dividends from a foreign company, it is subject to corporation tax on the dividends. It receives double tax relief in the form of a tax credit for any withholding tax on the dividend and, in a parent-subsidiary situation, for the underlying corporation tax incurred by the subsidiary. In other words, the UK applies the exemption method of giving double taxation relief for domestic dividends but applies the tax credit method for foreign dividends. It is suggested by the UK that the two methods are equivalent, and I note that the Commission appears to have made that assumption. In fact they are not equivalent. In saying that I am not referring to the argument that the tax credit method itself is unlawful because it neutralises lower levels of tax in other member states. I am happy on that point to refer to the arguments set out in our written observations. However fascinating that issue may be, there is in fact no need for the Court to decide it in this case. That is because it is clear that even in terms of the UK tax burden the tax credit method and the exemption method produce different results. Where a UK parent company receives a dividend from a foreign subsidiary it is subject to tax on the dividend at the UK nominal rate of tax, currently 30%. By contrast where it receives a dividend from a UK subsidiary it is exempt from tax on the dividend, and that is so whatever the actual tax burden incurred by the subsidiary. It is important to note the actual tax burden on a UK subsidiary’s distributed profits will never be equal to the UK nominal tax rate applied to foreign dividends. It is not simply a matter of taking 30% of the subsidiary’s accounting profits. A UK company’s accounts are adjusted by a series of reliefs and allowances in computing their taxable profits. They may receive R&D credits or capital allowances. There may be exemptions for gains such as the substantial shareholder exemption. A foreign subsidiary may make a gain which is exempt locally but taxed in the UK. They may also receive the surrender of losses or allowances from other companies which reduce their taxable profits. The list can go on. My instructing solicitors have given me a 2 page list of such reliefs. I do not think I need to read them out. I think the point is made. Thus, a company may pay no mainstream corporation tax but still make a distribution which will be exempt in the hands of the parent company. By contrast a parent company always pays tax on foreign dividends at the UK nominal rate. In addition, there is a significant difference in the compliance burden. The exemption method, used domestically, is much easier to apply and imposes a lower administrative burden than the tax credit method, which requires parent companies to track the underlying tax of multiple tiers of subsidiaries. So it is clear that the UK rules are far from being even-handed. What is more, there is really no excuse. The UK could easily achieve equal treatment by applying the tax credit method internally.”

“[46] In the present case it is important to note that the sole aim of the relevant UK legislation is to eliminate economic double taxation, both in respect of domestic and cross-border situations. In the purely domestic situation, the resident subsidiary is liable to corporation tax on its profits. Absent the exemption from corporation tax on the dividend in the hands of the Claimant parent company, the same amount of profits would be taxed twice at the same rate. This is because both parent and subsidiary would be chargeable to the same tax, at the same rate, on the same profits.47 This economic double taxation can be effectively dealt with by a simple exemption of the dividend from corporation tax. The effect is the same as if a tax credit were granted to the Claimant at the rate of corporation tax payable by the resident subsidiary on its profits. [47] The cross-border situation is not so simple. The rate of corporation tax on the profits of a non-resident subsidiary will vary from country to country and in most cases will not coincide with the rate of corporation tax in the UK. Hence a simple exemption of the dividend from UK corporation tax would not be an appropriate method for relieving economic double taxation, if the UK’s policy (or principle) of “capital export neutrality” is to apply. In such situations, tax credits are the more appropriate method. Under UK tax rules, therefore, such cross-border distributions are dealt with by the grant of credit for the foreign tax paid by the non-resident subsidiary in its state of residence. It follows that the grant of such exemptions and tax credits respectively are necessary and appropriate to achieve the aim of relieving double taxation in the two contrasting situations, whilst ensuring in each case the cohesion of the UK tax system.”

“In very exceptional circumstances, not applicable on the facts of the present case, the subsidiary and the parent may be liable to differing rates of corporation tax due to the availability of small companies relief.”

“[43] It must be pointed out, first of all, that a member state which wishes to prevent or mitigate the imposition of a series of charges to tax on distributed profits may choose between a number of systems. In the case of shareholders receiving those dividends, those systems do not necessarily have the same result. Thus, under an exemption system, a shareholder who receives a dividend is not, in principle, liable to tax on the dividends received, irrespective of the rate of tax to which the underlying profits are subject to tax in the hands of the company making the distribution and the amount of that tax which that company has in fact paid. By contrast, under an imputation system, such as the system at issue in the main proceedings, a shareholder may offset tax due on the dividends paid only to the extent of the amount of tax which the company making the distribution has actually had to pay on the underlying profits, and that amount may be offset only up to the limit of the amount of tax for which the shareholder is liable. [44] … [45] However, in structuring their tax system and, in particular, when they establish a mechanism for preventing or mitigating the imposition of a series of charges to tax or economic double taxation, member states must comply with the requirements of Community law and especially those imposed by the Treaty provisions on free movement. [46] It is thus clear from case-law that, whatever the mechanism adopted for preventing or mitigating the imposition of a series of charges to tax or economic double taxation, the freedoms of movement guaranteed by the Treaty preclude a member state from treating foreign-sourced dividends less favourably than nationally-sourced dividends, unless such a difference in treatment concerns situations which are not objectively comparable or is justified by overriding reasons in the general interest (see, to that effect, Case C-315/02 Lenz [2004] ECR I-7063, paragraphs 20 to 49, and Case C-319/02 Manninen [2004] ECR I-7477, paragraphs 20 to 55). … [47] As regards the question whether a member state may operate an exemption system for nationally-sourced dividends when it applies an imputation system to foreign-sourced dividends, it must be stated that it is for each member state to organise, in compliance with Community law, its system for taxing distributed profits and, in particular, to define the tax base and the tax rate which apply to the company making the distribution and/or the shareholder receiving them, in so far as they are liable to tax in that member state. [48] Thus, Community law does not, in principle, prohibit a member state from avoiding the imposition of a series of charges to tax on dividends received by a resident company by applying rules which exempt those dividends from tax when they are paid by a resident company, while preventing through an imputation system, those dividends from being liable to a series of charges to tax when they are paid by a non-resident company. [49] In order for the application of an imputation system to be compatible with Community law in such a situation, it is necessary, first of all, that the foreign-sourced dividends are not subject in that member state to a higher rate of tax than the rate which applies to nationally-sourced dividends. [50] Next, that member state must prevent foreign-sourced dividends from being liable to a series of charges to tax, by offsetting the amount of tax paid by the non-resident company making the distribution against the amount of tax for which the recipient company is liable, up to the limit of the latter amount. [51] Thus, when the profits underlying foreign-sourced dividends are subject in the member state of the company making the distribution to a lower level of tax than the tax levied in the member state of the recipient company, the latter member state must grant an overall tax credit corresponding to the tax paid by the company making the distribution in the member state in which it is resident. [52] Where, conversely, those profits are subject in the member state of the company making the distribution to a higher level of tax than the tax levied by the member state of the company receiving them, the latter member state is obliged to grant a tax credit only up to the limit of the amount of corporation tax for which the company receiving the dividends is liable. It is not required to repay the difference, that is to say, the amount paid in the member state of the company making the distribution which is greater than the amount of tax payable in the member state of the company receiving it. [53] Against that background, the mere fact that, compared with an exemption system, an imputation system imposes additional administrative burdens on taxpayers, with evidence being required as to the amount of tax actually paid in the State in which the company making the distribution is resident, cannot be regarded as a difference in treatment which is contrary to freedom of establishment, since particular administrative burdens imposed on resident companies receiving foreign-sourced dividends are an intrinsic part of the operation of a tax credit system. [54] The claimants in the main proceedings nonetheless point out that when, under the relevant UK legislation, a nationally-sourced dividend is paid, it is exempt from corporation tax in the hands of the company receiving it, irrespective of the tax paid by the company making the distribution, that is to say, it is also exempt when, by reason of the reliefs available to it, the latter has no liability to tax or pays corporation tax at a rate lower than that which normally applies in the UK. [55] That point is not contested by the UK Government, which argues, however, that the application to the company making the distribution and to the company receiving it of different levels of taxation occurs only in highly exceptional circumstances, which do not arise in the main proceedings. [56] In that respect, it is for the national court to determine whether the tax rates are indeed the same and whether different levels of taxation occur only in certain cases by reason of a change to the tax base as a result of certain exceptional reliefs. [57] It follows that, in the case of the national legislation at issue in the main proceedings, the fact that nationally-sourced dividends are subject to an exemption system and foreign-sourced dividends are subject to an imputation system does not contravene the principle of freedom of establishment laid down under Article 43 EC, provided that the tax rate applied to foreign-sourced dividends is not higher than the rate applied to nationally-sourced dividends and that the tax credit is at least equal to the amount paid in the member state of the company making the distribution, up to the limit of the tax charged in the member state of the company receiving the dividends.”

“Articles 43 EC and 56 EC do not preclude legislation of a member state which exempts from corporation tax dividends which a resident company receives from another resident company, when that State imposes corporation tax on dividends which a resident company receives from a non-resident company in which the resident company holds at least 10% of the voting rights, while at the same time granting a tax credit in the latter case for the tax actually paid by the company making the distribution in the member state in which it is resident, provided that the rate of tax applied to foreign-sourced dividends is no higher than the rate of tax applied to nationally-sourced dividends and that the tax credit is at least equal to the amount paid in the member state of the company making the distribution, up to the limit of the amount of the tax charged in the member state of the company receiving the distribution.”

“[59]Paragraph 55 of the judgment then says, and for convenience I will set it out again: '55. That point is not contested by the United Kingdom Government, which argues, however, that the application to the company making the distribution and to the company receiving it of different levels of taxation occurs only in highly exceptional circumstances, which do not arise in the main proceedings.' I cannot escape the impression that at this critical point the ECJ must have misunderstood the argument being advanced for the UK government. I say this because the detailed written observations submitted by the UK did not deal at all with the distinction between nominal and effective rates of tax. However, in the course of arguing that the sole aim of the relevant UK legislation, both in domestic and in cross-border situations, was to eliminate economic double taxation, the submissions pointed out (in paragraph 46) that in the domestic context the effect of ICTA, section 208 was to prevent the same amount of profits being taxed twice over at the same rate: ‘This is because both parent and subsidiary would be chargeable to the same tax, at the same rate, on the same profits.' There was then a footnote, numbered 47, which said: 'In very exceptional circumstances, not applicable on the facts of the present case, the subsidiary and the parent may be liable to differing rates of corporation tax due to the availability of small companies relief.' The reference to 'small companies relief' was not further explained, nor was any statutory reference given. '55. That point is not contested by the United Kingdom Government, which argues, however, that the application to the company making the distribution and to the company receiving it of different levels of taxation occurs only in highly exceptional circumstances, which do not arise in the main proceedings.' ‘This is because both parent and subsidiary would be chargeable to the same tax, at the same rate, on the same profits.' 'In very exceptional circumstances, not applicable on the facts of the present case, the subsidiary and the parent may be liable to differing rates of corporation tax due to the availability of small companies relief.' [60]Small companies relief operates by imposing a lower nominal rate of corporation tax on profits below a certain level, with taper provisions which increase the rate towards the normal level where the profits fall within an intermediate band below the level at which the full rate begins to apply: see ICTA, section 13. [61]In my view the argument attributed to the UK government in paragraph 55 of the judgment must have been meant to refer to the passage in the UK's written observations which I have quoted above, even though those arguments were not directed to the contrast between nominal and effective rates of tax upon which the claimants relied, and even though it is only in the context of an argument about nominal rates of tax that one could sensibly describe the small companies rate as 'highly exceptional'. There is obviously nothing exceptional about the proposition that companies often pay corporation tax at an effective rate lower than the nominal rate, because the existence and availability of reliefs which reduce the tax base (such as group relief, or the carry forward of trading losses) are commonplaces of UK corporate taxation. The UK government could not rationally have argued that such cases were exceptional. That, however, as I read paragraph 55, is the argument which the ECJ understood the UK to be advancing. [62]It also seems to me to be implicit in paragraph 55 that, had the ECJ been satisfied that differences between the nominal and effective rates of UK corporation tax were not highly exceptional, they would have agreed with the Advocate General that the exemption system for UK domestic dividends treated them more favourably than foreign dividends, and therefore breached Article 43. As I have already explained, the ECJ agreed with the Advocate General in their general approach to the question, and I cannot believe that they would then have dealt so briefly with the argument based on effective rates of tax, which he had accepted as determining the question in the claimants' favour, if they thought it was either irrelevant or mistaken. If they thought either of those things, they would surely have explained why the argument was irrelevant or mistaken, or conceivably they would just have ignored it. Having introduced the argument into their discussion, however, without any adverse comments, I think the ECJ must be taken to have endorsed it, and the conclusion which flowed from it, subject only to the question of fact which they thought (wrongly, in my view) had been put in issue by the UK government. [63]If, as I think, that is the right way to interpret paragraph 54 and 55 of the judgment, paragraph 56 then falls into place. Lacking the competence to decide questions of national law for themselves, and believing that there might be a dispute about the factual premises of the argument which the Advocate General had accepted, the ECJ left it to the national court to determine: (a) whether the (nominal) tax rates applied in the UK to domestic and foreign dividends are indeed the same (which I take to be a reference back to the question posed in paragraph 49 of the judgment); and (b) whether different levels of (effective) taxation occur in the UK 'only in certain cases by reason of a change to the tax base as a result of certain exceptional reliefs.' As before, I find some support for this reading in the French text, because the reference to 'tax rates' is a translation of the same term ('taux d'imposition') as is found in paragraph 49, while 'levels of taxation' is a translation of 'niveaux d'imposition.' [64]If these are the right questions to ask, there is no longer any dispute about how they should be answered. With regard to question (a), Mr Aaronson QC for the claimants accepts that the tax rates are the same, and does not argue that the existence of small companies relief makes any relevant difference. With regard to question (b), Mr Ewart QC for the Revenue accepts that UK companies frequently pay corporation tax at an effective rate which is lower than the nominal rate of corporation tax because of the availability of reliefs which reduce the tax base. If evidential support for the answer to question (b) is needed, it may be found in the expert report of Mr John Whiting OBE of PricewaterhouseCoopers LLP. After a detailed survey of the levels of corporation tax paid by UK companies as a percentage of their UK accounting profits over the years from 1973 to 2005, he concluded that: 'the majority of companies with accounting profits pay corporation tax at a level lower than the applicable statutory rate.' Since Mr Whiting's conclusion is not controversial, I need not examine his report in any detail. It is enough to say that he found the main causes of payment of tax at an effective rate lower than the nominal rate to be receipt of group relief, losses brought forward, and capital allowances in excess of depreciation. [65]Mr Ewart's principal argument for the Revenue was that the ECJ did not agree with the Advocate General, and in the view of the ECJ the only conditions which needed to be satisfied by the UK in order to secure compliance with Article 43 were those stated in paragraphs 49 and 50 of the judgment. He submitted that the second question referred back to the national court in paragraph 56 was nothing to do with effective rates of tax as contrasted with nominal rates, but was merely asking whether the existence of small companies relief meant that different nominal levels of taxation occur only in highly exceptional circumstances. For the reasons which I have given, I am unable to accept these submissions. It follows that, in my judgment, the claimants succeed on this issue, and the UK system of taxation of dividends received from member states has at all material times infringed Article 43 EC. [66]I should say, finally, that I am not deterred from reaching this conclusion by the fact that the conclusions stated in materially identical terms in paragraphs 57 and 73 of the judgment, and in the dispositif, refer only to the 'tax rate' ('taux d'imposition') applied to foreign dividends, and do not reflect the second enquiry remitted to the national court in paragraph 56. If I have interpreted the judgment correctly, the conclusion is over-compressed; but since it purports to be no more than the conclusion which flows from what has gone before, I do not think that it can throw much light on the substance of the discussion which precedes it.”

“The next group of issues that I have to consider concerns dividends received by a UK parent company from a subsidiary which is resident in a third country, i.e. a country other than a member state of the EU. The basic question which arises is whether the subjection of such dividends to the Case V charge infringes Article 56 EC. There could be no question of infringement of Article 43, because that article protects freedom of establishment in member states alone and has no application to the establishment of subsidiaries in third countries. Article 56, however, prohibits restrictions on the free movement of capital not only between member states, but also between member states and third countries, although in its application to third countries it is subject to an important "standstill" proviso (now contained in Article 57 EC) which preserves the effect of restrictions under national or Community law which existed on 31 December 1993.”

“[30] As the national court has raised both Articles 43 and 56 EC in questions 1 to 4, it is necessary as a preliminary matter to consider which of these articles applies in the present case. Just as I observed in my Opinion in Test Claimants in Class IV of the ACT Group Litigation, it is my view that the UK legislation at issue may in principle fall within the ambit of either Article 43 or 56 EC, depending on the quality of holding that a given parent company possesses in the relevant foreign subsidiary. The Court has consistently held that a company established in one Member State with a holding in the capital of a company established in another Member State which gives it ‘definite influence over the company’s decisions’ and allows it to ‘determine its activities’ is exercising its right of establishment. As a result, in the case of UK-resident parent companies whose holdings in non-UK companies satisfy the criterion, therefore, it is the compatibility of the UK legislation with Article 43 EC that should be assessed. The application of this criterion in a given case is a matter for the national courts after analysis of the circumstances of the claimant company. [31]. In the case of the test claimants in the present reference, it seems clear from the order for reference that these are UK resident companies (all members of the BAT group) with wholly-owned non-UK resident subsidiaries. As a result, the test case falls to be considered under Article 43 EC. As I observed in my Opinion in Test Claimants in Class IV of the ACT Group Litigation, although the exercise of freedom of establishment by these UK-resident companies will also inevitably involve the movement of capital out of the UK in so far as this is necessary to establish a subsidiary, this is a purely indirect consequence of the exercise of freedom of establishment. As a result, Article 43 EC takes priority of application for such companies. [32] In the case of UK-resident companies holding an investment in a non-UK-resident company which does not give them a ‘decisive influence’ over the latter’s activities, or allow them to determine that company’s activities, the UK legislation should be assessed for compatibility with Article 56 EC. I note in this regard that the UK legislation at issue clearly concerns what can be termed ‘movement of capital’. [33] In principle, therefore, due to the nature of the present case as a group action where the particular circumstances and nature of shareholding of each claimant have not been put before the court, it is necessary to consider the compatibility of the UK legislation at issue with both Articles 43 and 56 EC. [34] I would add that, although the substantive principles for analysis of whether a breach has occurred are the same for both articles, the geographic and temporal scope of Article 56 EC differs from that of Article 43 EC; Article 43 EC applies only to restrictions on the exercise of freedom of establishment between member states and entered into force as part of the Treaty of Rome, while Article 56 EC also prohibits restrictions on the movement of capital between member states and third countries and entered into force on 1 January 1994 (although the principle of free movement of capital had already been established by Directive 88/361.) Moreover, Article 56 EC is subject to a ‘standstill’ provision – Article 57(1) EC – as regards third States. [35] As a result, as regards the substantive principles for assessment of compatibility, I will only expressly consider Article 43 EC, as the same principles apply to the assessment under Article 56 EC. I will deal separately with certain issues of temporal and geographic scope particular to Article 56 EC (raised in Question 5). ”

“[37] The order for reference shows that the cases chosen as test cases in the proceedings before the national court concern UK-resident companies which received dividends from non-resident companies that are wholly owned by them. As the nature of the interest in question will confer on the holder definite influence over the company’s decisions and allow it to determine the company’s activities, the provisions of the EC Treaty on freedom of establishment will apply (Case C-251/98 Baars [2000] ECR I-2787, paragraphs 21 and 22; Case C-436/00 X and Y [2002] ECR I-10829, paragraphs 37 and 66 to 68; and Case C-196/04 Cadbury Schweppes and Cadbury Schweppes Overseas [2006] ECR I-0000, paragraph 31). [38] As the Advocate General stated at point 33 of his Opinion, the nature of the holdings of the other companies which are parties to the dispute has not been put before the court. It may therefore be that the dispute also relates to the effect of the national legislation at issue in the main proceedings on the situation of resident companies which received dividends on the basis of a holding which does not give them definite influence over the decisions of the company making the distribution and does not allow them to determine its activities. That legislation must therefore also be considered in the light of the Treaty provisions on the free movement of capital.”

“[165] In so far as, according to the national court, that question also concerns companies established in non-member countries which, accordingly, do not fall within the scope of Article 43 EC on freedom of establishment, and for the reason set out in paragraph 38 of this judgment, the question arises whether national measures such as those at issue in the main proceedings also contravene Article 56 EC on the free movement of capital.”

“[26] Depending on the individual case, it is possible for the decision to be based on freedom of establishment or free movement of capital. According to case law, the decisive criterion is a shareholding which gives the parent company definite influence over its subsidiary’s decision, and allows it to determine its subsidiary’s activities. [27] As is apparent from the order for reference, Alpha is a wholly owned subsidiary of Nordic Fund SICAV. It is therefore clear that Nordic Fund SICAV has a substantial influence over Alpha’s management. That means that the main proceedings are concerned with freedom of establishment, and that is why I shall seek to answer the question referred on the basis of the Treaty provisions on freedom of establishment.”

“[33] It is therefore clear that the main proceedings relate exclusively to the effect of the national legislation at issue in those proceedings on the situation of a resident company which distributes dividends to shareholders whose holdings give them definite influence over the decisions of that company and enable them to determine its activities (see, to that effect, Case C-446/04 Test Claimants in the FII Group Litigation v IRC [2006] ECR I-11753, paragraph 38, and Case C-284/06 Finanzant Hamburg-Am Tierpark v Burda GmbH (formerly Burda Velagsbeteiligungen GmbH) [2008] ECR I-4571, paragraph 72). [34] According to settled case law, where a company has a shareholding in another company which gives it definite influence over that company’s decisions and allows it to determine that company’s activities, it is the provisions of the Treaty on the freedom of establishment that are to be applied (see, inter alia, Cadbury Schweppes and Cadbury Schweppes Overseas, paragraph 31; Test Claimants in Class IV of the ACT Group Litigation v IRC, paragraph 39; Case C-524/04 Test Claimants in the Thin Cap Group Litigation [2007] ECR I-2107, paragraph 27; Case C-231/05 Proceedings brought by Oy AA [2007] ECR I-6373, paragraph 20; and Burda, paragraph 69). ”

“[27] In accordance with settled case-law, national provisions which apply to holdings by nationals of the Member State concerned in the capital of a company established in another Member State, giving them definite influence on the company’s decisions and allowing them to determine its activities, come within the substantive scope of the provisions of the EC Treaty on freedom of establishment (see, to that effect, Case C-251/98 Baars [2000] ECR I-2787, paragraph 22; Case C-436/00 X and Y [2002] ECR I-10829, paragraph 37; and Case C-196/04 Cadbury Schweppes and Cadbury Schweppes Overseas [2006] ECR I-0000, paragraph 31).”

“[94] It is true, however, that the national legislation which makes the receipt of dividends liable to tax, where the rate depends on whether the source of those dividends is national or otherwise, irrespective of the extent of the holding which the shareholder has in the distributing company, may be covered by the free movement of capital. It is therefore conceivable that a shareholder who is a national of a third country and is established outside the Union and who has a significant holding in the capital of a company that is resident in a Member State, may rely on Article 56(1) EC in order to challenge that legislation. [95] The fact that the extent of his holding in the capital of a company that is resident in a Member State enables a shareholder to have a definite influence on the company’s decisions and to determine its activities does not in itself appear to constitute sufficient justification to exclude the application of Article 56(1) EC, in the light of Article 57(1) EC. The latter provision, as was seen above, provides that the Member States may maintain restrictions existing on 31 December 1993 on the movement of capital to or from third countries where such movement involves ‘establishment’. It may therefore be deduced from that provision that the movement of capital to or from third countries may involve establishment. … [97] It is in the light of those considerations that I take the view that the concepts of ‘movement of capital’ and ‘restrictions’ used in Article 56(1) EC should be interpreted in the same manner, both as regards relations between member states and third countries and as regards intra-Community relations.”

"[189] It is necessary first of all to clarify the concept of "restrictions which exist" on 31 December 1993 within the meaning of Article 57(1) EC. [190] As the claimants in the main proceedings, the United Kingdom and the Commission propose, reference should be made to Case C-302/97 Klaus Konle v Republic of Austria [1999] ECR I-3099, in which the court had to provide an interpretation of the concept of "existing legislation" contained in a derogating provision in the Act concerning the conditions of accession of the Republic of Austria, the Republic of Finland and the Kingdom of Sweden and the adjustments to the Treaties on which the European Union is founded …, allowing the Republic of Austria to maintain its existing legislation governing secondary residences for a limited period. [191] While it is, in principle, for the national court to determine the content of the legislation which existed on a date laid down by a Community measure, the court held in that case that it is for the Court of Justice to provide guidance on interpreting the Community concept which constitutes the basis of a derogation from Community rules for national legislation "existing" on a particular date (see, to that effect, Konle, paragraph 27). [192] As the court stated in Konle, any national measure adopted after a date laid down in that way is not, by that fact alone, automatically excluded from the derogation laid down in the Community measure in question. If the provision is, in substance, identical to the previous legislation or is limited to reducing or eliminating an obstacle to the exercise of Community rights and freedoms in the earlier legislation, it will be covered by the derogation. By contrast, legislation based on an approach which is different from that of the previous law and establishes new procedures cannot be regarded as legislation existing at the date set down by the Community measure in question (see Konle, paragraphs 52 and 53)."

“[99] If that approach is applied to the facts of the present case, it seems to me that the relevant restriction must be identified as the exclusion of third country-source dividends from the exemption given to UK-source dividends by ICTA section 208. That exclusion was in place on 31 December 1993 and has remained in place ever since, so Article 57(1) applies and prevents a recipient of such dividends in a member state from complaining that the exclusion infringes Article 56. The fact that there may have been changes since 1993 in the Case V regime which subjects the dividends to tax in the UK is, on this analysis, irrelevant. Such changes might be relevant to the question whether Article 56 had been infringed, and (if so) to the quantification of the loss suffered by the claimant; but the changes are not relevant to the continued existence of the basic restriction itself, which is simply the inability to take advantage of the exemption in section 208.”

“[108] Against this background, can it be said that the introduction of the EUFT regime changed the legislative approach upon which the Case V charge was based and established new procedures (compare Konle at paragraphs 52 and 53, and the judgment of the ECJ in the present case at paragraph 192)? The EUFT system certainly established new procedures for the relief of foreign tax, but I do not consider that it changed the general approach upon which the Case V charge was based. As before, the general philosophy of the system was to grant relief in the UK for foreign withholding and underlying tax attributable to the dividends received, subject to an upper limit fixed by reference to the UK corporation tax rate. All that changed were the detailed rules relating to the utilisation of foreign tax which would otherwise have been unrelieved, and the introduction of a new system of onshore pooling to replace the offshore pooling which no longer carried any fiscal advantages. In some respects the new system was less attractive to UK multi-national groups than the system which it replaced, but the new system also introduced important elements of flexibility which had not previously been available. If one stands back from the small print and the detail, the overall nature of the Case V charge was in my judgment still in substance the same after the introduction of EUFT as it had been before. It is true that the changes would have cost the BAT group a substantial amount in extra tax, if Project Frankenstein had not been undertaken to mitigate the position. But the reorganisation was no greater than that which followed the merger with Rothmans and the abolition of ACT, and the claimants no longer contend that the abolition of ACT itself forfeited the protection of Article 57(1). Moreover, nobody suggests that a mere increase in the nominal rate of UK corporation tax would have been fatal, so the increased tax cost of the changes to a typical UK multi-national could not of itself be determinative. The test is essentially a structural one, and in my view the focus should be on the main features of the structure rather than the fine points of detail. Accordingly, if it were necessary for me to decide the question, I would hold that the introduction of the EUFT system did not cause the protection of Article 57(1) to be lost.”

“Articles 43 EC and 56 EC preclude legislation of a member state which allows a resident company receiving dividends from another resident company to deduct from the amount which the former company is liable to pay by way of advance corporation tax the amount of that tax paid by the latter company, whereas no such deduction is permitted in the case of a resident company receiving dividends from a non-resident company as regards the corresponding tax on distributed profits paid by the latter company in the state in which it is resident.”

“[139]My own view, which I express briefly and with considerable hesitation, is that as a matter of Community law Mr Aaronson's submissions are to be preferred. The governing principle of relieving or mitigating economic double taxation of dividends is a powerful one, whereas the corporate tree points are technical in nature and depend, it may be said, on a rather literal and blinkered approach to the ECJ's judgment. In the light of the governing principle, the situation expressly considered by the ECJ may be seen as a paradigm one, and a similar line of reasoning should in my judgment lead to the conclusion that there is also a breach of Articles 43 and 56 in situations where: (a) foreign underlying tax has been borne by lower-tier companies resident in a member state; and/or (b) the only reason why the UK company which receives the dividend is not itself liable to account for ACT when it pays the dividend on to its parent is that it makes the distribution under a group income election. [140] As regards situations of type (a), the UK rules on double taxation relief provide a credit for such underlying tax, so if one accepts the ECJ's premise that the ACT system has the object of relieving economic double taxation, it seems logical to compare it with all factual situations where double taxation relief would in principle be available to the UK company which receives the foreign dividend. It is true that the UK rules for relief of double taxation are more sophisticated than the ACT regime, but the benefit of a payment of ACT can in practice be passed up a group in such a way that ACT is paid once only in respect of the same underlying profits. That provides a close enough analogy, to my mind, to justify a comparison with situations where underlying tax is paid by a lower-tier company and a higher-level company subsequently pays a dividend with the benefit of a credit for that underlying tax, even though it does not pay corporation tax itself. [141]As regards situations of type (b), the ability to make group income elections only applies in situations where ACT would otherwise be payable, and its basic function is to enable the group to decide at what level in the corporate hierarchy ACT is to be paid. In my view the ability to make such elections cannot sensibly be segregated from the rest of the ACT regime, because it serves the same basic purpose of ensuring that ACT is paid once only within the group in respect of the same profits. It should not therefore matter, in the present context, whether the company which receives the foreign dividend itself pays ACT, or whether it pays the dividend to its parent under a group income election. Equally, it should not matter whether or not the company which receives the dividend happens to have FII available to it from other sources. The important point is that in all cases the foreign dividend is incapable of generating any relief from ACT in the hands of the recipient company, yet it will inevitably generate a liability to ACT at some point before it ultimately leaves the group. Viewed from a group perspective, therefore, it will give rise at some stage to an unrelieved charge to ACT within the group, in addition to the foreign tax which it has already borne at source. By contrast, UK profits which are paid up through the group are in practice liable to ACT once only, and they are then liable to a reduced charge to MCT because the ACT discharges an equivalent part of the MCT liability at the level at which it is paid. In other words, the former situation involves full economic double taxation, whereas the domestic UK regime does not.”

“231. Tax credits for certain recipients of qualifying distributions (1) Subject to sections 95(1)(b) and 247, where a company resident in the United Kingdom makes a qualifying distribution and the person receiving the distribution is another such company or a person resident in the United Kingdom, not being a company, the recipient of the distribution shall be entitled to a tax credit equal to such proportion of the amount or value of the distribution as corresponds to the rate of advance corporation tax in force for the financial year in which the distribution is made. (2) Subject to section 241(5), a company resident in the United Kingdom which is entitled to a tax credit in respect of a distribution may claim to have the amount of the credit paid to it if – (a) The company is wholly exempt from corporation tax or is only not exempt in respect of trading income; or (b) The distribution is one in relation to which express exemption is given (otherwise than by section 208), whether specifically or by virtue of a more general exemption from tax, under any provision of the Tax Acts.” (1) Subject to sections 95(1)(b) and 247, where a company resident in the United Kingdom makes a qualifying distribution and the person receiving the distribution is another such company or a person resident in the United Kingdom, not being a company, the recipient of the distribution shall be entitled to a tax credit equal to such proportion of the amount or value of the distribution as corresponds to the rate of advance corporation tax in force for the financial year in which the distribution is made. (2) Subject to section 241(5), a company resident in the United Kingdom which is entitled to a tax credit in respect of a distribution may claim to have the amount of the credit paid to it if – (a) The company is wholly exempt from corporation tax or is only not exempt in respect of trading income; or (b) The distribution is one in relation to which express exemption is given (otherwise than by section 208), whether specifically or by virtue of a more general exemption from tax, under any provision of the Tax Acts.”

“Article 43 EC precludes legislation of a Member State which allows a resident company to surrender to resident subsidiaries the amount of advance corporation tax paid which cannot be offset against the liability of that company to corporation tax for the current accounting period or previous or subsequent accounting periods, so that those subsidiaries may offset it against their liability to corporation tax, but does not allow a resident company to surrender such an amount to non-resident subsidiaries where the latter are taxable in that Member State on the profits which they made there.”

“Articles 43 EC and 56 EC preclude legislation of a Member State which, while exempting from advance corporation tax resident companies paying dividends to their shareholders which have their origin in nationally-sourced dividends received by them, allows resident companies distributing dividends to their shareholders which have their origin in foreign-sourced dividends received by them to elect to be taxed under a regime which permits them to recover the advance corporation tax paid but, first, obliges those companies to pay that advance corporation tax and subsequently to claim repayment and, secondly, does not provide a tax credit for their shareholders, whereas those shareholders would have received such a tax credit in the case of a distribution made by a resident company which had its origin in nationally-sourced dividends.”

“[165]The governing legislation in ICTA sections 246A to 246Y was long and complex, but it is unnecessary for me to refer to it in any great detail. A helpful thumbnail sketch may be found in Moores Rowland's Yellow Tax Guide for 1995–96 (Butterworths), Pt I, Commentary on Statutes, pp 120–122, to which I was referred by Mr Aaronson. I will, however, mention some aspects of the legislation upon which Mr Aaronson placed particular emphasis. [166]The starting point is that where a company resident in the UK paid a dividend in cash, it could elect that the dividend should be treated as a FID: sections 246A(1) and (2). An election could not be made unless it was made in respect of all the dividends on the same class of share; and where a company had more than one class of share capital, ignoring any fixed-rate preference shares, it could only elect for a dividend to be a FID if it paid a dividend at the same time, and on the same terms, in respect of each share of each class, and opted for each of those dividends to be a FID: sections 246A(4) to (9). It follows from these provisions that a company could not elect, for example, that a dividend payable on a particular class of shares should be a FID for recipients who were liable to UK income tax, but not a FID for exempt shareholders. An election had to be made on an all or nothing basis. This point is of central importance to the issue of enhancement of FIDs, to which I will come later in this judgment in my discussion of remedies. [167]The next important point is that an election had to be made to an inspector in an approved form no later than the time when the dividend was paid, and the election was then irrevocable after the dividend was paid: sections 246B(1). The company therefore had to commit itself to the FID regime before the dividend was paid, even though in many cases the company would not yet know for sure whether it had sufficient distributable foreign profit to match with the dividend. [168]A FID did not carry a tax credit, nor was it treated as a franked payment made by the company: sections 246C and 246E. A FID received by an individual shareholder, personal representatives of a deceased individual or trustees of a discretionary trust was, however, treated as income which had borne income tax at the lower rate, although no claim could be made for repayment of any such tax: section 246D. [169]Because a FID did not carry a tax credit, it could not generate FII in the hands of a corporate recipient. However, a company had to pay ACT only on the excess of the FIDs which it paid over the FIDs which it received in an accounting period: sections 246F(1) and (2). Furthermore, any excess of FIDs received over FIDs paid could be carried forward to the next accounting period and was then treated as a FID received in that period: section 246F(3). These provisions therefore produced a similar effect, within the FID regime, to the franking of franked payments by FII, and ensured that ACT had to be paid once only on a FID within the group. [170]The rules for the matching of FIDs with distributable foreign profit were contained in sections 246J to 246M. 'Distributable foreign profit' was defined in sections 246I as, in effect, the amount of the company's foreign source profit after deducting the amount of foreign tax payable in respect of that profit or (if less) the amount of corporation tax payable in respect of the foreign profit before double taxation relief. The matching rules were relatively generous, and enabled a FID to be matched with distributable foreign profit of any subsidiaries in the current or preceding accounting period. An unmatched FID of the parent could also be matched with distributable foreign profit of the subsidiary in a subsequent period. [171]Sections 246N, 246P and 246Q contained the provisions for repayment or set off of ACT which had been paid on FIDs during an accounting period. The drafting of these sections was exceedingly dense, but in very broad terms they provided for the repayment to the company of whichever was the lesser of: (a) the actual surplus ACT available to the company in the accounting period, and (b) the notional surplus ACT available to the company for the period in respect of the matched FIDs which it had paid, the available amounts in each case being calculated on the basis of various assumptions and hypotheses. The critical point which Mr Aaronson emphasises is that the system did not provide for an automatic repayment of all of the ACT paid in respect of FIDs which had been matched, but only for the repayment of a surplus amount. In particular, the detailed provisions relating to set off meant, again in broad terms, that ACT (whether actual or notional) had to be set off against any MCT for which the company was liable before any repayment could be made. [172] The basic structure of the provisions can be seen from the first four subsections of section 246N: '(1) This section and section 246Q apply where— (a) a company pays a [FID] in an accounting period (the relevant period), and (b) … (2) In a case where— (a) the company pays an amount of [ACT] in respect of qualifying distributions actually made by it during the relevant period, (b) the amount, or part of it, is available to be dealt with under this section, and (c) there is as regards the company an amount of notional foreign source [ACT] for the relevant period, an amount of the [ACT] paid shall be repaid to the company, or set off, or partly repaid and partly set off, in accordance with this section and section 246Q. (3) In the following provisions of this section “the relevant [ACT]” means the [ACT] paid as mentioned in subsection (2)(a) above. (4) The amount of the relevant [ACT] to be repaid or (as the case may be) set off, or partly repaid and partly set off, is whichever of the following is smaller— (a) so much of the relevant [ACT] as is available to be dealt with under this section; (b) so much of the relevant [ACT] as is equal to the amount which is, as regards the company, the amount of notional foreign source [ACT] for the relevant period (found under section 246P).' The remainder of section 246N then provided the rules for determining how much of the relevant ACT was available to be dealt with under the section, while section 246P said how notional foreign source ACT was to be calculated. The smaller of the amounts so found was then available in principle for repayment or set off, and section 246Q(2) provided that it must first be set off against any unpaid liability to MCT: '(2) If at the time when it falls to be determined whether the amount mentioned in subsection (1) above is to be repaid or set off— (a) [ACT] paid (or treated for the purposes of section 239 as paid) by the company in respect of distributions made by it in the relevant period has so far as possible been set against its liability to [MCT] for the period under section 239(1), but (b) the company's liability to [MCT] for the period is to any extent undischarged, the amount mentioned in subsection (1) above shall so far as possible be set off against the company's liability to [MCT] for the relevant period (and an amount of that liability equal to the amount so set off shall accordingly be discharged); and any excess of the amount mentioned in subsection (1) above over the amount so set off shall be repaid.' Subsection 246Q(3) then provided that where ACT had been paid, and there was no outstanding liability to MCT, 'the whole of the amount mentioned in subsection (1) above shall be repaid.'” (a) the actual surplus ACT available to the company in the accounting period, and (b) the notional surplus ACT available to the company for the period in respect of the matched FIDs which it had paid, '(1) This section and section 246Q apply where— (a) a company pays a [FID] in an accounting period (the relevant period), and (b) … (2) In a case where— (a) the company pays an amount of [ACT] in respect of qualifying distributions actually made by it during the relevant period, (b) the amount, or part of it, is available to be dealt with under this section, and (c) there is as regards the company an amount of notional foreign source [ACT] for the relevant period, an amount of the [ACT] paid shall be repaid to the company, or set off, or partly repaid and partly set off, in accordance with this section and section 246Q. (3) In the following provisions of this section “the relevant [ACT]” means the [ACT] paid as mentioned in subsection (2)(a) above. (4) The amount of the relevant [ACT] to be repaid or (as the case may be) set off, or partly repaid and partly set off, is whichever of the following is smaller— (a) so much of the relevant [ACT] as is available to be dealt with under this section; (b) so much of the relevant [ACT] as is equal to the amount which is, as regards the company, the amount of notional foreign source [ACT] for the relevant period (found under section 246P).' The remainder of section 246N then provided the rules for determining how much of the relevant ACT was available to be dealt with under the section, while section 246P said how notional foreign source ACT was to be calculated. The smaller of the amounts so found was then available in principle for repayment or set off, and section 246Q(2) provided that it must first be set off against any unpaid liability to MCT: '(2) If at the time when it falls to be determined whether the amount mentioned in subsection (1) above is to be repaid or set off— (a) [ACT] paid (or treated for the purposes of section 239 as paid) by the company in respect of distributions made by it in the relevant period has so far as possible been set against its liability to [MCT] for the period under section 239(1), but (b) the company's liability to [MCT] for the period is to any extent undischarged, the amount mentioned in subsection (1) above shall so far as possible be set off against the company's liability to [MCT] for the relevant period (and an amount of that liability equal to the amount so set off shall accordingly be discharged); and any excess of the amount mentioned in subsection (1) above over the amount so set off shall be repaid.' Subsection 246Q(3) then provided that where ACT had been paid, and there was no outstanding liability to MCT, 'the whole of the amount mentioned in subsection (1) above shall be repaid.'”

“[194] It is, however, for the national court to determine whether the fact that, as the claimants in the main proceedings point out, shareholders receiving a FID are not entitled to a tax credit, must be regarded as a new restriction. While it is true that, in the national system of which the FID regime forms part, the grant of such a tax credit to a shareholder receiving a distribution is the counterpart of the payment by the company making the distribution of the ACT on that distribution, it cannot be inferred from the description of the national tax legislation provided in the order for reference that the fact that a company which has elected to be taxed under the FID regime is entitled to be reimbursed surplus ACT justifies, under the logic governing the legislation which existed on 31 December 1993, its shareholders not being entitled to any tax credit.”

“[134] In principle, it is for the national court to decide how the various claims brought should be characterised under national law. However, as I observed above, this is subject to the condition that the characterisation should allow the test claimants an effective remedy in order to obtain reimbursement or reparation of the financial loss which they had sustained and from which the authorities of the member state concerned had benefited as a result of the advance payment of tax. This obligation requires the national court, in characterising claims under national law, to take into account the fact that the conditions for damages as set out in Brasserie du Pêcheur may not be made out in a given case and, in such a situation, ensure that an effective remedy is nonetheless provided.”

“[132] In the present case, it seems to me that, with one exception, the claims described in the national court's sixth question should be considered equivalent to claims for recovery of sums unduly paid, that is to say, claims for recovery of charges unlawfully levied within the meaning of the court's case law, which the UK is in principle obliged to repay. The underlying principle should be that the UK should not profit and companies (or groups of companies) which have been required to pay the unlawful charge must not suffer loss as a result of the imposition of the charge.As such, in order that the remedy provided to the test claimants should be effective in obtaining reimbursement or reparation of the financial loss which they had sustained and from which the authorities of the member state concerned had benefited, this relief should in my view extend to all direct consequences of the unlawful levying of tax. This includes to my mind: (1) repayment of unlawfully levied corporation tax (Questions 6(i), (iii) and (vii)); (2) the restoration of any relief applied against such unlawfully levied corporation tax (Question 6(ii)); (3) the restoration of reliefs foregone in order to set off unlawfully levied corporation tax (Question 6(v)); (4) loss of use of money insofar as corporation tax was, due to the breach of Community law, paid earlier than it would otherwise have been (Questions 6(iv), (vi), and (viii)).In each case, it would be for the national court to satisfy itself that the relief claimed was a direct consequence of the unlawful levy charged. [133] On this point, I am not convinced that the head of claim outlined in Question 6(ix) should qualify as equivalent to a claim for repayment of charges unlawfully levied. The test claimants essentially argue that the UK's discriminatory failure to grant equivalent imputation credits to shareholders of UK companies receiving FIDs caused those companies to enhance their distributions to compensate these shareholders. However, it does not seem to me that such actions on the part of the distributing company to increase the amount of distributions should be considered to be a direct consequence of the UK's unlawful failure to grant an equivalent credit to the shareholders. Rather, the direct consequence of this failure is simply the extra tax levied on those shareholders than would have been the case had the UK complied with its Community law obligations--which loss is suffered by the shareholders, and not the distributing companies. In contrast, any increase by these companies in the amount of dividend distributed to its shareholders does not seem to me to follow inevitably from the denial of tax credit, nor it is possible without more to conclude that the distribution of an increased dividend necessarily qualifies as a loss incurred for the distributing companies.”

“[197] By Questions 6 to 9, which should be considered together, the national court essentially asks whether, in the event that the national measures referred to in the preceding questions are incompatible with Community law, claims such as those brought by the claimants in the main proceedings in order to remedy that incompatibility should be classified as claims for the repayment of sums unduly levied or benefits unduly claimed or, conversely, as claims for compensation for damage suffered. In the latter case, it asks whether it is necessary to satisfy the conditions laid down in the Brasserie du Pêcheur and Factortame judgment and, if so, whether account should be taken of the form in which such claims must be brought under national law. [198] As regards the application of the conditions in which a member state is liable to make reparation for the loss and damage caused to claimants as a result of an infringement of Community law, the national court asks the court to provide guidance as to the need for a sufficiently serious breach of Community law and the need for a causal link between the breach of the obligation imposed on the member state and the loss and damage suffered by those affected. [199] The claimants in the main proceedings argue that each of the claims referred to in Question 6 falls to be categorised as a claim for repayment, both because those claims seek repayment of the excess tax that was unlawfully levied or of the loss arising from the loss of use of money due to premature payment of taxes, and because those claims seek reinstatement of tax reliefs or reimbursement of the amount by which the resident companies concerned had to increase the amount of FIDs in order to compensate for the lack of any tax credit in the hands of their shareholders. Should Community law provide that only a claim for damages was competent under national law, such a claim would, in any event, be a different type of claim from that which formed the subject matter of Brasserie du Pêcheur and Factortame. [200] Conversely, the UK government contends that each of the remedies sought by the claimants in the main proceedings constitutes a claim for damages which is subject to the conditions laid down in Brasserie du Pêcheur and Factortame. The way in which those claims were brought under national law has no bearing on how they are to be classified in Community law. [201] It must be stated that it is not for the court to assign a legal classification to the actions brought before the national court by the claimants in the main proceedings. In the circumstances, it is for the latter to specify the nature and basis of their actions (whether they are actions for repayment or actions for compensation for damage), subject to the supervision of the national court (see Metallgesellschaft, paragraph 81). [202] However, the fact remains that, according to established case law, the right to a refund of charges levied in a member state in breach of rules of Community law is the consequence and complement of the rights conferred on individuals by Community provisions as interpreted by the court (see, inter alia, Case 199/82 Amministrazione delle Finanze dello Stato v San Giorgio SpA [1983] ECR 3595, paragraph 12, and Metallgesellschaft and Others, paragraph 84). The member state is therefore required in principle to repay charges levied in breach of Community law … [203] In the absence of Community rules on the refund of national charges levied though not due, it is for the domestic legal system of each member state to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, provided, first, that such rules are not less favourable than those governing similar domestic actions (principle of equivalence) and, secondly, that they do not render virtually impossible or excessively difficult the exercise of rights conferred by Community law (principle of effectiveness) … [204] In addition, the court held in paragraph 96 of its judgment in Metallgesellschaft, that, where a resident company or its parent have suffered a financial loss from which the authorities of a member state have benefited as the result of a payment of advance corporation tax, levied on the resident company in respect of dividends paid to its non-resident parent but which would not have been levied on a resident company which had paid dividends to a parent company which was also resident in that member state, the Treaty provisions on freedom of movement require that resident subsidiaries and their non-resident parent companies should have an effective legal remedy in order to obtain reimbursement or reparation of the loss which they have sustained. [205] It follows from that case law that, where a member state has levied charges in breach of the rules of Community law, individuals are entitled to reimbursement not only of the tax unduly levied but also of the amounts paid to that state or retained by it which relate directly to that tax. As the court held in paragraphs 87 and 88 of Metallgesellschaft, that also includes losses constituted by the unavailability of sums of money as a result of a tax being levied prematurely. [206] In so far as the rules of national law governing the availability of tax relief have prevented a tax, such as ACT, levied in breach of Community law, from being recovered by a taxpayer who has accounted for it, the latter is entitled to repayment of that tax. [207] However, contrary to what the claimants in the main proceedings contend, neither the reliefs waived by a taxpayer in order to be able to offset in full a tax levied unlawfully, such as ACT, against an amount due in respect of another tax, nor the loss and damage suffered by resident companies which elected to be taxed under the FID regime because they saw themselves as having to increase the amount of their dividends so as to compensate for the lack of a tax credit in the hands of their shareholders, can form the basis of an action under Community law for the reimbursement of the tax unlawfully levied or of sums paid to the member state concerned or withheld by it directly against that tax. Such waivers of relief or increases in the amount of dividends are the result of decisions taken by those companies and do not constitute, on their part, an inevitable consequence of the refusal by the UK to grant those shareholders the same treatment as that afforded to shareholders receiving a distribution which has its origin in nationally-sourced dividends. [208] That being the case, it is for the national court to determine whether the waivers of relief or the increases in the amount of dividends constitute, on the part of the companies concerned, financial losses suffered by reason of a breach of Community law for which the member state in question is responsible.”

“[231] Mr Ewart submitted that the ECJ adopted a very different approach from the Advocate General in this part of the case, but I do not agree. It seems to me that if the court had disagreed in principle with the clearly stated views of the Advocate General about the potential width of the San Giorgio principle, they would have said so; and they would certainly not have confined their comments to the relatively narrow point whether the claims based on waiver of reliefs, as well as those based on the FID enhancements, fell outside the principle. The reasoning of the court in paragraphs 204 and 205 makes the point that the San Giorgio principle, as applied in Hoechst, extends not only to the repayment of tax unduly levied, but also to amounts paid to the State, or retained by it, "which relate directly to that tax". In Hoechst, the claim in question was for the time value of the ACT which had been levied prematurely. In my judgment, this passage reflects essentially the same approach as the Advocate General's view that the San Giorgio principle should "extend to all direct consequences of the unlawful levying of tax" (paragraph 132 of his opinion), and so understood it leads on naturally to the discussion which follows. [232] Paragraph 206 of the judgment is very compressed, but I read it as directed principally to the recovery of surplus ACT which has been unlawfully levied and which the taxpayer company has been unable to utilise. The difference from Hoechst is that in these cases the claim is for recovery of the unlawfully levied tax itself, and is not a direct consequential claim for the time value of ACT which was levied prematurely (because UK domestic law did not allow the making of a group income election) but which the company concerned was subsequently able to set off against its MCT or utilise in some other way. [233] Paragraph 207 then sets out the one point of substance on which the court differed from the Advocate General, namely how to characterise the waiver of relief claims. It will be recalled that these claims, as summarised in Question 6(v), relate to situations where a company disclaimed reliefs to which it would otherwise have been entitled (such as capital allowances) in order to set off surplus ACT against its MCT liability, and as a result of which it had to pay MCT on the relevant slice of its taxable profits at the difference between the MCT and ACT rates. The claims were therefore for recovery of part of the MCT which the company had paid, and which was itself (it must be assumed) lawfully levied. [234] It is interesting to note that the ECJ did not deal with this point by saying that a claim in respect of lawfully levied tax would automatically fall outside the scope of the San Giorgio principle. Instead, they founded their decision on the point that, as with the enhancement of the FIDS, the waivers were "the result of decisions taken by those companies", and were not "an inevitable consequence" of the unlawful ACT regime. In other words, they saw the chain of causation as having been broken at the stage when these separate decisions were made. [235] On the other hand, it is also clear, to my mind, that the test of causation for the recovery of consequential loss under the San Giorgio principle must be a strict one. The Advocate General used the phrase "direct consequences", and the ECJ used the phrase "an inevitable consequence" (in French, "une conséquence inévitable"). I do not regard these expressions as necessarily conflicting with each other, or as intended to provide an exhaustive definition. They reflect rather the need for a direct and unbroken causal link, and an approach to causation which is considerably more stringent than that applicable to a Factortame damages claim (where "it is for the national court to assess whether the loss and damage claimed flows sufficiently directly from the breach of Community law to render the State liable to make it good": see paragraph 218 of the judgment). “[271].… In the present context, the ECJ has held that the waiver of reliefs in order to be able to offset a tax levied unlawfully, such as ACT, against an amount due in respect of another tax cannot form the basis of an action under Community law for reimbursement (paragraph 207 of the judgment). I do not find the intended scope of this exception altogether clear, and in particular I am puzzled by the reference to "unlawfully" levied ACT. If the ACT was levied unlawfully, it can be recovered in any event. It seems to me that the further claims under this head are concerned with the use of lawful ACT rather than unlawfully levied ACT. That point aside, however, it seems reasonably clear to me that this exception covers all of the claims in the present case which depend on a waiver of reliefs, or some other similar act, on the part of a claimant company. It therefore clearly covers the ACT claims which are based on disclaimed capital allowances; and I note that in the Eighth Amended Particulars of Claim these are in any event pleaded only as claims for compensation. The position with regard to the other ACT claims is less clear, but for the reasons which I have given I do not regard any of them as a direct, and still less as an inevitable, consequence of the unlawful charge to ACT. I therefore do not consider that they fall within the San Giorgio principle. It is important to note in this connection that, although the Advocate General said that all of the types of claim set out in Question 6 (apart from the FID enhancements) were potentially San Giorgio claims, he also said (at the end of paragraph 132 of his opinion) that in each case it would be for the national court to satisfy itself that the relief claimed "was a direct consequence of the unlawful levy charged". I do not understand the ECJ to have dissented in any way from that proposition, and their use of the word "inevitable" in paragraph 207 suggests, if anything, an even more stringent test.”

“[245] It is common ground that two types of restitutionary claim in English law are relevant in the present case. The first is a claim for restitution of tax unlawfully demanded under the principle established by the House of Lords in Woolwich Equitable Building Society v IRC [1993] AC 70 ("Woolwich"). The second, established by the decision of the House of Lords in DMG, is a restitutionary claim for tax wrongly paid under a mistake of law. The two types of claim are, at any rate as the law now stands, conceptually distinct and subject to differing requirements. As Lord Hoffmann pointed out in DMG at paragraph 21, English law as yet "has no general principle that to retain money paid without any legal basis (such as debt, gift, compromise, etc.) is unjust enrichment". Accordingly, a claimant in England "has to prove that the circumstances in which the payment was made come within one of the categories which the law recognises as sufficient to make retention by the recipient unjust" (ibid). So, for example, mistake is not a necessary ingredient of the Woolwich cause of action, whereas it is obviously a crucial ingredient of the second type of claim. Conversely, a Woolwich claim must involve, at least in some sense, the making of a demand by the Revenue, whereas there is no need for a demand in cases of the second type.”

“[260] In the first place, I am unable to accept Mr Ewart's submission that the Woolwich principle alone provides a sufficient UK remedy for claims which as a matter of Community law fall under the San Giorgio principle. As I have already explained, it seems to me that the Court of Justice has adopted a relatively wide view of the San Giorgio principle in the present case, whereas the Court of Appeal in NEC Semi-Conductors has strictly confined the ambit of the Woolwich cause of action to cases where the tax in question was itself unlawfully demanded. It has given no encouragement to attempts to broaden the concept of a "demand", or to permit recovery of losses which go beyond the unlawfully demanded tax and interest. I therefore agree with Mr Cavender that the UK cause of action in mistake-based restitution is also needed in order to provide an effective UK remedy for many San Giorgio claims. I also agree with him that, since the decision of the House of Lords in DMG, the Woolwich cause of action is likely to play a subsidiary role in cases such as the present one. Woolwich was decided in 1992, several years before the House of Lords overturned the "mistake of law" rule in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 ("Kleinwort Benson"), and before the House of Lords held in DMG that the Kleinwort Benson principle extended to wrongly paid tax. Mistake is not a necessary ingredient of the Woolwich cause of action. As Lord Hoffmann said in DMG at paragraph 13, it is indifferent as to whether the taxpayer paid the tax because he was mistaken, or for some other reason. Where mistake is present, however, a restitutionary claim based on the mistake is likely to cover all the ground that a Woolwich claim could cover, but also has the potential to extend considerably further.”

“The taxpayer, assuming the validity of the statute as I believe it is entitled to do, considers itself obligated to pay. Citizens are expected to be law-abiding. They are expected to pay their taxes. Pay first and object later is the general rule. The payments are made pursuant to a perceived obligation to pay which results from the combined presumption of constitutional validity of duly enacted legislation and the holding out of such validity by the legislature. In such circumstances I consider it quite unrealistic to expect the tax payer to make its payments ‘under protest’. Any taxpayer paying taxes eligible under a statute which it has no reason to believe or suspect is other than valid should be viewed as having paid pursuant to the statutory obligation to do so. …[S]hould the individual taxpayer, as opposed to taxpayers as a whole, bear the burden of government’s mistake? I would respectfully) suggest that it is grossly unfair that X, who may not be (as in this case) a large corporate enterprise, should absorb the cost of government’s unconstitutional act. If it is appropriate for the courts to adopt some kind of policy in order to protect government against itself (and I cannot say that the idea particularly appeals to me), it should be one that distributes the loss fairly across the public. The loss should not fall on the totally innocent taxpayer whose only fault is that it paid what the legislature improperly said was due.”

“I cannot deny that I find the reasoning of Wilson J most attractive. Moreover I agree with her that, if there is to be a right to recovery in respect of taxes exacted unlawfully by the Revenue, it is irrelevant to consider whether the old rule barring recovery of money paid under mistake of law should be abolished, for that rule can have no application where the remedy arises not from error on the part of the taxpayer, but from the unlawful nature of the demand by the Revenue. Furthermore, like Wilson J, I very respectfully doubt the advisability of imposing special limits upon recovery in the case of “unconstitutional or ultra vires levies”. ”

“I refer to the decision of the European Court of Justice, in Amministrazione delle Finanze dello Stato v S.p.A. San Giorgio (Case 199/82) [1983] ECR 3595, which establishes that a person who pays charges levied by a member state contrary to the rules of Community law is entitled to repayment of the charge, such right being regarded as a consequence of and an adjunct to, the rights conferred on individuals by the Community provisions prohibiting the relevant charges: see paragraph 12 of the judgment of the court, at p.3612. …I only comment that, at a time when Community law is becoming increasingly important, it would be strange if the right of the citizen to recover overpaid charges were to be more restricted under domestic law than it is under European law.”

“the plaintiffs had quite enough compulsion upon them from the terms of the Act itself, apart from anything that may have been said or done by officers of government. Under that compulsion they parted with their money.”

“The instant appeal raises a question of general importance as to the scope of the principle established by [the decision in Kleinwort Benson] [sc. that a restitutionary claim lies in respect of money paid under a mistake of law]. The question is whether the principle applies where the payment in question is a payment to the revenue on account of a supposed liability to tax (in the instant case, advance corporation tax …). The appellants on this appeal contend that it does not apply to such a payment, given (a) that statute [viz. s.33 of the Taxes Management Act 1970] provides for the recovery of tax overpaid by error or mistake in certain, albeit limited, circumstances …; and (b) that, as the House of Lords held in Woolwich ... , a party who has made a payment to the revenue pursuant to an unlawful demand is entitled as of right to the restitutionary remedy, regardless of whether in making the payment the party was acting under a mistake of law.”

“[264]These general reflections about the essentially subtractive nature of unjust enrichment claims lead me to be very wary of Mr Cavender's siren call to extend the frontiers of the law of unjust enrichment by allowing recovery, on a so-called incremental basis, for claims which go beyond the repayment of mistakenly paid tax and the reversal of directly associated benefits to the Revenue which can reasonably be seen as arising from the mistaken payment. In my judgment the "but for" test of causation has no role to play in this context, except as a minimum requirement for linking the mistake made by the claimant with the types of recovery that, as a matter of general principle, a restitutionary claim can properly encompass. In other words, it cannot itself be used as a test to define the types of loss which are recoverable, and thus to bring within the scope of the law of restitution the same types of consequential loss as a claimant suing in contract or tort (or, I would add, for breach of statutory duty) might hope to recover.” “[270] … Consequential steps that were taken within the group to utilise surplus ACT, for example by setting it off against unlawful Case V corporation tax, or by setting it off against lawful corporation tax increased in amount by the disclaimer of capital allowances, may in principle give rise to a claim for compensation, subject to proof of loss and causation, and subject to a sufficiently serious breach being established; but they do not in my judgment give rise to a restitutionary claim, because the whole point of these steps was that tax was not paid to the Revenue, and any consequential enrichment of the Revenue cannot in my view be seen as a direct result, or concomitant, of any unlawful tax charge. So, for example, if lawfully paid ACT was used to offset an unlawful liability to Case V corporation tax, the result was that the company concerned did not pay corporation tax which, if it had done so, it would admittedly now be able to recover. If the Revenue was enriched at all, it was certainly not by the receipt of unlawfully levied corporation tax, but rather as a result of the group then having less ACT available to use for other purposes. An enquiry into whether (and if so how) such ACT would otherwise have been used within the group can in my judgment only form part of a claim for consequential loss. I do not see how it could be said that the Revenue was immediately and directly enriched at the group's expense by an amount equal to the ACT so used.”

“First Construct: Mistake in year 1 that Case V tax valid and reliefs required to offset that unlawful tax. Benefit of reliefs actually transferred in year 1. Valuation of that benefit transferred calculated by reference to lawful tax paid in subsequent years which would otherwise have been set off by such reliefs. Second Construct As in (1) – but benefit transferred in year 2 (or subsequently) when more lawful tax paid than would otherwise have been paid but for the mistake in thinking the Case V charge was valid. Third Construct Mistake in year 2 (or subsequently) that reliefs had been validly used in year 1 when in fact due to the unlawfulness of the Case V charge such use was only purported. By reason of that mistake a benefit was transferred in year 2 (or subsequent years) when more lawful tax was paid than would have been the case but for such mistake. In relation to this construct Test Claimants seek, in the alternative, a declaration in aid of the restitutionary cause of action. Fourth construct Whether or not there is a restitutionary remedy under (1) to (3) Test Claimants entitled to a declaration that: (a) the Case V charge to tax was unlawful. (b) In consequence the use of reliefs against such unlawful tax was purported. (c) In consequence such reliefs are available for use or to be carried forward.”

“[14] The Defendants are entitled to maintain a change of position defence in respect of any mistake-based restitutionary claims which go beyond San Giorgio claims.”

“… If, with the benefit of competent legal advice, the government could reasonably have decided to leave the existing legislation unchanged, and to introduce the FID regime in exactly the same form as they actually did, I think it would be unrealistic to regard their failure to take legal advice as a decisive factor in the balancing exercise which I have to perform. It is not alleged that the Revenue or the government acted in bad faith, and although their conduct is open to criticism, it cannot in my view be said that they “manifestly and gravely disregarded the limits on [their] discretion”

“[Mr Ewart] argued that sections 320 and 107 were untouched by the principles of Community law which I have mentioned, at any rate in the context of the present case, because the only domestic causes of action which are needed to satisfy the Community principle of effectiveness in relation to San Giorgio claims are the Woolwich cause of action in restitution and the right to claim damages for breach of statutory duty.”

“… if the Revenue were to succeed in persuading a higher court that the Woolwich cause of action alone is sufficient to satisfy the claimants’ rights to recover overpaid tax under Community law, I am unable to see any answer to Mr Ewart’s submission that the sections would be unaffected by Community law in the context of the present case.”

“The "scope of section 32(1)(c)" issue [146] This issue arises only if DMG fails on the first (cause of action) issue. In my opinion it does not arise on this appeal. The rule that in order to come within section 32(1) a mistake must be an essential ingredient of the claimant's cause of action rests on a surprisingly uncertain basis, that is a view expressed by Pearson J in Phillips-Higgins v Harper [1954] 1 QB 411, 419. Nevertheless it has been generally accepted (with some dissentient academic voices raised against it) for over 50 years. [147] The Law Commission has now completed and published its review of the Law of Limitation of Actions (2001) (Law Com No 270) and the Government has accepted its general recommendations with a view to legislation as soon as time permits. In those circumstances your Lordships need not, in my opinion, reconsider the now nearly traditional view of the scope of section 32(1)(c), although there are persuasive arguments for its reinterpretation: see Dr James Edelman, "Limitation Periods and the Theory of Unjust Enrichment" 68 MLR 848 and Professor Andrew Burrows, "Restitution in Respect of Mistakenly Paid Tax" 121 LQR 540.”

“[23] A somewhat similar position arises in cases where a relief is sought from the consequences of mistake, e.g., when money is paid or property transferred under a mistake. The equitable rule is that the time should only run under the Statutes of Limitation from the time at which the mistake was, or could with reasonable diligence have been, discovered. At present this rule does not apply in cases which formerly fell within the exclusive cognisance of a court of law (Baker v Courage [1910] 1 K B 56). It only applies to cases which were formerly only actionable in a court of equity, or were within the concurrent jurisdiction of the two systems … it was held in Baker v Courage (supra) that the Judicature Acts had not altered the common law rule. This position appears to us as unsatisfactory as the position with regard to the effects of concealed fraud, and accordingly we recommend that in all cases when relief is sought from the consequences of a mistake, the equitable rule should prevail and time should only run from the moment when the mistake was discovered, or could with reasonable diligence have been discovered. We desire to make it clear, however, that the mere fact that a plaintiff is ignorant of his rights is not to be a ground for the extension of time. Our recommendation only extends to cases when there is a right to relief from the consequences of a mistake. In such cases it appears to us to be wrong that the right should be defeated by the operation of the Statutes of Limitation.”

“Where in answer to an action to recover back money paid under a mistake of fact the defendant relies on the Statute of Limitations the statute must be taken to have run from the date of payment, and not from the date of the discovery of the mistake, nor from the date when the plaintiff might have discovered it by the exercise of reasonable diligence.”

“Section 26 is concerned with the postponing of the limitation period in the case of fraud or mistake. It is right in construing this provision, of course, to consider the pre-existing law, and a number of previously decided cases were referred to, …. In the end it seemed to me that the previous law did not afford much help. The Act is not a mere consolidating Act, but (as appears from its title) "an Act to consolidate with amendments certain enactments relating to the limitation of actions and arbitrations." Section 26 (c), which is the material provision, effects at least one amendment, because it overrides the decision in Baker v. Courage & Co. In construing the section it is to be observed that fraud and mistake are dealt with quite differently. [His Lordship read section 26 and continued:] In regard to fraud, there is provision (a) where the action is based upon fraud - for instance, if an action is to recover damages for fraudulent misrepresentation - or (b), that very wide provision, where the right of action (which may be wholly independent of fraud) is concealed by the fraud of "any such person as aforesaid," that is to say, the defendant or a person claiming through him; but there is not in respect of mistake any provision similar to (b). The section does not apply to the case of a right of action which is concealed from the plaintiff by a mistake. What, then, is the meaning of provision (c)? The right of action is for relief from the consequences of a mistake. It seems to me that this wording is carefully chosen to indicate a class of actions where a mistake has been made which has had certain consequences and the plaintiff seeks to be relieved from those consequences. Familiar examples are, first, money paid in consequence of a mistake: in such a case the mistake is made, in consequence of the mistake the money is paid, and the action is to recover that money back. Secondly, there may be a contract entered into in consequence of a mistake, and the action is to obtain the rescission or, in some cases, the rectification of such a contract. thirdly, there may be an account settled in consequence of mistakes; if the mistakes are sufficiently serious there can be a reopening of the account. In my opinion, the mere operation of the Limitation Act unless excluded by this section is not a relevant consequence for the purpose of the section. If it were, then any concealment of a right of action from the plaintiff by a mistake would be intended to be covered by this section and the provision (b) in respect of fraud should have been applied to mistake also. Moreover, I think that it is right to say that if there would be no consequence except the operation of the Limitation Act, and the operation of the Limitation Act is excluded, then there is no consequence at all. In this case the mistake, in my judgment, has had no relevant consequence for the purposes of this section. As the statement of claim shows, the plaintiff's claim is to recover moneys due to her under a contract, and the cause of action is the same as if she had sued for each unpaid balance on its due date. By reason of the mistake she failed to realize that the balance was due to her and by that mistake the right of action was concealed from her. But that is not sufficient. Probably provision (c) applies only where the mistake is an essential ingredient of the cause of action, so that the statement of claim sets out, or should set out, the mistake and its consequences and pray for relief from those consequences. In this case the statement of claim sets out that sums became due and that only a smaller amount of £x has been paid, and the prayer is for an account to ascertain the sums still due and for payment of them when so ascertained. This action is not for relief from the consequences of a mistake within the meaning of section 26. No doubt there are certain anomalies which result. As Mr. Wilson pointed out, it is odd that a person who has by mistake paid too much can take advantage of the section whereas a person who has by mistake received too little and made no protest cannot take advantage of the section. There may be other anomalies also. But, in my judgment, the carefully chosen wording of the provision (c) must have its proper effect notwithstanding any resulting anomalies. No doubt it was intended to be a narrow provision, because any wider provision would have opened too wide a door of escape from the general principle of limitation by six years' lapse of time, which is, of course, a reasonable and normally salutary principle, as Mr. Platts-Mills demonstrated by reference to this case, where the parties' memories have grown dim as to long past events and possibly some documents which might have been material have in the course of time perished.”

“[20] Mr Goudie also relied upon section 32 of the Limitation Act in his skeleton submissions. …. [21] In his skeleton argument he referred to Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, for the submission that a mistake occurs for the purposes of section 32 of the Limitation Act when the parties to a transaction believe it to be lawful but it is unlawful. On that basis Mr and Mrs Malkin were not prevented from recovering damages for breach of statutory duty because they entered into the sale and did not learn of the mistake until 1995. [22] Two objections were taken in the skeleton argument to that submission. First, that it was a matter not taken below and not pleaded; second, that the action is not an action arising from the consequences of a mistake. [23] In his oral submissions Mr Goudie did not press the case based on section 32. I believe that he accepted that if his submission as to the effect of section 20 was rejected because his clients' claim was for breach of statutory duty, then their mistake was not such as to come within the terms of section 32(1)(c). In my view he was right not to do so. This is an action for breach of statutory duty. No doubt the failure to take proceedings in time was a result of the mistake by Mr and Mrs Malkin or someone acting on their behalf. That happens in nearly every case where there is a failure to take proceedings in the statutory period laid down in the Limitation Act. Section 32 of the Act is concerned with cases where the plaintiff can establish that the mistake was part of or an element of the cause of action. That does not arise in this case. The action is in my view not for relief for the consequences of a mistake. It is for damages for breach of a statutory duty.”

“33. Error or mistake (1) If a person who has paid income tax or capital gains tax under an assessment (whether a self-assessment or otherwise) alleges that the assessment was excessive by reason of some error or mistake in a return, he may by notice in writing at any time not later than five years after the 31st January next following the year of assessment to which the return relates, make a claim to the Board for relief. (2) On receiving the claim the Board shall inquire into the matter and shall, subject to the provisions of this section, give by way of repayment such relief in respect of the error or mistake as is reasonable and just. (2A) No relief shall be given under this section in respect- (a) an error or mistake as to the basis on which the liability of the claimant ought to have been computed where the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when it was made; or (b) any error or mistake in a claim which is included in the return. (3) In determining the claim the Board shall have regard to all the relevant circumstances of the case, and in particular shall consider whether the granting of relief would result in the exclusion from charge to tax of any part of the profits of the claimant, and for this purpose the Board may take into consideration the liability of the claimant and assessments made on him in respect of chargeable periods other than that to which the claim relates. (4) If any appeal is brought from the decision of the Board on the claim, the Special Commissioners shall hear and determine the appeal in accordance with the principles to be followed by the Board in determining claims under this section; and neither the appellant nor the Board shall be entitled to appeal under section 56A of this Act against the determination of the Special Commissioners except on a point of law arising in connection with the computation of profits. (5) In this section “profits” – (a) in relation to income tax, means income, and (b) in relation to capital gains tax, means chargeable gains.” (a) an error or mistake as to the basis on which the liability of the claimant ought to have been computed where the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when it was made; or (b) any error or mistake in a claim which is included in the return. (a) in relation to income tax, means income, and (b) in relation to capital gains tax, means chargeable gains.”

“Relief in case of mistake in return 51 (1) A company which believes it has paid tax under an assessment which was excessive by reason of some mistake in a return may make a claim for relief-- (a) by notice in writing, (b) given to the Board, (c) not more than six years after the end of the accounting period to which the return relates. (2) On receiving the claim the Board shall enquire into the matter and give by way of repayment such relief in respect of the mistake as is reasonable and just. (3) No relief shall be given under this paragraph-- (a) in respect of a mistake as to the basis on which the liability of the claimant ought to have been computed when the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when it was made, or (b) in respect of a mistake in a claim or election which is included in the return. (4) In determining a claim under this paragraph the Board shall have regard to all the relevant circumstances of the case. They shall, in particular, consider whether the granting of relief would result in amounts being excluded from charge to tax. For that purpose they may take into consideration the liability of the claimant company, and assessments made on it, for accounting periods other than that to which the claim relates. (5) On an appeal against the Board's decision on the claim, the Special Commissioners shall hear and determine the claim in accordance with the same principles as apply to the determination by the Board of claims under this paragraph. (6) Neither the company nor the Board may appeal under section 56A of the Taxes Management Act 1970 against the determination of the Special Commissioners, except on a point of law arising in connection with the computation of-- (a) the profits of the company for the purposes of corporation tax, (b) any amount assessable under section 419(1) of the Taxes Act 1988 (tax on loan or advance made by close company to a participator), or (c) any amount chargeable under section 747(4)(a) of that Act (tax on profits of controlled foreign company).” (a) by notice in writing, (b) given to the Board, (c) not more than six years after the end of the accounting period to which the return relates. (a) in respect of a mistake as to the basis on which the liability of the claimant ought to have been computed when the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when it was made, or (b) in respect of a mistake in a claim or election which is included in the return. (a) the profits of the company for the purposes of corporation tax, (b) any amount assessable under section 419(1) of the Taxes Act 1988 (tax on loan or advance made by close company to a participator), or (c) any amount chargeable under section 747(4)(a) of that Act (tax on profits of controlled foreign company).”

“[20] Thirdly, it should be borne in mind that when it interprets and applies national law, every national court must presume that the State had the intention of fulfilling entirely the obligations arising from the directive concerned. As the Court held in its judgment in Case 106/89 Marleasing v La Comercial Internacional de Alimentación [1990] ECR I-4135, paragraph 8, in applying national law, whether the provisions in question were adopted before or after the directive, the national court called upon to interpret it is required to do so, so far as possible, in the light of the wording and the purpose of the directive in order to achieve the result pursued by the latter and thereby comply with the third paragraph of Article 189 of the Treaty.”