Test Claimants In the FII Group Litigation v HM Revenue & Customs [2008] EWHC 2893 (Ch)

“Except as otherwise provided by the Corporation Tax Acts, corporation tax shall not be chargeable on dividends and other distributions of a company resident in the United Kingdom, nor shall any such dividends or distributions be taken into account in computing income for corporation tax.”

“Where such income is a dividend paid by a company which is a resident of the Netherlands to a company which is a resident of the United Kingdom and which controls directly or indirectly not less than one-tenth of the voting power in the former company, the credit shall take into account (in addition to any Netherlands tax payable in respect of the dividend) the Netherlands tax payable by that former company in respect of its profits.”

“12. When I moved to head office in 1985 BAT’s ongoing ACT liabilities were already regarded as an established problem. Indeed ACT had been a problem for BAT from its inception in 1973. The problem arose because BAT at that time and ever since made most of its profits outside the UK. 13. Throughout the period from 1973, BAT has always been a global business operating in the markets where we trade through local subsidiaries. It now operates in around 180 countries. Throughout the period, the shareholders of both the UK and foreign trading subsidiaries would largely be UK intermediate parent companies which were in turn owned, directly or indirectly, by the ultimate parent, which was listed on the Stock Exchange. Dividends from the trading companies (whether UK or non-resident) would be received by the intermediate holding companies and would then be passed to the ultimate parent company for distribution to its public shareholders. This was and is a common way major corporations structure themselves for commercial reasons. 14. For as long as I am aware, the group’s policy has always been, where local rules allowed it, to repatriate the profits after tax of the overseas trading subsidiaries to the UK as quickly as possible. I refer to the UK resident companies which received foreign dividend income as “water’s edge” companies. As profits derived from overseas trading were distributed up the group structure, ACT had to be paid by the water’s edge company, the ultimate parent or (if there were any) one of the companies between them. As I explain below, the ACT was usually paid at the level of the ultimate parent. 15. The water’s edge companies were liable to corporation tax under Schedule D Case V on their dividend receipts from the overseas subsidiaries. This liability was reduced to a great extent by double tax relief. The result was that there was, therefore, insufficient UK tax liability against which the ACT payable on the onward distribution of foreign dividends could be utilised, unless other sources of UK MCT could be found against which the ACT could be utilised. 16. BAT has never been able fully to utilise ACT in the year it was paid, and BAT has carried ACT forward every year since 1973. The amount of brought forward surplus ACT steadily increased so that by 31 December 1992 this accumulated surplus peaked at £416 million. ACT thus became a permanent secondary UK corporation tax (and not an advance payment of corporation tax).”

“BAT therefore like just about every international group in a similar position of which I am aware would, save in exceptional circumstances, pay dividends between UK resident members of the group within a group income election so that they reached the ultimate parent without paying the ACT bill. This included dividends to the ultimate parent from the UK intermediate companies which received foreign sourced dividend income. This meant that when the ultimate parent distributed that income to its public shareholders it would be the entity within the group which paid the ACT. If it was the ultimate parent which paid the ACT, the group could then look to all UK subsidiaries in the group for sources of MCT against which to utilise it.”

“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 differed 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 United Kingdom used a partial imputation system of dividend taxation.”

“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 that 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- 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.”

“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 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. 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.”

“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.”

“the majority of companies with accounting profits pay corporation tax at a level lower than the applicable statutory rate.”

“ Article 56 1. Within the framework of the provisions set out in this chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited. 2. Within the framework of the provisions set out in this chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited. Article 57 1. The provisions of Article 56 shall be without prejudice to the application to third countries of any restrictions which exist on 31 December 1993 under national or Community law adopted in respect of the movement of capital to or from third countries involving direct investment – including in real estate – establishment, the provision of financial services or the admission of securities to capital markets. 2. …”

“22. As regards the question whether national legislation falls within the scope of one or other of the freedoms of movement, it is clear from what is now well-established case-law that the purpose of the legislation concerned must be taken into consideration. [Authority for this proposition was then cited, including Cadbury Schweppes]. 23. Unlike the situations in Cadbury Schweppes and Cadbury Schweppes Overseas (paragraphs 31 and 32) and TestClaimants in the Thin Cap Group Litigation (paragraphs 28 to 33), the Austrian legislation in the present case is not intended to apply only to those shareholdings which enable the holder to have a definite influence on a company’s decisions and to determine its activities. 24. 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 company making the distribution, may fall within the scope of both Article 43 EC on freedom of establishment and Article 56 EC on free movement of capital (see, to that effect, Test Claimants in Class IV of the ACT Group Litigation, paragraphs 37 and 38, and Test Claimants in the FII Group Litigation, paragraphs 36, 80 and 142).”

“68. It follows from settled case-law that, in so far as any given national rules concern only groups of companies, they primarily affect the freedom of establishment … 69. Moreover, according to consistent 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 … 70. It emerges from the order for reference that Burda, which is resident in German territory, is 50% owned by a non-resident company, namely, RCS. In principle, a holding of that size in Burda’s capital by RCS gives the latter the right to exercise definite and decisive influence over its subsidiary’s activities within the meaning of the case-law cited in the previous paragraph of the present judgment. 71. In that regard, it should also be pointed out that national legislation such as that at issue in the main proceedings, the application of which does not depend on the extent of the holding which the company receiving the dividend has in the company paying it, may fall within the purview both of Article 43 EC on freedom of establishment and of Article 56 EC on the free movement of capital (see, to that effect, Test Claimants in the FII Group Litigation, paragraph 36). 72. The fact remains that the dispute before the referring court relates exclusively to the effect of the national legislation at issue in the main proceedings on the situation of a resident company which has distributed dividends to shareholders whose holding gives them definite influence over the decisions of that company and enables them to determine its activities (see, to that effect, Test Claimants in the FII Group Litigation, paragraph 38). 73. In that context, the provisions of the Treaty on freedom of establishment apply to a case such as that before the referring court. 74. In any event, should the provisions of the [national legislation] have restrictive effects on the free movement of capital, it follows from the case-law that those effects would be the unavoidable consequence of such an obstacle to freedom of establishment as there might be, and do not therefore justify an independent examination of that legislation from the point of view of [Article 56] … 75. It follows from the foregoing that the present question must be answered solely in the light of the provisions of the Treaty on freedom of establishment.”

“the High Court has limited the scope of Questions 1 to 3 to intra-EU situations given that the rules which are the subject of those questions existed at 31 December 1993.”

“if the latter measures constitute a restriction prohibited by Article 56 of the EC Treaty, is that restriction to be taken to be a new restriction not already existing on the 31 December 1993?”

“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 Konle [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).”

“52. Any measure adopted after the date of accession is not, by that fact alone, automatically excluded from the derogation laid down in Article 70 of the Act of Accession. Thus, if it is, in substance, identical to the previous legislation or if it 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. 53. On the other hand, legislation based on an approach which differs from that of the previous law and establishes new procedures cannot be treated as legislation existing at the time of accession. That is true of the [1996 measure] which includes a number of significant differences when compared with the [1993 measure] and which, even if it brings to an end, in principle, the dual scheme of land acquisition which existed before, does not thereby improve the treatment reserved for nationals of Member States other than the Republic of Austria since it also lays down detailed rules for examining applications for authorisation which are designed, in practice, as the Court stated at paragraph 41 above, to favour applications from Austrian nationals.”

“In my view, therefore, the words “restrictions which exist on 31 December 1993” presuppose that the legal provisions relating to the restriction in question have formed part of the national legal order continuously since 31 December 1993. Article 57(1) EC provides that Member States may maintain the restrictions referred to in that article permanently but does not provide that they may reintroduce restrictions that have been repealed.”

“In Konle, Test Claimants in the FII Group Litigation and Holboeck, the contested legislation constituted an amendment to the legislation in force at the relevant date. In those cases, there was no time when, as in the case in the main proceedings, the original restriction had been removed from the national legal order and the contested legislation had not yet entered into force.”

“50. In the present case, on the date of its entry into force in 1992, [the relevant legislation] already provided that dividends paid by companies established in a third country which had not concluded a convention providing for the exchange of information with the Kingdom of Sweden were precluded from the exemption provided for dividends distributed in the form of shares in a subsidiary. It is apparent from the order for reference that, at that date, that exemption applied only to dividends paid by companies established in Sweden. 51. Admittedly, the provisions on exemption were repealed in 1994, then reintroduced in 1995 and extended in 2001 to dividends paid by companies established in an EEA Member State or in another State with which the Kingdom of Sweden has concluded a convention providing for the exchange of information. However, the fact remains that, as the Italian Government contends, that exemption was removed continuously, at the very least with effect from 1992, for dividends paid by companies established in a third country outside the EEA which has not concluded such a convention with the Kingdom of Sweden. 52. In those circumstances, the preclusion, since 1992, from the exemption provided for by the Law of dividends paid by a company established in a third country outside the EEA which has not concluded a convention with the Kingdom of Sweden providing for the exchange of information must be regarded as a restriction which existed on 31 December 1993 within the meaning of Article 57(1) EC, at the very least where such dividends relate to direct investment in the distributing company, which is a matter for the [Swedish court] to verify.”

“2. Where a Member State has a system which in certain circumstances imposes [ACT] on the payment of dividends by a resident company to its shareholders and grants a tax credit to shareholders resident in that Member State in respect of those dividends, is it contrary to Article 43 or 56 EC … for the Member State to keep in force and apply measures which provide for the resident company to pay dividends to its shareholders without being liable to pay ACT to the extent that it has received dividends from companies resident in that Member State (either directly or indirectly through other companies resident in that Member State) and do not provide for the resident company to pay dividends to its shareholders without being liable to pay ACT to the extent that it has received dividends from non-resident companies?”

“11A Accordingly a UK holding company which established a subsidiary resident in another State was discriminated against and/or treated unequally (compared with a UK holding company which established a UK resident subsidiary or invested directly in the UK) in at least the following ways, relevant to the Claimants, by virtue of the ACT Provisions: (a) The dividends received from the foreign resident subsidiary could never be used as [FII] to offset the liability to ACT even where tax was paid in the other State on the profits from which the dividend was paid. Therefore where a group, such as the BAT Group, wished to distribute profits earned by the subsidiary to its ultimate shareholders, the UK holding company or a subsequent superior parent company was required to pay ACT upon the onward distribution of dividends received from the subsidiary or their proceeds. In similar circumstances Dividends from a UK resident subsidiary would amount to [FII] and accordingly no liability to ACT need arise on the distribution from the UK holding company to the ultimate shareholders.”

“The answer to Question 2 must therefore be that 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 [ACT] 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.”

“the fact remains that that system leads, in practice, to a company receiving foreign-sourced dividends being less favourably treated than a company receiving nationally-sourced dividends. On a subsequent payment of dividends, the former is obliged to account for ACT in full, whereas the latter has to pay ACT only to the extent to which the distribution paid to its own shareholders exceeds that which the company has itself received.” (5) The objective of the ACT provisions is to prevent the imposition of a series of charges to tax. Viewed in the light of that objective, a company which receives foreign-sourced dividends is in a comparable position to that of a company receiving nationally-sourced dividends, even though only the latter receives dividends on which ACT has been paid (paragraph 87). (6) ACT is “nothing more than a payment of corporation tax in advance, even though it is levied in advance when dividends are paid and calculated by reference to the amount of those dividends” (paragraph 88). This is shown by the fact that ACT may in principle be set off against MCT, and by the fact that corporation tax which is not required to be paid in advance as ACT is in principle paid when the MCT falls due (ibid, citing the judgment of the ECJ in Hoechst at paragraph 53). (7) Like UK companies, foreign companies are also liable to corporation tax in the state in which they are resident (paragraph 89). I comment that here, as elsewhere, the reference to corporation tax is not to UK corporation tax, but to the equivalent local tax. (8) Accordingly, “the fact that a non-resident company has not been required to pay ACT when paying dividends to a resident company cannot be relied on in order to refuse that company the opportunity to reduce the amount of ACT which it is obliged to pay on a subsequent distribution by way of dividend. The reason why such a non-resident company is not liable to ACT is that it is subject to corporation tax, not in the United Kingdom, but in the State in which it is resident. A company cannot be required to pay in advance a tax to which it will never be liable …” (paragraph 90). (9) The threads are then drawn together in paragraph 91, as follows: “Since both resident companies distributing dividends to other resident companies and non-resident companies making such a distribution are subject, in the State in which they are resident, to corporation tax, a national measure which is designed to avoid a series of charges to tax on distributed profits only as regards companies receiving dividends from other resident companies, while exposing companies receiving dividends from non-resident companies to a cash-flow disadvantage, cannot be justified by a relevant difference in the situation of those companies.”

“… where a Member State has a system for preventing or mitigating a series of charges to tax or economic double taxation for dividends paid to residents by resident companies, it must treat dividends paid to residents by non-resident companies in the same way …”

“income of a company resident in the United Kingdom which consists of a distribution in respect of which the company is entitled to a tax credit …”

“3. Is it contrary to the provisions of EC law referred to in Question 2 above for the Member State to keep in force and apply measures which provide for the ACT liability to be set against the liability of the dividend-paying company, and that of other companies in the group resident in that Member State, to corporation tax in that Member State upon their profits: (a) but which do not provide for any form of set off of the ACT liability or some equivalent relief (such as the refund of ACT) in respect of profits earned, whether in that State or in other Member States, by companies in the group which are not residents in that Member State; …”

“Article 43 EC precludes legislation of a Member State which allows a resident company to surrender to resident subsidiaries the amount of [ACT] 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.”

“With respect to the second part of the question, it should be observed at the outset that the arguments presented to the Court were limited to the inability of a resident company to surrender surplus ACT to non-resident subsidiaries in order for them to set it off against the corporation tax for which they are liable in the United Kingdom in respect of activities carried on in that Member State.”

“(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).”

“(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.”

“Where the Member State has measures which in certain circumstances provide for resident companies, if they so elect, to recover the ACT paid on distributions to their shareholders to the extent that distributions are received by the resident companies from non-resident companies (including for this purpose companies resident in third countries), is it contrary to Article 43 or 56 EC … for those measures: (a) to oblige the resident companies to pay ACT and to reclaim it subsequently; and (b) not to provide for the shareholders of the resident companies to receive a tax credit which they would have received on a dividend from a resident company which had not itself received dividends from non-resident companies?” (a) to oblige the resident companies to pay ACT and to reclaim it subsequently; and (b) not to provide for the shareholders of the resident companies to receive a tax credit which they would have received on a dividend from a resident company which had not itself received dividends from non-resident companies?”

“144. As the Advocate General stated at point 94 of his Opinion, the national court is, by that question, asking the Court to rule on the lawfulness of the FID regime, introduced in the United Kingdom with effect from 1 July 1994. That regime permits resident companies receiving foreign-sourced dividends to obtain a repayment of the amount of surplus ACT, that is to say, the amount of ACT which could not be offset against the amount due by way of corporation tax. 145. However, it must be held that the tax treatment of resident companies receiving foreign-sourced dividends and opting for the FID regime remains less favourable in two respects than that which applies to resident companies receiving nationally-sourced dividends. 146. As regards, in the first place, the ability to recover surplus ACT, the Order for Reference shows that, while ACT must be accounted for within 14 days of the quarter in which the company concerned pays dividends to its shareholders, surplus ACT is repayable only when corporation tax becomes due, that is to say nine months after the end of the accounting period. Depending on when the company paid the dividends, it must wait between 8½months and 17½ months to obtain repayment of the ACT accounted for. 147. Accordingly, as the claimants in the main proceedings contend, resident companies electing to be taxed under such a regime by reason of their receipt of foreign-sourced dividends are exposed to a cash-flow disadvantage which does not arise in the case of resident companies receiving nationally-sourced dividends. In the latter case, since the resident company making the distribution has already accounted for ACT on the profits distributed, a tax credit is granted to the resident company receiving the distribution, thereby allowing that company to pay an equivalent amount by way of dividends to its own shareholders without having to account for ACT. 148. In the second place, a shareholder receiving a payment of dividends from a resident company which has its origin in foreign-sourced dividends treated as FIDs, is not entitled to a tax credit, but is treated as having received income which has been taxed at the lower rate for the tax year in question. In the absence of a tax credit, such a shareholder has no right to any repayment if he is not liable to income tax or where the income tax due is less than the tax on the dividend at the lower rate. 149. As the claimants in the main proceedings contend, that means that a company which has elected to be taxed under the FID regime must increase the amount of its distributions if it wishes to guarantee its shareholders a return equivalent to that which would be achieved from a payment of nationally-sourced dividends.”

“152. Nevertheless, as was held in paragraphs 87 to 91 of this judgment, since profits distributed by a company are subject to corporation tax in the Member State in which the company is resident, where a system of advance payment of corporation tax which applies to the company receiving the dividends determines the amount due by having regard to the tax on distributed profits paid by a resident distributing company but not to the tax paid abroad by a non-resident distributing company, such a system treats a company receiving foreign-sourced dividends less favourably than a company receiving nationally-sourced dividends, even though the situation of the former is comparable to the latter. 153. While it is true that the situation of the former company is improved by the fact that the tax paid in advance which cannot be offset against the amount due in respect of corporation tax may be repaid, such a company remains in a less favourable situation than that of a company receiving nationally-sourced dividends, in that it suffers a cash-flow disadvantage. 154. Such a difference in treatment, which makes the acquisition of a holding in a non-resident company less attractive than a holding in a resident company, constitutes, in the absence of any objective justification, an infringement of freedom of establishment.”

“159. However, that argument is based on the same false premiss that a risk of economic double taxation arises only in the case of dividends paid by a resident company subject to an obligation to account for ACT on dividends distributed by it, whereas the true position is that such a risk also exists in the case of dividends paid by a non-resident company, the profits of which are also subject to corporation tax in the State in which it is resident, at the rates and according to the rules applying there. 160. For the same reason, the United Kingdom government cannot suggest that dividends received from a non-resident company are not less favourably treated by arguing that, because such a company is not obliged to account for ACT, it may pay higher dividends to its shareholders. 161. It is also necessary to reject the argument that the differences in treatment to which foreign-sourced dividends paid under the FID regime are subject do not constitute a restriction on the freedom of establishment because that scheme is merely optional. 162. As the claimants in the main proceedings point out, the fact that a national scheme which restricts the freedoms of movement is optional does not mean that it is not incompatible with Community law.”

“5. Where, prior to 31 December 1993, a Member State adopted the measures outlined in Questions 1 and 2 and after that date it adopted the further measures outlined in Question 4, and if the latter measures constitute a restriction prohibited by Article 56 of the EC Treaty, is that restriction to be taken to be a new restriction not already existing on the 31 December 1993?”

“193. Next, as regards the relationship between the FID regime and the existing national legislation governing the taxation of foreign-sourced dividends, as described by the national court, it is apparent that the objective of that regime is to limit the restrictive effects arising from the existing legislation for resident companies receiving foreign-sourced dividends, in particular by offering those companies the opportunity to obtain a repayment of the surplus ACT which is due when they pay dividends to their own shareholders. 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.”

“Nowhere did the legislation state that liability to pay ACT was a precondition of entitlement to a tax credit. But this unspoken linkage lay at the heart of the scheme, and the legislation was drawn in a form which achieved this result.”

“1. A declaration that the ACT Provisions, the FID Provisions and the Dividend Provisions, in so far as they applied to the Claimants in the manner referred to above, are contrary to the Treaty Provisions and are therefore illegal. 2. Restitution including compound interest. 3. Damages and/or compensation including compound interest. 4. Interest pursuant to section 35A Supreme Court Act 1981 and/or compound or other interest at common law or pursuant to the rules of equity. 5. A declaration that the losses purportedly surrendered and/or claimed as group relief and/or the Expenses deducted in arriving at the unlawful [Case V] Corporation Tax liability have not been expended and remain available for use. 6. Further or other relief. 7. Costs.”

“15A 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. 15B In the premises, the Defendants were unjustly enriched at the expense of the Claimants by the receipt and/or retention of the ACT Payments and by the enjoyment of the time value of those sums for such period as the Defendants remained so enriched.”

“as the result of [the Claimants’] reasonable efforts to mitigate losses that would otherwise have directly resulted from the Defendants’ breaches in connection with the ACT Provisions.”

“Does it make any difference to the answers to Questions 6 or 7 whether as a matter of domestic law the claims referred to in Question 6 are brought as restitutionary claims or are brought or have to be brought as claims for damages?”

“126. In this regard, the Court has consistently held that 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. The Member State is therefore required in principle to repay charges levied in breach of Community law. 127. In the absence of Community rules on the recovery of sums unduly paid, 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, second, that they do not render practically impossible or excessively difficult the exercise of rights conferred by Community law (principle of effectiveness).”

“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 it 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 in so far 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) [i.e. the claim for the FID enhancements] 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 is it possible without more to conclude that the distribution of an increased dividend necessarily qualifies as a loss incurred for the distributing companies. 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 Brasseriedu Pêcheur may not be made out in a given case and, in such a situation, ensure that an effective remedy is nonetheless provided.”

“204. In addition, the Court held in paragraph 96 of its judgment in [Hoechst], 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 [ACT], 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 [Hoechst], 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 United Kingdom 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.”

“The answer to Questions 6 to 9 should therefore be that, in the absence of Community legislation, 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, including the classification of claims brought by injured parties before the national courts and tribunals. Those courts and tribunals are, however, obliged to ensure that individuals should have an effective legal remedy enabling them to obtain reimbursement of the tax unlawfully levied on them and the amounts paid to that Member State or withheld by it directly against that tax.”

“That was where the mistake was made, of which the payment of ACT was a secondary consequence. But, as Park J was right to recognise, if the mistake about the availability of group income relief had not existed, the ACT would not have been paid. There was an unbroken causative link between the mistake and the payment. It follows that the payments were made under a mistake.”

“To succeed in an action to recover money on that ground, the plaintiff has to identify a payment by him to the defendant, a specific fact as to which the plaintiff was mistaken in making the payment, and a causal relationship between that mistake of fact and the payment of the money: see Barclays Bank Ltd v W J Simms Son & Cooke (Southern) Ltd, [1979] 3 All ER 522 at 534, [1980] QB 677 at 694.”

“It is sufficient to ground recovery that the plaintiff’s mistake should have caused him to pay the money to the payee.”

“But if the legal obligation under which the money was paid cannot be, or has not been, invalidated, then, in my opinion, whether or not it can be shown that “but for” the mistake in question the money would not have been paid, a restitutionary remedy for the recovery of the money would not be available.”

“For the issue of recoverability to turn upon a nice analysis as to the precise nature of the mistake of law appears to me to be almost as undesirable as it is for recoverability to turn upon whether the mistake made by the payer was one of fact or law.”

“If streaming were not possible at all the company would have to decide how much of the benefit, if any, it would share with its shareholders by means of an enhanced FID.”

“We do not have to pay a[n] FID if we do not choose to do so.”

“As I recall it effectively from the start of our investigation of the FID system, I was of the view that it would not be possible to pay a FID unless the exempt shareholders were compensated for the lack of a repayable tax credit. Otherwise the pension funds would simply not “wear it” and they were a substantial part of the shareholder base. Also effectively from the start the mechanism considered for compensating for the lack of the credit was to enhance the dividend so that an addition to the dividend would be paid, representing the amount of the ACT and therefore the amount of credit which the tax exempt shareholders would otherwise receive. I cannot recall any discussion of what might happen if we had not recommended an enhancement to the dividends to compensate the tax exempt shareholders for the lack of the credit. It was however clear to everyone involved in this process that if the dividends were not enhanced, then the tax exempt shareholders would only get two thirds of the value of an ordinary dividend of the same amount. BAT had a record of paying high dividends, compared to other publicly listed UK companies. In 1989 BAT had fought off a hostile takeover bid from Hoylake … As part of the defence to that bid the Chairman, Sir Patrick Sheehy, had promised high dividends on a progressively increasing scale. In my discussions with our investor relations department over the years they made it clear that a major attraction of BAT shares to investors was the size of the dividend. Producing a dividend which carried a lower net yield for institutional investors without compensating for that reduction was not an option.”

“If this is correct this money is available to share between companies and their shareholders.”

“The effect of switching to FIDs to the maximum degree possible coupled with delaying payment of the final until July and the interim until January is generally favourable. Year end borrowings are lower, EPS [earnings per share] are increased and the extra cost of the dividend is balanced by the saving in ACT leaving shareholders’ funds little different from what they would have been under a conventional dividend regime. The impact on group interest is slight.”

“This enables us to increase the dividend by 25% leaving exempt shareholders no worse off and taxpaying shareholders 25% better off in income terms. The reason why we can do this is because the whole of the 25% uplift will be recovered from the Government and any Corporation Tax liability which would normally be covered by ACT on dividends paid in the year will be covered by ACT brought forward, thus reducing the surplus ACT mountain considerably. We believe that this is an unintended benefit which is likely to be removed once it becomes known. If we were going to adopt this proposal it would be best to be first. This would ensure that we received any credit attached to providing such a significant benefit to our shareholders, and also that we would indeed be able to provide it and not be thwarted by subsequent legislative change. This proposal significantly improves Earnings per Share, Cash flow and the debt/equity ratio for 1994.”

“Institutional views have polarised depending on whether they are either gross or net funds. Gross funds are vociferously against the schemes if the FID were pitched at the net level. These concerns were almost entirely addressed if the FID were pitched at the gross level.”

“On balance institutions view FIDs at the net level negatively but there would be little hostility to FIDs at the gross level (at which level a number of institutions agreed that the result could be positively beneficial on the share price due to the attraction of the after tax yield on the shares to net funds).”

“The essence of the proposal is that the company saves ACT and can apply the same amount in enhancing the dividend by 25% at no net cost to itself. In effect, the company is able to take money from the Revenue and give it to shareholders.”

“I accept that the solicitors’ claim in the present case is founded upon the unjust enrichment of the club, and can only succeed if, in accordance with the principles of the law of restitution, the club was indeed unjustly enriched at the expense of the solicitors. The claim for money had and received is not, as I have previously mentioned, founded upon any wrong committed by the club against the solicitors. But it does not, in my opinion, follow that the court has carte blanche to reject the solicitors’ claim simply because it thinks it unfair or unjust in the circumstances to grant recovery. The recovery of money in restitution is not, as a general rule, a matter of discretion for the court. A claim to recover money at common law is made as a matter of right; and even though the underlying principle of recovery is the principle of unjust enrichment, nevertheless, where recovery is denied, it is denied on the basis of legal principle. It is therefore necessary to consider whether Mr Lightman’s submission can be upheld on the basis of legal principle. In my opinion it is plain, from the nature of his submission, that he is in fact seeking to invoke a principle of change of position, asserting that recovery should be denied because of the change in position of the respondents, who acted in good faith throughout. Whether change of position is, or should be, recognised as a defence to claims in restitution is a subject which has been much debated in the books. It is however a matter on which there is a remarkable unanimity of view, the consensus being to the effect that such a defence should be recognised in English law. I myself am under no doubt that this is right.”

“In these circumstances, it is right that we should ask ourselves: why do we feel that it would be unjust to allow restitution in cases such as these? The answer must be that, where an innocent defendant’s position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution. If the plaintiff pays money to the defendant under a mistake of fact, and the defendant then, acting in good faith, pays the money or part of it to charity, it is unjust to require the defendant to make restitution to the extent that he has so changed his position … In other words, bona fide change of position should of itself be a good defence in such cases as these. The principle is widely recognised throughout the common law world.”

“I am most anxious that, in recognising this defence to actions of restitution, nothing should be said at this stage to inhibit the development of the defence on a case by basis, in the usual way. It is, of course, plain that the defence is not open to one who has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution; and it is commonly accepted that the defence should not be open to a wrongdoer. These are matters which can, in due course, be considered in depth in cases where they arise for consideration. They do not arise in the present case. Here there is no doubt that the respondents have acted in good faith throughout, and the action is not founded upon any wrongdoing of the respondents. It is not however appropriate in the present case to attempt to identify all those actions in restitution to which change of position may be a defence. A prominent example will, no doubt, be found in those cases where the plaintiff is seeking repayment of money paid under a mistake of fact; but I can see no reason why the defence should not also be available in principle in a case such as the present, where the plaintiff’s money has been paid by a thief to an innocent donee, and the plaintiff then seeks repayment from the donee in an action for money had and received. At present I do not wish to state the principle any less broadly than this: that the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full. I wish to stress however that the mere fact that the defendant has spent the money, in whole or in part, does not of itself render it inequitable that he should be called upon to repay, because the expenditure might in any event have been incurred by him in the ordinary course of things. I fear that the mistaken assumption that mere expenditure of money may be regarded as amounting to a change of position for present purposes has led in the past to opposition by some to recognition of a defence which in fact is likely to be available only on comparatively rare occasions. In this connection I have particularly in mind the speech of Lord Simonds in Ministry of Health v Simpson [1951] AC 251, 276.”

“The fact that the recipient may have suffered some misfortune (such as a breakdown in his health, or the loss of his job) is not a defence unless the misfortune is causally linked (at least on a “but for” test) with the mistaken receipt.”

“I would also accept that it may be right for the court not to apply too demanding a standard of proof when an honest defendant says that he has spent an overpayment by improving his lifestyle, but cannot produce any detailed accounting …”

“Their Lordships are, however, most reluctant to recognise the propriety of introducing the concept of relative fault into this branch of the common law, and indeed decline to do so. They regard good faith on the part of the recipient as a sufficient requirement in this context. In forming this view, they are much influenced by the fact that, in actions for the recovery of money paid under a mistake of fact, which provide the usual context in which the defence of change of position is invoked, it has been well settled for over 150 years that the plaintiff may recover “however careless [he] may have been, in omitting to use due diligence”: see Kelly v Solari (1841) 9 M & W 54 at 59 … per Parke B. It seems very strange that, in such circumstances, the defendant should find his conduct examined to ascertain whether he had been negligent, and still more so that the plaintiff’s conduct should likewise be examined for the purposes of assessing the relative fault of the parties.”

“15. The accumulation of previous tax decisions together with the overall functioning of the economy determines the amount of tax revenue that enters the baseline fiscal aggregates. This is the amount of tax that the government expects to receive on the basis of existing policy. It is then on the basis of this baseline, and with a view to meeting the government’s fiscal objectives, that policy decisions are made. So tax receipts that are already in the government’s baseline fiscal forecast can be considered to have been spent in the sense that the government’s tax and spending decisions are made on the basis that these funds are available.”

“While it has not gone so far as to rule out the possibility of a State being liable in less restrictive conditions on the basis of national law, the Court has held that there are three conditions under which a Member State will be liable to make reparation for loss and damage caused to individuals as a result of breaches of Community law for which it can be held responsible, namely that the rule of law infringed must be intended to confer rights on individuals, that the breach must be sufficiently serious, and that there must be a direct causal link between the breach of the obligation resting on the State and the loss or damage sustained by those affected …”

“213. In order to determine whether a breach of Community law is sufficiently serious, it is necessary to take account of all the factors which characterise the situation brought before the national court. Those factors include, in particular, the clarity and precision of the rule infringed, whether the infringement and the damage caused were intentional or involuntary, whether any error of law was excusable or inexcusable, and the fact that the position taken by a Community institution may have contributed towards the adoption or maintenance of national measures or practices contrary to Community law … 214. On any view, a breach of Community law will clearly be sufficiently serious if it has persisted despite a judgment finding the infringement in question to be established, or a preliminary ruling or settled case-law of the Court on the matter from which it is clear that the conduct in question constituted an infringement … 215. In the present case, in order to determine whether a breach of Article 43 EC committed by the Member State concerned was sufficiently serious, the national court must take into account the fact that, in a field such as direct taxation, the consequences arising from the freedoms of movement guaranteed by the Treaty have been only gradually made clear, in particular by the principles identified by the Court since delivering judgment in Case 270/83 Commission v France. Moreover, as regards the taxation of dividends received by resident companies from non-resident companies, it was only in Verkooijen, Lenz and Manninen that the Court had the opportunity to clarify the requirements arising from the freedoms of movement, in particular as regards the free movement of capital. 216. Apart from cases to which Directive 90/435 [i.e. the Parent/Subsidiary directive] applied, Community law gave no precise definition of the duty of a Member State to ensure that, as regards mechanisms for the prevention or mitigation of the imposition of a series of charges to tax or economic double taxation, dividends paid to residents by resident companies and those paid by non-resident companies were treated in the same way. It follows that, until delivery of the judgments in Verkooijen, Lenz and Manninen, the issue raised by the order for reference in the present case had not yet been addressed as such in the case-law of the Court. 217. It is in the light of those considerations that the national court should assess the matters referred to in paragraph 213 of this judgment, in particular the clarity and precision of the rules infringed and whether any errors of law were excusable or inexcusable.”

“… the decisive test for finding that a breach of Community law is sufficiently serious is whether the Member State or the Community institution concerned manifestly and gravely disregarded the limits on its discretion.”

“137. In [Hoechst], the Court, as I observed above, did not consider this matter, nor was the question raised by the national court in that case. Advocate General Fennelly, who as I have noted was of the opinion that the plaintiffs’ remedy in that case was restitutionary in nature, nonetheless made some comments in the alternative on the question of whether the [Factortame] conditions were satisfied. He remarked that, “The issue is whether the clarity and precision of Article [43] of the EC Treaty were such that the breach may be regarded as sufficiently serious. This has to be viewed in the light of the widespread use of residence as a criterion for direct taxation purposes coupled with the state of development of the relevant case-law at the material time. This will concern the limits which affect the use by Member States of that criterion where it is detrimental to the interests of residents from other Member States. In short, was the refusal to allow the group income election, viewed objectively, excusable or inexcusable?”

“Before introducing the Act the British Government had conducted a process of consultation and obtained legal advice, including leading counsel’s opinion, that there was a reasonably good chance that the proposed legislation would be upheld by the [ECJ]. However, the European Commission had warned that provisions of the Act appeared to infringe Community law. Under the Act a vessel could be registered as a British fishing vessel only if its owners and 75 per cent of its shareholders were British citizens resident and domiciled in the United Kingdom, and all previously registered vessels required to be re-registered. The applicants, companies incorporated under UK law, and their directors and shareholders, most of whom were Spanish nationals, owned between them 95 deep-sea fishing vessels which had previously been registered as British. They were unable to re-register their vessels because they failed to satisfy one or more of the conditions imposed by the Act.”

“… that the deliberate adoption of legislation which was plainly discriminatory on the grounds of nationality was a fundamental breach of clear and unambiguous Articles of the EEC Treaty; that it was inevitable that when the Act of 1988 took effect it would seriously affect the rights of non-British citizens with financial stakes in British registered fishing vessels; that the seriousness of the breach was emphasised by the facts that the Government had chosen to resort to primary legislation with a very short transitional period, that there was no possibility of obtaining interim relief under domestic law as it then stood, that the applicants were obliged not merely to avoid being removed from the old register but to apply to be put on a new one, and that the Government took a calculated risk by choosing to disregard the Commission’s opinion that the Act contravened Community law; that although the Government had acted in good faith and obtained legal advice, the breach had not been shown to be excusable; and that, accordingly, since the Government had manifestly and gravely disregarded the limits on its discretion, the breach of Community law was sufficiently serious to entitle the applicants to damages for losses directly caused by the breach.”

“It is obvious that what was done here by the Government was not done inadvertently. It was done after anxious consideration and after taking legal advice. I accept that it was done in good faith and with the intention of protecting British fishing communities rather than with the deliberate intention of harming Spanish fishermen and those non-British citizens with financial stakes in British registered fishing vessels. The inevitable result of the policy adopted, however, was to take away or seriously affect their rights to fish against the British quota.”

“Officials have … concluded that we should proceed as originally intended. While this does pose a risk to our position on damages, the official view was that the applicant would have to overcome so many obstacles – not least of which would be winning his case in the European Court on the substantive issue on whether our law is compatible with the Treaty – that the risk was worth taking given the drawbacks of the alternatives.”

“There is no doubt that in discriminating against non-UK Community nationals on the grounds of their nationality, to which the requirements of domicile and residence were added to tighten the exclusion of non-UK interests, the legislature was prima facie flouting one of the most basic principles of Community law. The responsible Ministers considered, on the basis of the advice they had received, that there was an arguable case for holding that the United Kingdom was entitled to do so. In that sense, the Divisional Court has held that the Government acted bona fide. But they could have been in no doubt that there was a substantial risk that they were wrong. Nevertheless, they saw the political imperatives of the time as justifying immediate action. In these circumstances, I do not think that the United Kingdom, having deliberately decided to run the risk, can say that the losses caused by the legislation should lie where they fell. Justice requires that the wrong should be made good.”

“The Solicitor-General argued that the breach of Community law was excusable on the grounds that the Government acted upon legal advice. He relied in particular on the written opinion given by Professor Francis Jacobs QC and others in February 1987. I do not think that a Member State can rely simply on the fact that its relevant organ of government acted upon legal advice. It is a basic principle of Community law that in considering the liabilities of a Member State, all its various organs of government are treated as a single aggregate entity. It does not matter how their responsibilities are divided under domestic law or what passed between them. Likewise, as it seems to me, the process of advice and consultation undertaken within a Member State by its responsible organs of government is irrelevant. Advice received from Community institutions is another matter: as the Court of Justice points out in its judgment on the reference in this case … “the fact that the position taken by a Community institution may have contributed towards to the omission” is a relevant matter to take into account in deciding whether a breach was sufficiently serious. But the question of whether the error of law was excusable or inexcusable is an objective one and the excuses must be considered on their own merits.”

“The national courts have the sole jurisdiction to find the facts in the main proceedings. It is for them to decide how to characterise the breaches of Community law which are in issue.”

“It is a novel task for the courts of this country to have to assess whether a breach is sufficiently serious to entitle a party who has suffered a loss as a result of it to damages. The general rule is that where a breach of duty has been established and a causal link between the breach and the loss suffered has been proved the injured party is entitled as of right to damages. In the present context however the rules are different. The facts must be examined in order that the court may determine whether the breach of Community law was of such a kind that damages should be awarded as compensation for the loss. The phrases “sufficiently serious” and “manifestly and gravely” which the European Court has used indicate that a fairly high threshold must be passed before it can be said that the test has been satisfied.”

“If damages were not to be held to be recoverable in this case, it would be hard to envisage any case, short of one involving bad faith, where damages would be recoverable.”

“The good faith of the Government is not in question. It is not suggested that it proceeded without taking advice, or that it acted directly contrary to the advice which it received. Nor is it suggested that there was a lack of clarity in the wording of the relevant provisions of the Treaty or that there was some other point which might reasonably have been overlooked. So this case cannot, I think, be described as one which went wrong due to inadvertence, misunderstanding or oversight. The meaning of the relevant Articles was never in doubt. The critical issue related to the interaction between these Articles and the common fisheries policy. On this matter there was clearly a serious issue to be resolved. Different views had been expressed within Government, and the Commission was known to have taken a view contrary to that which the Government decided to adopt.”

“It would doubtless be premature to attempt any comprehensive analysis. But it appears to be possible to identify some of the particular considerations which may properly be taken into account, although the relevance in particular cases and the weight to be given to them in particular circumstances may obviously vary from case to case. It is to be noted that liability does not require the establishment of fault as, to use the language of the Advocate General in his Opinion [1996] QB 404, 476 para 90, “a subjective component of the unlawful conduct”

“On the wider question of an international approach to dividend flows, there is a limit to what the UK can achieve unilaterally, without the co-operation of other Governments, although the issue is something to which we give particular attention in our bilateral double taxation negotiations. It will be important to ensure that any international developments do not produce an unduly rigid system or lead to other distortions through an incoherent or piecemeal approach. Progress towards harmonising tax structures may also involve reconciling the possibly conflicting interest of all the Exchequers concerned, and this inevitably implies a lengthy process. Nevertheless, I do accept the need to reduce, where possible, distortions that may arise from differing tax systems, and this is an area which we will continue to look at closely.”

“This change of concept has not been assimilated into tax law either in the UK or elsewhere in the Community. UK tax law on this point remains nationalistic in the old-fashioned sense.”

“Looking forward from where we are now, it can be seen that the surplus ACT problem, while not solved, is already for the time being clearly in retreat, whether or not the Government goes ahead with the general FID scheme. In very broad terms, as a result of the changes already announced, combined with the expected recovery of profits over the next few years, the growth of surplus ACT is expected to be halved from its recent level of around £1 billion annually.”

“The Government has proposed a scheme which it thought last March it could afford on the basis that streaming would not be allowed. Open house for streaming would increase the Exchequer cost substantially; and I do not need to remind you of the very tight constraints at present on Government expenditure and revenue.”

“The first time we considered that the denial of [FII] treatment of foreign dividends might be a breach of EC law was when we discussed internally the Verkooijen judgment shortly after it was published on 6 June 2000. Following this, we spent a considerable amount of time considering our options and waiting to see how EC law would develop. Following discussions with our tax advisers, PricewaterhouseCoopers and our solicitors, Dorsey & Whitney in the spring and early summer of 2003, we decided to issue the Claim.”

“As Head of Taxation I would certainly have been involved in any discussions or meetings and would have received any correspondence or memoranda generated concerning the ability of BAT to challenge the payment of ACT upon distributions. The issue was never raised. Had it been raised it would certainly have been brought to my attention.”

“68. In the period of 1985 to 1990 when I was a tax manager at BAT Industries Plc … I believed that the tax had to be paid because it would have been illegal not to pay it because the relevant statute said it was due. 69. At no stage during this period did I ever hear of any discussion or suggestion that it was not due. Any planning which was done to mitigate these liabilities was done on the basis that the legislation applied on its terms and the incidence of ACT or tax on [Case V] income could only be mitigated by finding a means within the terms of that legislation which produced a more favourable outcome. I am certain that through this period all members of the tax department were of the same view … 70. When I was Head of Tax at Bat Co, while I was not involved in the day to day management of the group’s ACT issues, I was of course involved in the incidence of liability to tax under Schedule D Case V upon non-resident sourced dividend income received by BAT Co. Corporation tax returns establishing those tax liabilities and the work of tax managers to meet those liabilities by, for example, taking the surrender of group losses, was done under my supervision. The returns were completed and payments requested in the same way as described above. My understanding remained the same, namely that those tax liabilities were due because it would have been illegal not to pay them because that is what the law said. I was not aware of any argument which suggested those payments did not need to be made. 71. Additionally, even though I was not at BAT Industries through that period, I was in very frequent contact with Ken Etherington. Had he been aware of any argument that ACT or tax upon [Case V] income did not need to be paid or that the incidence of surplus ACT was somehow unlawful despite what the legislation said, he definitely would have mentioned it to me. He did not. Since he did not do so and he had been in BAT’s tax department since the early 1970s, I do not believe that anyone at BAT had ever considered since 1973 that BAT had any basis for not paying ACT or corporation tax upon income under [Case V] in accordance with the statutory provisions. 72. When I returned to BAT Industries in 1997 to be deputy Head of Tax and then Head of Tax from 1998, those relevant tax returns as described were completed by tax managers under my supervision. I remained of the view throughout this period that the tax was due because it would be illegal not to pay it because the law said it was due. None of the managers or other people in the department who reported to me expressed any contrary view. The issue that ACT might not be payable because it was unlawful never arose.”

“Although as I noted above, the boundaries of the scope of the application of the Treaty free movement provisions in the direct taxation sphere have not always been obvious, it seems to me that the UK ought to have been aware that there was a risk that a system which treated foreign source income less favourably than domestic-source income could be viewed as discriminatory and contrary to Community law. The potential application of the basic non discrimination prohibition to direct tax measures should have at least been clear to the UK with the Court’s judgment in Avoir Fiscal [i.e. Commission v France], if not before, albeit that that case concerned a different type of discrimination via such measures.”

“For many years there has been symmetry within the direct tax system: the Inland Revenue normally has the right to go back six years to assess outstanding tax and those who have overpaid tax have the right to make claims to repayment for a similar period. A recent High Court case has the potential to upset this balance. Yesterday I announced that legislation will be included in Finance Bill 2004 to restore this balance. The period for claiming repayments of overpaid tax will be generally limited to six years … from the date of the original payment. The legislation will apply to proceedings commenced on or after 8 September 2003.”

“Some claimants who had commenced proceedings before 8 September 2003 are seeking to amend their claims to add in years beyond the normal time limits. They are doing so because, under existing law, if the courts allow an amendment of this sort, it is deemed to be a new action started on the date of the original action. So it is arguable that the legislation announced on 8 September would not apply to such an amendment. And, other claimants may also seek to amend their existing claims to add in years beyond the normal time limits. This places tax revenues at risk. And whilst the Inland Revenue may well succeed in opposing amendments to existing claims in the courts, I believe that this risk is unacceptable. I am therefore announcing today amended draft legislation to ensure that tax revenues are further protected. The amended draft legislation will prevent amendments being made to proceedings for relief from the consequences of a mistake of law, commenced before 8 September, to introduce new periods of claim for years beyond the normal time limits. The change announced today will not, however, affect applications made to the court before today.”

“[t]hat national legislation reducing the period within which repayment of sums collected in breach of Community law could be sought was not in itself incompatible with the principle of effectiveness, but the new limitation period had to be reasonable, and since, in the interests of legal certainty, limitation periods had to be fixed in advance, legislation introducing a shorter limitation period than that applying previously had to allow an adequate period for the submission of claims under the previous legislation; that, accordingly, legislation such as that in issue, the retroactive effect of which deprived potential claimants of any opportunity to exercise to its full extent their pre-existing right in relation to the repayment of VAT collected from them in breach of provisions of the Sixth Directive having direct effect … was incompatible with the principle of effectiveness; and that such legislation was also in breach of the principle of the protection of legitimate expectations, which formed part of the Community legal order and had to be observed by the Member States when they exercised the powers conferred on them by Community Directives … ”

“36. Moreover, it is clear from the judgments in Aprile (paragraph 28) and Dilexport (paragraphs 41 and 42) that national legislation curtailing the period within which recovery may be sought of sums charged in breach of Community law is, subject to certain conditions, compatible with Community law. First, it must not be intended specifically to limit the consequences of a judgment of the Court to the effect that national legislation concerning a specific tax is incompatible with Community law. Secondly, the time set for its application must be sufficient to ensure that the right to repayment is effective. In that connection, the Court has held that legislation which is not in fact retrospective in scope complies with that condition. 37. It is plain, however, that that condition is not satisfied by national legislation such as that at issue in the main proceedings which reduces from six to three years the period within which repayment may be sought of VAT wrongly paid, by providing that the new time-limit is to apply immediately to all claims made after the date of enactment of that legislation and to claims made between that date and an earlier date, being that of the entry into force of the legislation, as well as to claims for repayment made before the date of entry into force which are still pending on that date. 38. Whilst national legislation reducing the period within which repayment of sums collected in breach of Community law may be sought is not incompatible with the principle of effectiveness, it is subject to the condition not only that the new limitation period is reasonable but also that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation. Such transitional arrangements are necessary where the immediate application to those claims of a limitation period shorter than that which was previously in force would have the effect of retroactively depriving some individuals of their right to repayment, or of allowing them too short a period for asserting that right. 39. In that connection it should be noted that Member States are required as a matter of principle to repay taxes collected in breach of Community law …, and whilst the Court has acknowledged that, by way of exception to that principle, fixing a reasonable period for claiming repayment is compatible with Community law, that is in the interests of legal certainty … . However, in order to serve their purpose of ensuring legal certainty limitation periods must be fixed in advance (Case 41/69 ACF Chemiefarma v Commission [1970] ECR 661, paragraph 19). 40. Accordingly, legislation such as that at issue in the main proceedings, the retroactive effect of which deprives individuals of any possibility of exercising a right which they previously enjoyed with regard to repayment of VAT collected in breach of provisions of the Sixth Directive with direct effect must be held to be incompatible with the principle of effectiveness. 41. That applies notwithstanding the argument of the United Kingdom Government to the effect that the enactment of the legislation at issue in the main proceedings was motivated by the legitimate purpose of striking a due balance between the individual and the collective interest and of enabling the State to plan income and expenditure without the disruption caused by major unforeseen liabilities. 42. Whilst such a purpose may serve to justify fixing reasonable limitation periods for bringing claims, as was noted in paragraph 35, it cannot permit them to be so applied that rights conferred on individuals by Community law are no longer safeguarded.”

“33. Error or mistake (1) If any person who has paid tax charged under an assessment 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 six years after the end of the year of assessment (or, if the assessment is to corporation tax, the end of the accounting period) in which the assessment was made, make a claim to the Board for relief. (2) On receiving the claim the Board shall enquire 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: Provided that no relief shall be given under this section in respect of 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 the return was made. (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) … (5) In this section “profits” – … (c) in relation to corporation tax, means profits as computed for the purposes of that tax.” (c) in relation to corporation tax, means profits as computed for the purposes of that tax.”