“Such a difference in treatment has the effect of discouraging United Kingdom-resident companies from investing their capital in companies established in another member state. In addition, it also has a restrictive effect as regards companies established in other member states in that it constitutes an obstacle to their raising of capital in the United Kingdom. In so far as income arising from foreign-sourced capital is treated less favourably from a tax point of view than dividends paid by companies established in the United Kingdom, shares in companies established in other member states are less attractive to United Kingdom-resident investors than those of companies having their seat in that member state.”
“54. The Claimants none the less point out that when, under the relevant United Kingdom 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 United Kingdom. 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. 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.”
“Unlike the exemption method, the imputation method therefore does not enable the benefit of the corporation tax reductions granted at an earlier stage to the company paying dividends to be passed on to the corporate shareholder.”
“It follows that application of the imputation method to foreign-sourced dividends as prescribed by the legislation at issue in the main proceedings does not ensure a tax treatment equivalent to that resulting from application of the exemption method to nationally-sourced dividends.”
“60. As to the proportionality of the restriction, whilst application of the imputation method to foreign-sourced dividends and of the exemption method to nationally-sourced dividends may be justified in order to avoid economic double taxation of distributed profits, it is not, however, necessary, in order to maintain the cohesion of the tax system in question, that account be taken, on the one hand, of the effective level of taxation to which the distributed profits have been subject to calculate the tax advantage when applying the imputation method and, on the other, of only the nominal rate of tax chargeable on the distributed profits when applying the exemption method.”
“61. The tax exemption to which a resident company receiving nationally-sourced dividends is entitled is granted irrespective of the effective level of taxation to which the profits out of which the dividends have been paid were subject. That exemption, in so far as it is intended to avoid economic double taxation of distributed profits, is thus based on the assumption that those profits were taxed at the nominal rate of tax in the hands of the company paying dividends. It thus resembles grant of a tax credit calculated by reference to that nominal rate of tax. 62. For the purpose of ensuring the cohesion of the tax system in question, national rules which took account in particular, also under the imputation method, of the nominal rate of tax to which the profits underlying the dividends paid have been subject would be appropriate for preventing the economic double taxation of the distributed profits and for ensuring the internal cohesion of the tax system while being less prejudicial to freedom of establishment and the free movement of capital.”
“65. In light of the foregoing, the answer to the first question is that articles 49FEU and 63FEU must be interpreted as precluding legislation of a member state which applies the exemption method to nationally-sourced dividends and the imputation method to foreign-sourced dividends if it is established, first, that the tax credit to which the company receiving the dividends is entitled under the imputation method is equivalent to the amount of tax actually paid on the profits underlying the distributed dividends and, second, that the effective level of taxation of company profits in the member state concerned is generally lower than the prescribed nominal rate of tax.”
“It is apparent from the answer to the second question that national rules, such as those at issue in the main proceedings, which seek to prevent the economic double taxation of distributed profits are incompatible with European Union law in so far as those rules, in the context of a group taxation scheme, do not take account, as regards dividends from other states, of the corporation tax already paid on the profits out of which those dividends have been paid.”
“The answer to the third question therefore is that European Union law must be interpreted as meaning that a parent company resident in a member state, which in the context of a group taxation scheme, such as the group income election at issue in the main proceedings, has, in breach of the rules of European Union law, been compelled to pay ACT on the part of the profits from foreign-sourced dividends, may bring an action for repayment of that unduly levied tax in so far as it exceeds the additional corporation tax which the member state in question was entitled to levy in order to make up for the lower nominal rate of tax to which the profits underlying the foreign-sourced dividends were subject compared with the nominal rate of tax applicable to the profits of the resident parent company.”
“The dispute is whether EU law requires, as the judge held, a tax credit for the higher of tax actually paid and the foreign nominal rate of tax of the dividend paying company capped at the UK corporation tax rate, or, as HMRC claim, a credit for the actual tax rate paid capped at the UK corporation tax rate.”
“There remains for consideration whether or not the judge was right to hold that the credit should be at the higher of the actual or nominal rate (up to the limit of the Case V tax charge after a credit for withholding tax: see Declaration 1 C). This issue is unlikely to arise in practice although there can be some rare cases in which the actual rate will exceed the nominal. In our view the judge was right to take the higher of the two rates since the foundation of the jurisprudence is that there should be a credit for at least the tax actually paid. The controversy over whether, if the nominal rate is higher than the actual, there should be credit at the higher rate does not, in our view, mean that less than the actual rate is ever appropriate.”
“The effect of the rulings of the CJEU is that the foreign dividend should be afforded equivalent treatment, taking the form of the imputation method according to which credit should be given for the relevant foreign tax at the effective rate (i.e. the actual tax paid) or the nominal rate (whichever is the higher), subject to a cap at the rate of the UK’s appropriate nominal rate (i.e. the corporation tax rate or the rate of ACT as applicable).”
“Against this background, Issue 2 asks how to determine which FNR is appropriate in respect of each foreign dividend received by a UK company. The three possibilities canvassed in argument were: (a) the FNR of the foreign water's edge company paying the dividend to the UK (this being the Claimants' primary case); (b) the FNR of the jurisdictions where the income had been subject to tax, applying where necessary a weighted average of those FNRs following the system of s 801 of ICTA 1988 (the Claimants' alternative case); and (c) the FNR of each jurisdiction where the underlying profits had been subject to tax, so that where a dividend was derived from a variety of sources of profit carrying differing FNRs the dividend must be disaggregated into the parts which carried different FNRs (the Revenue's case).”
“In reaching that conclusion, however, I was heavily influenced by the practical impossibility in nearly all cases of pursuing an enquiry into FNRs beyond the water's edge company paying the dividend where the holdings in question were all of less than 10%, and the UK recipient would normally be in no position to trace the course which the distributed profits had previously followed. Those practical considerations do not apply where the dividends have throughout remained in a single multi-national group of which the UK recipient is a member. It is therefore not suggested by the Claimants that either the second or the third solutions would in practice be unworkable. Indeed, it is common ground that the necessary information can be retrieved without undue difficulty, because it had to be collected and submitted to the Revenue for the purposes of claiming double taxation relief for the actual underlying tax on the dividends. I do not, therefore, start with any predisposition to hold that solution (a) is the correct one in cases of the present type.”
“The problem of how to treat mixer companies, and analogous arrangements, is to my mind more difficult, and the choice between solutions (b) and (c) reflects a fundamental difference of approach between the two sides. In essence, the Claimants' approach is to take the UK system as it actually was, and to make only such modifications to it as are appropriate to accommodate the ECJ's ruling. The Revenue's approach, by contrast, is to start from first principles and then try to work out how far the UK could lawfully have imposed a Case V charge on the various streams of income comprised in the blended dividends paid by the mixer company.”
“54. As to the difference in approach which is reflected in the example which I have discussed, I consider that the claimants' approach as set out in their alternative case is to be preferred. The question of the unlawfulness of the Case V charge does not arise in a legislative vacuum. It has to be considered in the context of the actual tax system operated by the UK, which was binding as a matter of domestic law and has to be applied by the English court subject only to any disapplication or conforming construction which may be needed in order to make it compliant with EU law. The introduction of a credit for tax at the FNR should therefore be implemented in a way which, as far as reasonably possible, reflects and goes with the grain of the existing UK legislative scheme. It seems to me that the claimants' approach respects this principle more closely than the Revenue's, because it adapts and builds on the existing machinery for giving credit for underlying tax. It is not an objection to this approach, in my judgment, that the grant of relief from juridical double taxation of cross-border dividends, of which the s 801 machinery forms part, is not itself required by EU law. The point is, rather, that the machinery formed an integral part of the UK's existing system for taxation of cross-border dividends which has to be made compliant with EU law. 55. Another aspect of the same point, in relation to mixer companies, is that the claimants' approach does less violence to the actual facts than the Revenue's approach. The main (if not the only) purpose of such companies, before the introduction of the eligible unrelieved foreign tax ('EUFT') rules in 2001, was to blend income streams which carried different rates of creditable underlying tax in such a way that the higher rates were offset by the lower, and the weighted average rate was no higher than the UK nominal rate. This is what actually happened, and the onward dividends received by the UK water's edge company were blended ones to which the s 801 machinery applied. By contrast, the notional disaggregation of the blended income streams in accordance with the Revenue's methodology contradicts the actual blending which the mixer company was designed to achieve, and seeks to undo (in relation to nominal rates of tax) the legitimate tax planning which led to the actual blending of the dividends in the first place. The significance of this becomes apparent when it is recalled that, if the Revenue's argument on Issue 1 were correct, the only credit required by EU law would be a single credit at the FNR. The Revenue say that this credit should be calculated on a basis which, in effect, posits a lawful Case V charge even where such a charge could not in fact have been imposed because of the availability of double taxation relief for underlying tax. A reconstruction of this nature seems to me to go well beyond the proper bounds of conforming interpretation.”
“There is, however, a further refinement which I need to mention. It is only in respect of distributions of profits originating in the EU that the operation of the Case V charge needs to be modified in order to make it compliant with EU law. This follows from the fact that, in relation to distributions by subsidiaries, in contrast to portfolio dividends, the only fundamental freedom under EU law which was infringed by the Case V charge was freedom of establishment. Although the Case V charge was in principle capable of engaging art 56 EC (free movement of capital) in relation to distributions by third country subsidiaries, any infringement of it, at least prior to the introduction of the EUFT rules, was admittedly protected by the standstill provisions of art 57(1) EC: see FII (CA) at [72]. Accordingly, I believe it to be common ground, and (if not) it appears to me correct in principle, that any third-country source income which was paid up through an EU mixer company in whose hands it was exempt from tax should be disregarded in calculating the FNR credit required by EU law. There can be no objection in principle to the imposition of the unmodified Case V charge on distributions of profits which originated in a third country, and which have not been subjected to tax in the EU, even if they formed part of a blended dividend paid up by an EU mixer company.”
“The jurisdiction of the ECJ to give preliminary rulings relates to the interpretation of the EC Treaty and the other matters referred to in Article 234 EC. They do not include the interpretation of the legislation of a member state, see Pfeiffer v Deutsches Rotes Kreuz[2004] ECR I-8835 para 115 and Criminal ProceHoerchstedings against Pupino[2005] ECR I-5285 para 47. Further, as those citations show, the obligation of the national court is to examine the whole of the national law to consider how far it may be applied so as to conform to enforceable Community rights.”
“It is possible to read the legislation up (expansively) or down (restrictively) or to read words in to the legislation.”
“110. Mr Ewart sought to suggest that this court's ruling at [107] in FII (CA) was not tied to interpretation of section 231(1) but produced a sort of power of amendment which roamed at large across all the ACT provisions, leaving it open to HMRC to propose a different methodology within the interstices of those provisions taken as a whole for giving effect to the requirements of EU law. In substance, he wished to introduce a distinct crediting methodology into section 241. 111. In our view this is an unsustainable submission. It rests on a misconception regarding the operation of the Marleasing interpretive principle and of the ruling given in FII (CA). Application of that principle does not make it irrelevant which particular statutory provision in a group of provisions is being interpreted. On the contrary, it is a principle of interpretation which is applied to give a specifiable and specific meaning to a particular provision (or series of provisions, taken one by one), even if it allows considerable latitude as to the wording which may be read into the provision (or provisions). In considering whether a particular conforming interpretation can be given to a particular provision, the court has to check to see that that proposed interpretation does not go against "the grain" of the legislation in question or conflict with its cardinal features. This was the exercise performed by this court in FII (CA) to arrive at the particular conforming interpretation it identified for a specific section, namely section 231(1) of ICTA.”
“[54] As to the difference in approach which is reflected in the example which I have discussed, I consider that the Claimants' approach as set out in their alternative case is to be preferred. The question of the unlawfulness of the Case V charge does not arise in a legislative vacuum. It has to be considered in the context of the actual tax system operated by the UK, which was binding as a matter of domestic law and has to be applied by the English court subject only to any disapplication or conforming construction which may be needed in order to make it compliant with EU law. The introduction of a credit for tax at the FNR should therefore be implemented in a way which, as far as reasonably possible, reflects and goes with the grain of the existing UK legislative scheme. It seems to me that the Claimants' approach respects this principle more closely than the Revenue's, because it adapts and builds on the existing machinery for giving credit for underlying tax. It is not an objection to this approach, in my judgment, that the grant of relief from juridical double taxation of cross-border dividends, of which the section 801 machinery forms part, is not itself required by EU law. The point is, rather, that the machinery formed an integral part of the UK's existing system for taxation of cross-border dividends which has to be made compliant with EU law.”
“With some hesitation, I agree with the Claimants on this point. In the absence of any evidence about the precise nature of the relevant exemption, I think it preferable to regard the capital gain as a receipt which prima facie formed part of the taxable profits of BAT Nederland BV and was in principle subject to tax at the nominal rate, even though the effect of the exemption was to narrow the tax base by removing it from charge.”
“You do not remove a tax credit given by Parliament which is the withholding tax credit, in order to take advantage of a tax credit by reference to underlying tax, which EU law demands.”
“118. In very broad terms, the rival methodologies for dealing with these problems reflect a fundamental difference of approach which I have already noted in relation to some aspects of the Case V charge. The claimants' approach, in outline, is to take the UK system as it actually operated, and make adjustments to it designed to accommodate the tax credit required by EU law at the point of entry of the EU dividend into the UK. The dividend is thus regarded as carrying a tax credit in the same way as a dividend received by the water's edge company from a UK subsidiary would have done, although the quantum of the credit is not necessarily the same because the credit required by EU law may in certain circumstances be less than a domestic credit at the ACT rate. The credit thus identified is then treated as available for use within the group in the same way as a credit attaching to domestic FII, and is set against the actual ACT payable on subsequent distributions (usually at the level of the top company in the group, because of group income elections). 119. The Revenue's methodology, by contrast, starts from the proposition that it is only when ACT was actually paid that it is necessary to determine whether any of it was unlawful. It is therefore necessary to begin by identifying the EU source income comprised in the dividends which trigger the actual charge to ACT. Since the charge was usually imposed at the top of the group, after payment up of all or part of the EU income originally received by the water's edge company through one or more intermediate holding companies, and since all the UK companies involved usually had other sources of income, the Revenue have to devise a mechanism for tracing the original EU income as it passed up the group until the stage when ACT became payable. This is an exercise which has no analogue in the UK ACT system, and it involves the making of a number of sometimes arbitrary assumptions, as well as calculations of very considerable complexity. 120. Once the EU portion of the dividend has been identified, it next has to be decided how much of the ACT actually payable in respect of the dividend (at the rate of ACT then in force) was unlawful. For this purpose, the Revenue calculate the maximum rate of ACT which they say could lawfully have been charged in respect of each stream of EU income represented in the dividends, and express that rate as a percentage which is then compared to the actual ACT rate charged on the dividend. Only to the extent that the ACT actually charged on the EU income components of the dividend exceeds the maximum lawful percentages attributable to those components is the charge unlawful.”
“145. In arguing for the claimants' approach, Mr Aaronson rightly went back to first principles. That which needs to be remedied, he submits, is the failure of the ACT system to provide a credit for underlying tax and/or tax at the FNR in the case of EU dividends, because only in that way (according to the analysis of the ECJ) could the UK have justified its decision to counter economic double taxation of corporate profits by the adoption of a dual system of exemption for domestic dividends and imputation for EU dividends. The remedial tax credit needs to be given, and fed into the ACT system, at the UK water's edge, rather than at the level when ACT in fact became payable, because when the dividend reaches the UK it has already been subjected to foreign tax on the distributed profits. The essence of the domestic ACT system is that, when a dividend is paid out of profits which are subject to corporation tax, ACT is payable and the aggregate amount of the dividend and ACT then constitutes FII in the hands of the recipient company. Thus in order to achieve parity of treatment of EU dividends in the hands of the UK water's edge company they must be treated in the same way as dividends received from UK subsidiaries in respect of which ACT has already been paid. The critical point is that, at the stage of receipt in the UK, the EU dividends have already borne actual foreign tax. In order to remedy the unlawful discrimination identified by the ECJ, the foreign tax must be regarded as equivalent to domestic ACT, and the sum of the dividend and the foreign tax credit must be treated as equivalent to FII. 146. If the matter is viewed in this way, submits Mr Aaronson, it can be seen to be irrelevant that EU dividends were in fact normally paid up the UK group under group income elections, with ACT only becoming chargeable at the top level. In order to remedy the unlawful discrimination under EU law, the dividends must be treated as if they had already borne a tax equivalent to ACT when they were received at the UK water's edge. In order to avoid a double charge to tax, the dividends and their associated tax credits must thenceforth be treated as equivalent to FII. For remedial purposes, it is too late for the dividends to be the subject of notional group income elections, because the payment of ACT which such an election would postpone has already taken place.”
"In our judgment, the decision of this court in FII (CA) has given the answer to this question. The answer which has been given bears out Prudential’s submission on this point."
“a conforming interpretation can be achieved simply by reading in words that make it clear that resident companies can claim a credit under section 231 in respect not only of qualifying distributions made by resident companies (domestic-source income) but also distributions made by other companies (foreign-source income) to the extent that Community law requires a tax credit to be given in respect of that income too. The extent of that entitlement can then be investigated when the section falls to be applied. …”
“This means that the relevant conforming interpretation of the ACT provisions is achieved by modifying the interpretation of section 231 by application of the Marleasing interpretive obligation so as to create a tax credit of the relevant amount in respect of foreign dividends assessed by reference to the relevant foreign nominal or effective rate of tax (whichever is the higher), capped at the UK nominal rate of tax. No other change to the interpretation of the ACT provisions in accordance with their ordinary meaning was suggested by the court and none is necessary to give effect to the requirements of EU law. It may be observed that although HMRC succeeded in overturning the more generous approach (from the taxpayer's point of view) favoured by the judge in FII (High Court), the solution arrived at leads to the conclusion that Prudential is correct in its submissions on this question in the present appeal.”
“Once the conforming interpretation of section 231(1) given by this court in FII (CA) and by the judge’s declaration is applied, the other ACT provisions simply apply in accordance with their ordinary meaning, precisely as Prudential submits on the present appeal.”
“23. From1 July 1994 , a resident company receiving dividends from a non-resident company could elect that a dividend which it paid to its shareholders be treated as a “foreign income dividend” (“FID”). ACT was payable on the FID but, to the extent to which the FID matched the foreign dividends received, the resident company could claim repayment of the surplus ACT. 24. While ACT was payable within 14 days of the end of the quarter in which the dividend was paid, surplus ACT was repayable when the resident company became liable for mainstream corporation tax, namely nine months after the end of the accounting period. 25. When a FID was paid to an individual shareholder, the latter ceased to be entitled to a tax credit, but was treated for income tax purposes as having received income which had borne tax at the lower rate. Tax-exempt shareholders, such as United Kingdom pension funds which received a FID, were also not entitled to a tax credit. 26. For dividends paid after6 April 1999 , the ACT system and the FID regime were abolished.”
“… the fact that ACT would only be repaid by HMRC to the company which had declared and paid a FID when it had been matched to HMRC's satisfaction with distributable foreign profits of the company which had already borne a rate of underlying tax in excess of the UK corporation tax rate. In the real world, no UK company would ever have declared a FID unless it was confident that it would be able to perform the necessary matching exercise and thereby obtain repayment of the relevant ACT. Furthermore, the effect of the matching requirements was that, once a repayment of ACT had been made on a final as opposed to a provisional basis, one could be certain that the ACT in question was directly attributable to foreign profits of the company which had already borne tax at a rate higher than the UK rate. The necessary linkage was provided by the matching exercise itself.”
“By question 4, the national court essentially asks whether Articles 43 EC and 56 EC … preclude national legislation, such as the legislation at issue in the main proceedings, which, while allowing resident companies receiving foreign-sourced dividends to elect to recover ACT accounted for on a subsequent distribution to their own shareholders, first, obliges those companies to pay the ACT and to reclaim it subsequently and, secondly, does not provide any tax credit to their shareholders, whereas those shareholders would have received such a tax credit if the resident companies had made a distribution based on nationally-sourced dividends.”
“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 advance corporation tax paid but, first, obliges those companies to pay that advance corporation tax and subsequently to claim repayment …”
“The following claims are successful in relation to the GLO issues determined in the trial: (a) claims for the repayment of surplus ACT … or ACT refunded under the FID regime, paid on or after1 January 1973 , by claimants which received dividend income from subsidiaries established in other member states in so far as (i) the ACT paid was not due after taking into account the tax credit available under section 231 ICTA 1988 in respect of those dividends and (ii) the claims are made within the applicable limitation periods; (b) claims for the time value of ACT on third country FIDs paid on or after1 July 1994 and refunded under the FID regime in so far as (i) the ACT paid was not due after taking into account the tax credit available under section 231 in respect of those dividends and (ii) the claims are made within the applicable limitation periods; (c) claims for interest based on claims under (a) and (b) above.”
“Once this point is understood, it seems clear to me that the restrictions contained in sub-paragraphs (a)(i) and (b)(i) of the varied Order 1 will have no impact on claims such as those brought by the present claimants. The unlawfulness of the FID regime as a whole under EU law has been definitively established by the ECJ. It follows that the ACT levied on the FIDs was unlawful, and the companies should have been placed in the same position as a UK company in receipt of FII from a UK subsidiary. The matching rules mean that all of the dividends matched with the FIDs will have been paid out of profits which bore an underlying rate of tax higher than the UK corporation tax rate. Accordingly, had the company which paid the FIDs instead received the same dividends in a purely domestic scenario, they would have been received as FII and would have franked the onward distribution in its entirety. Moreover, EU law would require credit to be given for the whole of the notional foreign tax, up to the UK corporation tax limit, because only thus could economic double taxation of the same underlying profits be avoided. In other words, in cases of the present type the notional tax credit required by EU law under the modified section 231 would in effect require the matched dividends to be treated as if they were domestic dividends, with the result that no ACT on the FIDs was payable.”
“These claims are simpler than those relating to ordinary dividends because the FID regime was subject to a separate and self-contained legislative code which required the FIDs to be matched with identified foreign profits which had borne underlying tax in excess of the UK corporation tax rate. In those circumstances, there could be no question of EU law requiring any further tax credit to be granted for the FIDs, but equally there is no further linking exercise to perform before the extent of the illegality of the ACT charge can be ascertained. Since the whole of the matched foreign profits had already borne foreign tax at a rate above the corporation tax rate, it was clearly unlawful to subject the same profits to a second charge to corporation tax in the form of ACT.”
“[[37-39] of FII CJEU 3 seem] to us to be a clear rejection of the Court of Appeal’s view that the test Claimants in FII were not entitled to protection in respect of both existing domestic causes of action which were capable of giving effect to their EU San Giorgio rights. In the Supreme Court which made the reference views differed on this point but Lord Hope, Lord Walker and Lord Reed, all considered that the summary removal of the DMG claims by the disapplication of s 32(1)(c) was incompatible with the principles of equivalence and effectiveness”
“[u]pon the payment of the dividends which attracted those ACT liabilities … [Ford US] were entitled to receive a tax credit pursuant to Article 10(2) of the UK-US double taxation convention … calculated as one half of the ACT paid less …”
“[t]he Defendants are in principle entitled to maintain a change of position defence in respect of any mistake-based restitutionary claims which go beyond San Giorgio claims”
“[t]he defendant has a defence to the extent that:- (a) the defendant’s position has changed as a consequence of, or in anticipatory reliance on, obtaining the benefit, and (b) the change is such that the defendant would be worse off by making restitution than if the defendant had not obtained, or relied in anticipation on obtaining, the benefit”
“… [W]here in the case of any action for which a period of limitation is prescribed by this Act, either— (a) …; (b) …; or (c) the action is for relief from the consequences of a mistake; the period of limitation shall not begin to run until the plaintiff has discovered the … mistake or could with reasonable diligence have discovered it. …”
“The Claimants made the ACT Payments by reason of their mistaken beliefs (i) that the ACT Provisions were lawful and enforceable, and/or (ii) that the Claimants were lawfully obliged to make those payments”
“The Claimants discovered their mistakes relating to the ACT Payments when the ECJ gave its judgment [that is, in FII CJEU1] on12 December 2006 . The Claimants could not with reasonable diligence have discovered their mistakes any earlier than they did, alternatively, any earlier than when the ECJ gave its decision in Joined Cases C-397/97 Metalgesellschaft Ltd v IRC and C-410/98 Hoechst AG v IRC on8 March 2001 .”
“The fact that the DV Corporation Tax Payments, to the extent of their unlawfulness, [and certain associated payments] were made by mistake depends upon the final determination of the issues in these proceedings. In the premises, the Claimants could not with reasonable diligence have discovered these mistakes at any other time or in any other way.”
“If DMG made a mistake about the law, when could they ‘with reasonable diligence’ have discovered it? On this question it is important to bear in mind the special nature of the mistake, namely that it was deemed to have been made because of the retrospective operation of a later decision of the Court of Justice. The ‘reasonable diligence’ proviso depends upon the true state of affairs being there to be discovered. In this case, however, the true state of affairs was not discoverable until the Court of Justice pronounced its judgment. One might make guesses or predictions, especially after the opinion of the Advocate General. This gave DMG sufficient confidence to issue proceedings. But they could not have discovered the truth because the truth did not yet exist. In my opinion, therefore, the mistake was not reasonably discoverable until after the judgment had been delivered.”
“DMG's mistaken belief that a group income election was not available was not shown to be wrong until the issue which Hoechst had raised was determined by the European Court on8 March 2001 . The issue, which was one of law, was not capable of being resolved except by litigation. Until the determination was made the mistake could not have been "discovered" in the sense referred to in section 32(1) of the 1980 Act. In this situation I would hold, in agreement with Park J and Jonathan Parker LJ, that DMG was not in a state of doubt, when it paid the ACT. It was not then obvious that the payments might not be due. They were made in accordance with the law as it was then understood to be. There was nothing yet to be discovered to the contrary which could have been revealed by the exercise of reasonable diligence.”
“I think the judge and Jonathan Parker LJ were correct in their views that the mistake was not discovered until the European Court of Justice gave judgment in the Metallgesellschaft/Hoechst case[2001] Ch 620 . Perusal of the report in that case suggests that the United Kingdom Government tenaciously defended the ACT regime on every available ground. At no time before the judgment did the Government concede that the ACT regime was (in discriminating between national and multi-national groups) contrary to EU law and unlawful. It was the judgment that first turned recognition of the possibility of a mistake into knowledge that there had indeed been a mistake. I agree with the view of Lightman J in First Roodhill Leasing Ltd v Gillingham Operating Co Ltd (unreported)5 July 2001 , para 22 that there may be cases ‘where a party may be held to have discovered a mistake without there being an authoritative pronouncement directly on point on the facts of that case by a court, let alone an appellate court’. It all depends on the facts. But in this case it is, in my opinion, clear that the judgment of the European Court of Justice on8 March 2001 was the decisive moment.”
“… I would hold that as soon as a paying party recognises that a worthwhile claim arises that he should not after all have made the payment and accordingly is entitled to recover it (or, as here, to compensation for the loss of its use), he has "discovered" the mistake within the meaning of section 32; and, by the same token, I would hold that if he makes any further payments thereafter, they are not to be regarded as payments made under a mistake of law.”
“… I fail to see why the question whether moneys are paid under a mistake of law should turn on the degree of conviction or optimism which the parties hold upon the legal issue dividing them. Were the claimants in the Hoechst case (who issued their proceedings against the revenue in 1995) none the less to be regarded as having made all subsequent payments under a mistake of law? Surely not. Even DMG itself, it will have been noted, brought its claim in October 2000. Is it nevertheless to be said that their original mistake remained undiscovered until the European Court of Justice's actual decision in Hoechst some five months later?”
“172. On the present appeal, however, Lord Hope concludes his judgment on ‘the discovery issue’, at paras 63-71 of his speech, with the view that, when DMG paid the ACT, ‘it was not then obvious that the payments might not be due.’ I confess to some difficulty with that conclusion. Surely, when DMG learned in July 1995 that there was a serious legal challenge to the legality of the ACT regime, it must then have been obvious to them that these payments might not after all be due. Of course they could not be sure and of course nothing short of a final judgment from the European Court of Justice would have persuaded the revenue to accept any claim by DMG here for group income relief. But it does not seem to me to follow that DMG paid under a mistake of law-any more than Woolwich would be regarded as having paid under such a mistake simply because the revenue in that case were insisting on the validity of the contested regulations. 173. I have the same difficulty with para 144 of Lord Walker's opinion. Again, I see no good reason why the revenue's tenacious defence of their position and their refusal to concede its unlawfulness means that DMG's mistake must be treated as undiscovered prior to the Metallgesellschaft/Hoechst judgment. The passage quoted by Lord Walker from Lightman J's judgment in First Roodhill Leasing Ltd v Gillingham Operating Co Ltd5 July 2001 , para 22, continues: ‘For this purpose it cannot be necessary that the party knows of the mistake as a certainty. There are gradations of knowledge. It may well be sufficient to constitute the necessary discovery when the claimant has good reason to believe that a mistake has been made (consider Earl Beatty v Inland Revenue Comrs[1953] 1 WLR 1090 ) or has been given “a line” on this question: see G L Baker v Medway[1958] 1 WLR 1216 , 1224.’” (We were shown the decision of Lightman J in the First Roodhill case to which Lord Walker and Lord Brown refer: its citation is[2001] EWHC Ch 397 . It concerned an application for permission to amend and the discussion of the law about discoverability goes no further than the passages which they quote.) ‘For this purpose it cannot be necessary that the party knows of the mistake as a certainty. There are gradations of knowledge. It may well be sufficient to constitute the necessary discovery when the claimant has good reason to believe that a mistake has been made (consider Earl Beatty v Inland Revenue Comrs[1953] 1 WLR 1090 ) or has been given “a line” on this question: see G L Baker v Medway[1958] 1 WLR 1216 , 1224.’”
“The combined effect of the decisions on [the issues in DMG] was in one respect extremely remarkable. If tax was overpaid under a mistake of law, then provided that a claim to recover it was brought before six years had elapsed from the judgment establishing the correct legal position, there was no limit upon how far back the claim could go.”
“Before Park J gave judgment in [DMG] on18 July 2003 , no one could reasonably have counted on being able to recover tax on the ground of mistake of law. They might have thought that there were strong arguments to that effect, but I do not believe that they could reasonably have assumed when deciding how long they had in which to bring their claims that those arguments would prevail. Even after Park J's judgment, the right to recover tax on the ground of mistake of law was being challenged on appeal on serious grounds. The existence of such a right was rejected by the Court of Appeal and was not definitively established until the judgment of the House of Lords on25 October 2006 .”
“It is right to point out that this is substantially the same principle as that on which the test claimants themselves rely when they say (with the support of the House of Lords in [DMG]) that they cannot be taken to have discovered their mistake about the lawfulness of the United Kingdom's corporation tax regime until the Court of Justice definitively decided the point. By the same token, the test claimants cannot be taken to have assumed that they had a right to recover the tax on the ground of mistake at a stage when they had arguments and hopes but no definitive decision.”
“103. … [U]ntil the decision of the Court of Justice in [Hoechst]there was no general appreciation that the UK corporation tax regime was seriously open to challenge as infringing the Treaty. Henderson J [that is, in FII HC1] did not make any detailed findings about this, since the principle of legitimate expectations does not seem to have been argued as a separate issue before him. But he did[2009] STC 254 , para 267, make a general finding of fact about mistake: ‘The unlawful payments of ACT made from 1973 to 1999, and the unlawful payments of ACT made under the FID regime from 1994 to 1999, were in my view plainly made under a mistake about the lawfulness of the tax regimes under which they were paid. I am satisfied from the evidence, both written and oral, that this was not obvious to anybody within the BAT group at the time, since everybody proceeded on the footing that the tax in question was lawfully due and payable.’ 104. After8 March 2001 a well advised multinational group based in the UK would have had good grounds for supposing that it had a valid claim to recover ACT levied contrary to EU law, with at least a reasonable prospect that the running of time could be postponed until then (but not subsequently) by the operation ofsection 32(1)(c) of the Limitation Act 1980 . 105. The next important date was18 July 2003 , when Park J gave his first instance judgment in DMG ... . This was the first judicial decision which positively upheld a claim for repayment of unduly levied tax with an extended limitation period under section 32(1)(c). But appeals to the Court of Appeal and the House of Lords were to follow and (as Henderson J observed, at para 406), ‘the outcome of those appeals was, at the time, impossible to predict with any confidence.’”
“As Lord Walker explains at para 104, after8 March 2001 , when the Court of Justice decided [Hoechst], the Test Claimants would have had good grounds for supposing that they had a good claim to recover ACT levied contrary to EU law, with at least a reasonable prospect that the running of time could be postponed until then bysection 32(1)(c) of the Limitation Act 1980 .”
“As Lord Walker has explained at paras 103-104, it has been established in this case that the payments were made under a mistake about the lawfulness of the tax regimes under which they were paid; and it was only after the Court of Justice issued its judgment in [Hoechst] that it was generally appreciated that the UK corporation tax regime was open to challenge as infringing Community law. A well-advised company in the position of the claimants would then have had grounds for considering that it was entitled to the repayment of tax which had been levied contrary to Community law, and that there was at least a reasonable prospect that it could rely upon the extended limitation period provided by section 32(1)(c) of the 1980 Act in order to recover any taxes paid more than six years before the proceedings were begun.”
“Under section 32(1)(c) of the 1980 Act, the limitation period applicable to that action began to run from discovery of the mistake of law giving rise to the payment of the tax, in the present case, the date of delivery of the judgment in [Hoechst], namely8 March 2001 .”
“Mr Hardman therefore believed that, if DMG were successful, BAT could likewise bring a claim for recovery of ACT paid under a mistake, and that such a claim could extend back to 1973.”
“… [I]t was only the definitive statement of the law by the ECJ in Hoechst which made the mistake reasonably discoverable within the meaning of section 32(1)(c). It was not enough that DMG had known before then that the Hoechst claim was being brought, or that it had reasonable prospects of success.”
“By parity of reasoning, it seems to me strongly arguable that it was only when the House of Lords delivered its judgment in DMG that, in the present case, time began to run against the BAT test claimants. The existence of a mistake-based remedy to recover unlawfully levied tax had been established at first instance in 2003, but the issues were far from straightforward, the case went the other way in the Court of Appeal, and finality was only achieved when the House of Lords pronounced on the subject.”
“In the light of the approach to section 32(1)(c) adopted by the House of Lords in DMG, and the history of the DMG litigation itself as described by Lord Sumption in FII(SC), I consider that the date when a mistake is discovered, or becomes reasonably discoverable, for the purposes of section 32 may, in principle, be a date later than that on which an action based on the mistake was started. A well-advised claimant may begin proceedings at a time when the law is still, objectively, unclear. That was the position, in my judgment, in relation to the claimants' mistake-based claims on18 June 2003 , and the uncertainty was not finally resolved until the House of Lords delivered its judgment in DMG on25 October 2006 .”