Test Claimants In the Franked Investment Income Group Litigation v Inland Revenue & Anor [2013] EWHC 3757 (Ch)

Case No HC03C02223

[2013] EWHC 3757 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Venue Rolls Building,, Royal Courts of Justice, Fetter Lane, London, EC4A 1NL

Date 29/11/2013

Before

MR JUSTICE HENDERSON

Between

TEST CLAIMANTS IN THE FRANKED INVESTMENT INCOME GROUP LITIGATIONClaimants

(1) COMMISSIONERS OF INLAND REVENUEDefendants

(2) COMMISSIONERS FOR HER MAJESTY’S REVENUEDefendant

AND CUSTOMSDefendant

Mr Graham Aaronson QC, Mr Tom Beazley QC and Mr Jonathan Bremner (instructed by Joseph Hage Aaronson LLP) for Claimants

Mr David Ewart QC and Ms Barbara Belgrano (instructed by the General Counsel and Solicitor to HMRC) for Defendants

Hearing Hearing date: 2 October 2013

Judgment

Introduction

[1]On 2 October 2013 I heard argument for half a day on an application by the defendants (“HMRC”) to make certain re-amendments to their defence to which the claimants have not consented.

[2]The immediate procedural background to the application is briefly as follows. At a case management conference held on 14 May 2013, I gave directions intended to lead to the determination of all remaining issues of liability and quantification in the FII Group Litigation (apart from a few issues on which applications for permission to appeal to the Supreme Court remain outstanding) in a four week trial which has subsequently been fixed to begin on 29 April 2014.

[3]In relation to the pleadings, I set a timetable for sequential amendments to the statements of case in their then current form, with an opportunity for each side to consent to the amendments proposed by the other, coupled with a direction that permission should be sought for any amendments to which consent was not forthcoming.

[4]I also gave directions providing that:(a) by 9 July 2013, the claimants should serve a set of worked simplified examples addressing each factual situation for which they contended the court would be required to provide an answer, annotated with brief supporting submissions;

(b) by the end of August 2013, HMRC were to provide a response in like form, together with any additional worked examples which they considered necessary;

(c) by 23 September 2013, the claimants should serve a schedule setting out particulars of the quantification of their claim;

(d) the parties should endeavour to agree any additional test cases by 30 September 2013; and

(e) by 7 October 2013, they should endeavour to agree a detailed list of issues of the matters to be decided at the resumed trial.

[5]The parties have substantially adhered to this timetable, and I was informed at the hearing on 2 October that worked examples had been duly exchanged, the claimants had served a detailed schedule of quantum together with an extensive explanatory narrative explaining their methodology, and work was well advanced on the agreement of a list of issues. The amendments to the particulars of claim proposed by the claimants were either agreed by HMRC or withdrawn in the light of HMRC’s objections, with the result that the claimants’ case is now set out in the thirteenth amended particulars of claim dated 14 May 2013 (“the particulars of claim”). HMRC’s proposed amendments to their existing amended defence dated 21 December 2007 (“the defence”) were served on 24 June 2013. In a letter dated 26 June 2013, the claimants’ solicitors, Hage Aaronson Limited (now Joseph Hage Aaronson LLP), consented to certain of the amendments, but objected to others. It proved impossible to reach agreement on the disputed amendments, so on 10 July HMRC issued the application for permission to make them which is now before me.

[6]The main objections to the proposed amendments fell under two broad headings. First, it was said that some of the amendments involved the withdrawal of previous admissions, which could not be done without the consent of the court: see CPR Rule 14.1(5) and PD 14 paragraphs 7.1 and 7.2. Secondly, other amendments were alleged to be an abuse of process, because they sought to reopen matters which had already been conclusively determined against HMRC. In their application notice, HMRC set out their general position on these points as follows:

“1. The Claimants object to a number of the proposed amendments to the draft Amended Defence on the grounds that the amendments either represent the removal of an admission or are an abuse of process… 2. The issues in the FII GLO litigation [have] moved on significantly and the proposed amendments to the Amended Defence are intended to clarify and update the defence in light of the issues now before the Court. 3. The Defendants have not removed any substantive admissions but have admitted what is relevant and have restated the admissions to reflect the current issues.”

[7]I will not attempt in this judgment to set out the broader background to the FII Group Litigation. It is of enormous complexity, and has already been described in a number of judgments. In the unlikely event that this judgment is read by anybody not already familiar with the litigation, a good starting point would be the judgment of Lord Hope in FII (Supreme Court)

[2012] UKSC 19

[2012] 2 AC 337

, especially at paragraphs [1] to [8]. A brief summary of some of the main points decided by the Supreme Court, and of developments since that date, including the third reference to the ECJ, may be found in the judgment which I handed down on 24 October 2013 in The Prudential Assurance Co Ltd and another v HMRC

[2013] EWHC 3249 (Ch)

(“Portfolio Dividends (No. 2)”) at paragraphs [7] and [34] to [37]. In referring to earlier judgments, both domestic and European, I will use the same nomenclature as I did in that judgment.

[8]I heard submissions on 2 October from Mr Ewart QC on behalf of HMRC, and from Mr Aaronson QC and Mr Beazley QC on behalf of the claimants. The claimants produced a helpful document setting out the disputed amendments in the form of a spreadsheet or schedule with four columns, the first showing the relevant allegations in the particulars of claim, the second showing the relevant paragraphs of the defence with the text that HMRC now wish to delete printed in red, the third showing the proposed draft re-amendments, with new material in blue ink, and the fourth containing comments by the claimants. Both sides argued the case by reference to this document, which ran to six double pages. I will refer to it as “the claimants’ schedule”.

Withdrawal of admissions: relevant principles

[9]CPR Rule 14.1(5) provides that:

“The permission of the court is required to amend or withdraw an admission.”

This provision is now supplemented by PD 14 paragraph 7.2, which says that: “In deciding whether to give permission for an admission to be withdrawn, the court will have regard to all the circumstances of the case, including – (a) the grounds upon which the applicant seeks to withdraw the admission including whether or not new evidence has come to light which was not available at the time the admission was made; (b) the conduct of the parties, including any conduct which led the party making the admission to do so; (c) the prejudice that may be caused to any person if the admission is withdrawn; (d) the prejudice that may be caused to any person if the application is refused; (e) the stage in the proceedings at which the application to withdraw is made, in particular in relation to the date or period fixed for trial; (f) the prospects of success (if the admission is withdrawn) of the claim or part of the claim in relation to which the offer was made; and (g) the interests of the administration of justice.” (a) the grounds upon which the applicant seeks to withdraw the admission including whether or not new evidence has come to light which was not available at the time the admission was made; (b) the conduct of the parties, including any conduct which led the party making the admission to do so; (c) the prejudice that may be caused to any person if the admission is withdrawn; (d) the prejudice that may be caused to any person if the application is refused; (e) the stage in the proceedings at which the application to withdraw is made, in particular in relation to the date or period fixed for trial; (f) the prospects of success (if the admission is withdrawn) of the claim or part of the claim in relation to which the offer was made; and

[10]In Kojima v HSBC Bank Plc

[2011] EWHC 611 (Ch)

[2011] 3 All ER 359

, Briggs J (as he then was) said at [19] that paragraph 7.2 of PD 14 “contains a useful and uncontentious distillation of earlier authority as to the discretion to permit withdrawal of admissions”.

[11]The only other point to note is that the admissions in question in the present case are all admissions of law. It must be remembered in this context that parties are not obliged to plead points of law on which their case is based: see PD 16 paragraph 13.3, which says in permissive language that “A party may:(1) refer in his statement of case to any point of law on which his claim or defence, as the case may be, is based,

(2) …” (1) refer in his statement of case to any point of law on which his claim or defence, as the case may be, is based,

The first group of amendments: unlawfulness of the ACT regime

[12]The first group of disputed amendments concerns the alleged unlawfulness of the UK taxation regime relating to advance corporation tax (“ACT”) between 1973 and its abolition in 1999. The respects in which the ACT provisions were said to infringe the freedoms of establishment and movement of capital under the EU Treaty (“the Treaty Provisions”) were pleaded by the claimants in paragraph 11A of the particulars of claim, leading to the following allegations of unlawfulness and breach:

“11B The ACT Provisions accordingly provided a disincentive for UK companies to establish subsidiaries in other member states of the EU or EEA or to move capital or make payments between the UK and subsidiaries wherever situated. Unlawfulness and breach 11C The ACT Provisions were at all material times contrary to the Treaty Provisions and unlawful in that: (a) They did not entitle a resident company which had received dividends from an EU or EEA resident company to deduct from the amount of ACT to which it was liable the amount of the corporation tax levied on the underlying profits which were distributed plus the withholding tax levied on that distribution in the source state. 11D Accordingly: (a) The ACT payments which are the subject of this claim were unlawfully and unduly levied. (b) The Defendants acted in breach of their duties as identified in paragraph 11B above (i) by enacting, maintaining and applying the ACT Provisions to the extent that they were contrary to the Treaty Provisions, and/or (ii) by levying unlawful ACT.”

Unlawfulness and breach (a) They did not entitle a resident company which had received dividends from an EU or EEA resident company to deduct from the amount of ACT to which it was liable the amount of the corporation tax levied on the underlying profits which were distributed plus the withholding tax levied on that distribution in the source state. (a) The ACT payments which are the subject of this claim were unlawfully and unduly levied. (b) The Defendants acted in breach of their duties as identified in paragraph 11B above (i) by enacting, maintaining and applying the ACT Provisions to the extent that they were contrary to the Treaty Provisions, and/or (ii) by levying unlawful ACT.”

Unlawfulness and breach

[13]HMRC’s proposed amended response to those paragraphs, all of which is new, reads as follows:

“11. Paragraph 11B is admitted. 12. Paragraph 11C is denied. The [ACT] provisions were unlawful to the extent that they charged ACT which exceeded the corporation tax which was payable to make up for the lower nominal rate of tax to which the profits underlying the foreign-sourced dividends had been subject compared with the nominal rate of tax applicable to the profits of the resident company. 13. Paragraph 11D(a) is not admitted. 14. Paragraph 11D(b) is admitted to the extent that the ACT provisions were contrary to the Treaty Provisions and unlawful ACT was levied. ”

[14]Of those proposed re-amendments, only paragraph 14 is in issue. The claimants have consented to the new paragraphs 11, 12 and 13. The new paragraph 12 is important, because it sets out (at least in part) HMRC’s case about the extent of the illegality under EU law of the ACT provisions, in terms which directly track paragraph 72 of the judgment of the ECJ in FII (ECJ) II:

“72. As is clear from paragraph 62 of the present judgment, the obligation imposed on a resident company by national rules, such as those at issue in the main proceedings, to pay ACT when profits from foreign-sourced dividends are distributed is, in fact, justified only in so far as that advance tax corresponds to the amount designed to make up for the lower nominal rate of tax to which the profits underlying the foreign-sourced dividends have been subject compared with the nominal rate of tax applicable to the profits of the resident company.”

[15]It should be noted that in that paragraph the ECJ dealt only with nominal rates of tax. Earlier in its judgment, however, when dealing with the lawfulness of the charge to corporation tax under Case V of Schedule D, the Court had cited established authority to the effect that a member state could only validly adopt a dual exemption/imputation system for domestic and foreign dividends if it granted a tax credit at least equal to the amount paid in the state of the company making the distribution, up to the limit of the tax charged in the home state of the recipient: see in particular paragraph 39, referring inter alia to FII (ECJ) I at paragraphs 48 and 57.

[16]That part of the ECJ’s reasoning appears to be reflected in a further admission contained in paragraph 10 of the re-amended defence, pleading to paragraph 11A of the particulars of claim, as follows:

“10. As to paragraph 11A: (a) It is admitted that there is discrimination and/or unequal treatment to the extent that a resident company which has received dividends from another resident company may deduct the amount of ACT paid by the latter company from the amount of ACT for which the former is liable, whereas a resident company which has received dividends directly or via UK subsidiaries from a non-UK resident company resident within the EU/EEA is not entitled to make such a deduction in respect of the corporation tax which the non-UK resident company resident in the EU/EEA is obliged to pay in the State in which it is resident.” (a) It is admitted that there is discrimination and/or unequal treatment to the extent that a resident company which has received dividends from another resident company may deduct the amount of ACT paid by the latter company from the amount of ACT for which the former is liable, whereas a resident company which has received dividends directly or via UK subsidiaries from a non-UK resident company resident within the EU/EEA is not entitled to make such a deduction in respect of the corporation tax which the non-UK resident company resident in the EU/EEA is obliged to pay in the State in which it is resident.”

[17]Mr Ewart accepted in the course of argument that the words which I have italicised in the above quotation should be added to paragraph 10(a), to allow for part of the decision of the ECJ on the “corporate tree” issues. Even with that addition, however, the paragraph does not make any admission in relation to foreign corporation tax paid by companies further down the corporate “roots” than the waterside company which paid the dividend, although that issue too was conclusively determined against HMRC in FII (ECJ) II.

[18]Before coming to the admissions which HMRC now wish to withdraw, there are a number of matters to deal with concerning the case now pleaded by HMRC in paragraphs 10 to 14 of the draft re-amended defence.

[19]The first point is the one I have just mentioned, namely the fact that the admission in paragraph 10(a) does not extend to corporation tax paid further down the corporate “roots”. I appreciate that this omission may be readily explicable on the basis that paragraph 11A(a) of the particulars of claim refers only to cases “where tax was paid in the other State on the profits from which the dividend was paid (or those profits were subject to tax in that jurisdiction)”. Nevertheless, since the point has been conclusively determined against HMRC by the ECJ, I think it is desirable that the admission should be expanded so as to provide an accurate reflection of the decision of the ECJ on the corporate tree issues on both sides of the water’s edge. It should be possible to achieve this by the addition of a few words similar to those proposed by Mr Ewart to cater for the position on the UK side of the water.

[20]Secondly, and more importantly, paragraph 12 is open to the objection that it may set out only part of HMRC’s case about the unlawfulness of the ACT provisions. In my judgment it leaves the claimants and the court in real doubt:(a) about the relationship between this paragraph and the admission contained in paragraph 10(a); and

(b) about the need to allow a credit for withholding tax levied on the distribution in the source state.

[21]In relation to point (a), it is wholly unclear to me how HMRC say that paragraphs 10(a) and 12 are to be reconciled. Is it now their case (as I held in Portfolio Dividends (No. 2)) that the requirement to grant a credit by reference to nominal rates of tax is additional to the requirement to grant a credit for underlying tax actually paid in the source state? Or is it their case that the first of these requirements has somehow displaced the second? As to point (b), I do not understand HMRC to dispute that, as a matter of English law, a credit must be allowed for the foreign withholding tax. Furthermore, the ECJ has held that the grant of such a credit is not a requirement of EU law: see Portfolio Dividends (No. 2) at paragraph [54]. It seems likely, therefore, that there will be no issue between the parties about those principles, and the question of withholding tax in relation to non-portfolio dividends is in any event relevant only to years before 1990 when the Parent-Subsidiary Directive came into force.

[22]Nevertheless, it is in my view desirable that HMRC’s position in relation to withholding tax should be clarified and positively pleaded. In a case of this magnitude and complexity, it is more important than ever that the scope for possible misunderstandings should be minimised and that the issues should be defined by the pleadings as precisely as possible. It is true, as I have observed, that there is no positive obligation on a party to plead contentions of law. In a case of the present type, however, where the law is complex, evolving and largely derived from decisions of the ECJ, I think it will greatly assist the preparation for next year’s trial if the parties’ cases on the relevant law are fully pleaded. In particular, where (as with HMRC’s existing paragraph 12) contentions of law may be only half-pleaded, the scope for confusion and misunderstanding is obvious.

[23]Nor is it a satisfactory answer, in my judgment, to say that the real areas of disagreement between the parties will be made apparent by the worked examples. It is certainly true that worked examples are an invaluable aid to exposition, and can often flush out issues which would otherwise have remained undetected. But the general principle still holds good that the issues between the parties should, as far as possible, be both defined and confined by the pleadings. The problem with paragraph 12 in its present form is that it only partially explains HMRC’s case on the critical issue of the unlawfulness of the ACT provisions, at a time when there is a pressing need for them to articulate their case with complete clarity.

[24]Thirdly, the points which I have just made apply with equal force to paragraph 14. In my view it is essential for HMRC to clarify precisely to what extent, and in what way, they admit that the ACT provisions were contrary to the Treaty Provisions.

[25]The final point is a relatively minor one. It concerns paragraph 10(b), which as it stands contains a non-admission of paragraph 11A of the particulars of claim, subject to the admission contained in paragraph 10(a). Under the CPR, a defendant is required to plead any positive case on which he relies, and a non-admission should in general be reserved only for matters of which he has no knowledge, explaining (where it is not obvious) why that is the case and requiring the claimant to prove the allegation: see generally CPR Rule 16.5 and PD 16 paragraph 10. Mr Ewart did not dispute the validity of these propositions, and made it clear that the non-admission in paragraph 10(b) was in truth directed only at the allegations in paragraph 11A(b) of the particulars of claim to the effect that UK holding companies were obliged to bear ACT “as, effectively, an absolute and permanent cost” where the profits of the group were largely earned by foreign subsidiaries and those profits were distributed to the UK parent. In my view it would not be objectionable if the non-admission were confined to that aspect of paragraph 11A(b), because HMRC cannot reasonably be expected either to admit or to deny that, in the general circumstances posited, the ACT had in practice to be borne by the UK holding company as an absolute and permanent cost. As it stands, however, the non-admission is much too wide, and is on any view inappropriate as a substitute for a full pleading of HMRC’s case on the unlawfulness of the ACT provisions.

[26]I now turn to the admissions which HMRC seek permission to withdraw.

(c) of the defence, reads as follows:

“It is admitted that there is discrimination and/or unequal treatment to the extent that a resident company is not permitted to surrender surplus ACT to its non-resident subsidiaries in circumstances when the latter are liable to corporation tax in the Member State concerned.”

I can deal with this briefly. Mr Ewart does not dispute that the point in question (a peripheral one, which will apply in no more than a handful of cases) was conclusively determined against HMRC in FII (ECJ) I. HMRC do not wish to resurrect the issue in any shape or form, and the proposed deletion of the sub-paragraph is merely intended to reflect the fact that the point is no longer in issue. With the benefit of that explanation, I agree that there is no need for the admission to be retained. It is a simple piece of updating, and the point is no longer a live one between the parties.

[27]The other admissions which HMRC seek to delete are contained in paragraph 13 of the defence, as follows: “13. As to paragraph 11D: (a) It is admitted that ACT was unlawful and unduly levied in circumstances where a resident company received a dividend from a non-UK resident company resident within the EU/EEA and was obliged to account for ACT when distributing that dividend to its own shareholders, to the extent that the ACT would not have been payable had a deduction been allowed in the amount of the corporation tax levied on the underlying profits distributed by the non-UK resident company plus the withholding tax levied on that distribution in the source state. [sub-paragraphs (b) and (c) then set out HMRC’s case on the corporate tree issues] (d) Sub-paragraph 11D(b) is admitted so far as is consistent with the foregoing. (e) Save as aforesaid, paragraph 11D is denied.” (a) It is admitted that ACT was unlawful and unduly levied in circumstances where a resident company received a dividend from a non-UK resident company resident within the EU/EEA and was obliged to account for ACT when distributing that dividend to its own shareholders, to the extent that the ACT would not have been payable had a deduction been allowed in the amount of the corporation tax levied on the underlying profits distributed by the non-UK resident company plus the withholding tax levied on that distribution in the source state. [sub-paragraphs (b) and (c) then set out HMRC’s case on the corporate tree issues] (d) Sub-paragraph 11D(b) is admitted so far as is consistent with the foregoing.

[28]It can be seen that the admission in paragraph 13(a) appears to follow on from the admission in paragraph 10(a), and to reflect the clear case law of the ECJ before FII (ECJ) II. In my judgment its proposed deletion reinforces the concerns which I have already expressed about the precise nature of the case now advanced by HMRC in relation to the unlawfulness of the ACT provisions, and HMRC should only be permitted to withdraw the admission if and when their new case, including any fallback contentions, has been fully pleaded. Furthermore, it seems to me at the moment that the existing admission, suitably amended to allow for the determination of the corporate tree issues and the point that deduction of withholding tax is a requirement of UK rather than EU law, should in substance be retained as part of HMRC’s alternative case, assuming that their primary contention will be that the only credit required by EU law is one based on nominal rates of tax. I am therefore not prepared at this stage to give permission for the admission in paragraph 13(a) to be withdrawn; and, because of its consequential nature, the same applies to the admission in sub-paragraph (d). The question will have to be revisited when HMRC have properly and fully formulated their positive case.

[29]Substantially similar issues arise in relation to HMRC’s case on the foreign income dividend (“FID”) regime, where HMRC seek permission to withdraw an admission that ACT levied in connection with FIDs was unlawful, in terms materially identical to the admission in paragraph 13(a) discussed above, and to replace it with an admission “that some ACT levied in connection with FIDs was unlawful and unduly levied”. The details are set out on page 4 of the claimants’ schedule. For the reasons which I have already given, I consider that the proposed new admission is both vague and embarrassing, because it leaves the claimants and the court in the dark about the precise nature of HMRC’s case. As before, I consider it essential that HMRC should spell out their case, including any fallback contentions, with clarity and precision. They should not be permitted to withdraw their existing admission unless and until they have done so.

The second group of amendments: attempts to re-litigate issues already decided against HMRC

[30]The second group of disputed amendments concerns alleged attempts by HMRC to re-litigate issues which have already been conclusively determined against them. (1). Can the FID regime benefit from the standstill protection in Article 57(1) EC (now Article 64(1) TFEU)?

[31]This question was considered by the ECJ in FII (ECJ) I and remitted to the national court for determination in the light of the guidance given by the Court. I dealt with it in FII (High Court) at paragraphs [180] to [191], concluding as follows:

“190. In my judgment Mr Ewart’s argument does not meet Mr Aaronson’s contention, nor does it answer the question remitted to the national court by the ECJ. A central point of that question, although it is easy to miss it on a superficial reading, is that the FID regime denies any tax credit, even though it does not provide for automatic reimbursement of the ACT which is paid, and instead gives priority to setting off ACT which would otherwise be repayable against any outstanding liability to MCT. In an extreme case, the result could be that no ACT at all was repayable, because the company concerned had a sufficiently large outstanding MCT liability to absorb all of the ACT paid in respect of the FIDS. Mr Ewart had no real answer to this point, and in my view this feature of the FID regime has to be regarded as the introduction of a new restriction which had no precursor in the previous legislation. By introducing this new restriction, I consider that the UK forfeited the protection of art 57(1) EC for the FID regime, even though the general purpose of the FID regime was to mitigate the adverse ACT consequences of the regime otherwise applicable to foreign dividends. 191. For these reasons, I conclude that the FID regime breached art 56 EC in relation to third country FIDs, and that the breach was not negated by art 57(1) EC. It follows that liability in respect of third country FIDs is in principle established.”

Consistently with my decision, the order which I made on 12 December 2008 included a declaration in the following terms:

“9. The introduction of the FID regime was a new restriction for the purposes of Article 57(1) so that the application of Article 56 EC is not excluded in relation to third country FIDs.”

[32]My conclusion on this point was appealed by HMRC to the Court of Appeal. The parties agreed a list of the issues on the appeal. Issues 9 and 10 were worded as follows:

“9. Do the FID provisions infringe Article 56? 10. If the FID provisions infringe Article 56 in principle, are they permitted by virtue of the “standstill” provisions of Article 57(1)?”

The Court of Appeal dealt with issue 9 in paragraphs [116] to [119] of the judgment of the Court delivered by Arden LJ, and with issue 10 in paragraphs [120] to [130]. The Court dismissed HMRC’s appeal. It is enough for present purposes to quote the last three paragraphs of this part of their judgment:

“128. In sum, Mr Aaronson submitted that the removal of the tax credit where a dividend was paid as a FID did not follow the logic of the ACT arrangements. He submitted therefore that the fact that shareholders were not entitled to any tax credit was a new restriction. 129. The question that the ECJ required the national court to consider was whether the FID scheme justified the absence of a tax credit for shareholders. The fact is that a company could fall between two stools. There was nothing which prevented it from electing to make a FID and then finding that it could not in fact obtain repayment of ACT under the restrictions applying to the foreign tax admitted for FID regime purposes. No doubt this would not happen to a company that was well advised, and could be avoided with planning. Nonetheless the circumstances postulated could occur. The company would have paid ACT and not be able to claim repayment of that ACT, and yet the dividend paid by it would carry no tax credit. That was inconsistent with the logic of the legislation as it did not respect the “unspoken” link between the payment of ACT and the entitlement to a tax credit. Thus there was a new approach and new restriction in the FID regime, which meant that art 57(1) EC did not apply to it. 130. We would dismiss the appeal on this point.”

[33]By paragraph 7 of its order of 19 March 2010, the Court ordered that:

“The Respondents’ appeals on Issues 9 and 10 are dismissed. Declarations 8 and 9 are affirmed.”

HMRC did not seek permission to appeal issue 10 to the Supreme Court, so it has been finally determined in the claimants’ favour since March 2010.

[34]In the particulars of claim, it is alleged: in paragraph 12E, that the FID regime introduced a new regime for the taxation of foreign sourced dividends with effect from 1 July 1994; in paragraph 12F, that this new regime entailed new restrictions on the free movement of capital in the form of(i) the requirement to pay ACT and then claim it back, and

(ii) the refusal of a repayable tax credit to exempt shareholders receiving dividends, and that these restrictions did not fall within the scope of Article 57(1) EC; and in paragraph 12G, that in the premises, where foreign profits were distributed as FIDs, HMRC were prohibited by EC law from levying ACT and required by EC law to grant a tax credit. In the defence, which of course predated the decisions in FII (High Court) and FII (CA), these allegations were denied, and it was averred that the FID regime fell within the standstill provision in Article 57(1).

[35]HMRC’s proposed re-amendments on this point are in substance mainly new, and read as follows:

“19(e) As to paragraph 12E, the FID Regime introduced with effect from 1 July 1994 introduced two new elements i.e. the right given to the payer of the FID to automatically recover ACT and the denial of a tax credit to the recipient of the FID. This required new procedures to establish whether a FID could be paid, to what foreign sourced income it related and as to the way in which ACT was to be recovered. Subject to the above, paragraph 12E is not admitted. (f) As to paragraph 12F, the requirement to pay ACT and claim it back did not amount to a new restriction on the free movement of capital. Subject to the above, paragraph 12F is admitted. (g) Accordingly, the requirement to pay ACT on a FID is authorised as a restriction which existed on 31 December 1993 for the purposes of Article 57(1) EC. Subject to the above, paragraph 12G is admitted.”

[36]In their skeleton argument, counsel for HMRC argue that these proposed amendments are merely consequential on the decision of the Court of Appeal that the introduction of the FID regime gave rise to a new restriction for the purposes of Article 57(1). They accept that it is not open to HMRC, in the light of the Court of Appeal’s judgment, to contend that the absence of a tax credit for the shareholder did not amount to a new restriction. They contend, however, that HMRC are entitled to maintain their position that the requirement for the company to pay ACT and then claim it back did not amount to a new restriction.

[37]I agree with the claimants that it is not open to HMRC to adopt this position. The issue which has been conclusively determined against them is not merely the question whether the absence of a tax credit amounted to a new restriction, but the issue whether HMRC are entitled to rely on the standstill provision at all. The Court of Appeal, affirming my decision, has held that they are not. This gives rise to an issue estoppel between the parties, which precludes HMRC from attempting to argue the contrary in either the same or subsequent proceedings between the same parties. Furthermore, I do not accept that the reasoning of the Court of Appeal was confined to the question of the absence of a tax credit. It seems clear to me that they considered the FID regime as a whole, and concluded that it could not benefit from the standstill provision. Accordingly, paragraph 16 of the order of the Court, based on paragraph 1 of my order with immaterial variations, read as follows:

“The following claims are successful in relation to the GLO issues determined in the trial: … (b) claims for the time value of ACT on third country FIDs paid on or after 1 July 1994 and refunded under the FID regime …”

It would not have been possible for the Court of Appeal to make an order in this form if it were still open to HMRC to contend that the requirement to pay ACT and claim it back under the FID regime did not amount to a new restriction on the free movement of capital. Finally, even if it were still open to HMRC to argue the point, I am unable to understand how it would help them to do so. The admitted new restriction relating to the absence of a tax credit would, by itself, be enough to ensure that the standstill provision was inapplicable.

[38]I should add, for completeness, that there is an exception to issue estoppel in special circumstances where its application would work injustice: see Arnold v NatWest Bank Plc

[1991] 2 AC 93

at 109A-C per Lord Keith of Kinkel, with whose speech the other members of the House agreed. There is, however, no suggestion in the proposed re-amendments that HMRC might even arguably be able to rely on this exception, which as formulated applies only where:

“there has become available to a party further material relevant to the correct determination of a point involved in the earlier proceedings, whether or not that point was specifically raised and decided, being material which could not by reasonable diligence have been adduced in those proceedings.”

[39]In the circumstances, I consider that the proposed re-amendments to paragraph 19 of the defence must be disallowed, because the contentions advanced have no reasonable prospect of success. The options available to HMRC, as it seems to me, are either to leave their existing defence on this point un-amended, in which case it will be rejected at trial because the point has already been conclusively determined against them, or (in my view preferably) simply to admit paragraphs 12E to 12G of the particulars of claim. (2). Section 107 of the Finance Act 2007

[40]Paragraph 18C of the particulars of claim reads as follows:

“The Defendants are not entitled to rely on section 107(1) of the Finance Act 2007, which purports to disapply section 32 from certain mistake claims brought before 8 September 2003.”

In paragraph 68 of the defence, this allegation was denied “on the grounds set out hereinafter”, which were then pleaded at length in paragraphs 70 to 74.

[41]In FII (Supreme Court), the Supreme Court has now unanimously held that section 107 cannot be relied on by HMRC as a defence to claims founded on EU law, because it breaches the EU law principle of protection of legitimate expectations. This conclusion is, of course, binding on the parties as a matter of law, and it is not open to HMRC to question it in the present proceedings. HMRC clearly recognise this fact of forensic life, because their proposed re-amendments include the deletion of paragraphs 69 to 74 of the defence containing arguments which the Supreme Court has now rejected. Nevertheless, paragraph 66 of the proposed re-amended defence still reads:

“Paragraph 18C is denied.”

This is not technically an amendment, because it merely repeats words already contained in paragraph 68 of the defence. The claimants take issue with it, however, on the basis that it should now be replaced by an admission.

[42]In my view HMRC are technically entitled to maintain their denial, although it is obvious that they are bound by the decision of the Supreme Court on the issue and it will not be open to them to contend the contrary at trial. It would, however, be preferable in my judgment if they were to bow to the inevitable and admit paragraph 18C of the particulars of claim, coupled if necessary with a qualification to the effect that the interpretation and application of the Supreme Court’s decision on the issue are matters for legal argument. (3). Other amendments

[43]There is one further disputed amendment which I have not yet mentioned. It concerns the claims for restitution of surplus ACT, or the time value of utilised ACT, on the ground of mistake of law, as pleaded in paragraph 15C of the particulars of claim. In the defence, these claims are denied, but in the alternative it is said that any such restitution should be confined to:

“… such ACT as would not have been payable had a deduction been allowed in the amount of the corporation tax levied on the underlying profits distributed by the non-resident company plus the withholding tax levied on that distribution in the source state …”

In paragraph 35 of the proposed re-amended defence, the words which I have quoted would be replaced with:

“… such ACT as would not have been payable had the Claimants only paid ACT which was lawfully due …”

[44]It can be seen that this proposed amendment raises essentially the same issues as those which I have already discussed in relation to unlawful ACT. In my view the proposed wording is acceptable, but only on the understanding that HMRC’s detailed case on the unlawfulness of the ACT provisions will have been fully set out earlier in the re-amended defence.

Other matters

[45]The claimants sought to buttress their case by reference to the strict approach which the court adopts to late amendments. I was referred to well-known authorities such as Swain-Mason v Mills & Reeve

[2011] EWCA Civ 14

[2011] 1 WLR 2735

(CA). I do not find those principles of assistance in the present context. HMRC’s proposed amendments were formulated pursuant to a timetable laid down at the CMC in May of this year, and the trial is not due to begin until the end of April 2014. Although the proceedings have a very long history, that is due to their great legal complexity and the need to make no fewer than three references to the ECJ. I also accept that the decision of the ECJ on the second reference, which was delivered on 13 November 2012, will have required very careful analysis and consideration by HMRC’s legal team. I consider that HMRC acted with reasonable expedition in all the circumstances by submitting their proposed re-amendments on 24 June 2013, and they cannot be blamed for the fact that it proved impossible to arrange the present hearing before the Long Vacation.

[46]It is, however, now necessary for HMRC to produce a revised draft of their re-amended defence as a matter of considerable urgency, if the orderly preparation of this case for trial is to proceed smoothly. I will hear submissions on the appropriate period to allow for this purpose when I hand down this judgment, but my provisional inclination is to allow no more than a further 21 days.