This month’s Chartered Accountants Tax Case digest looks at the latest developments in the long-running Franked Investment Income (“FII”) Group Litigation case as a result of appeals from the Court of Appeal judgments of 2010 and 2016. The case specifically examined the tax treatment of dividends received by UK-resident companies from non-UK resident subsidiaries compared to the treatment of dividends paid/received within wholly UK-resident groups of companies. The treatment was held to be incompatible with EU law and resulted in overpaid taxes.

The latest judgment covers a wide range of issues including the treatment of interest. In particular, the judgment held that UK double tax relief (“DTR”) legislation, which prevented unused DTR being carried forward, gave rise to an indirect economic double taxation making this a breach of EU law that should be disapplied.

Background

This case arose in the course of the long-running proceedings in the FII Group Litigation case. The Respondents to this appeal are claimants within the FII Group Litigation whose cases were selected to proceed on certain common issues against the Appellant, the Commissioners for Her Majesty’s Revenue and Customs (“HMRC”).

The outstanding issues for determination in these appeals involved issues of principle and quantification of the claimants’ claims. The main issues were as follows:-

1. Is HMRC barred from contesting an award of compound interest for tax paid prematurely by the claimants?
2. On what basis are the claimants entitled to recover interest for tax paid prematurely?
3. What is the nature of the remedy required by EU law in respect of the set off of double taxation relief?

There were four other issues subject to appeal and certain other outstanding issues were determined by agreement between the parties.

Decision

The Supreme Court unanimously allowed HMRC’s appeal on the first and second issues. The claimants’ appeal on the third issue was unanimously allowed.

1. Is HMRC barred from contesting an award of compound interest for tax paid prematurely by the claimants?

The claimants’ argued that HMRC were barred from challenging their entitlement to compound interest for the time value of money during periods when they paid tax prematurely and argued that the first phase of the litigation conclusively established the validity of their claims in restitution. They also made a number of other arguments each of which was underpinned by the principle that there should be finality in litigation.

The claimants’ submissions were rejected. Neither the High Court nor the Court of Appeal made any determination as to the appropriate measure of compensation, which was leftover to the second phase. Although HMRC did concede during the second phase that compound interest should be paid, the Supreme Court allowed HMRC to withdraw its concession in light of its judgment in Prudential1. In addition, the Supreme Court held that HMRC’s challenge did not amount to an abuse of process.

2. On what basis are the claimants entitled to recover interest for tax paid prematurely?

HMRC’s case was that interest for the prematurity period should be calculated on a simple interest basis under 2019 legislation which imposes a six-year limitation period, whilst the claimants argued that interest should instead be calculated under earlier legislation which benefited from an extended period.

HMRC’s appeal succeeded. The 2019 legislation was introduced to provide a statutory basis for awarding interest. The Supreme Court also rejected the numerous arguments advanced by the claimants that they should not be confined to remedy under the 2019 legislation and highlighted, among other things, that although EU law confers a right to the payment of interest, it does not prescribe a period of limitation and that, following Prudential, claims to interest are not restitutionary in nature.

3.What is the nature of the remedy required by EU law in respect of the set-off of double taxation relief?

This concerned the utilisation of various reliefs by the claimants including DTR to reduce or eliminate their liability to pay unlawfully levied mainstream corporation tax as a result of the incompatible legislation. A consequence of the order in which reliefs were applied was that DTR was not fully utilised. Under the DTR provisions, DTR could not be carried forward to reduce corporation tax in a future accounting period and was consequently lost. The claimants sought a remedy, arguing that the inability to carry forward unused DTR breached EU law. Their appeal on this issue succeeded.

In light of the CJEU’ s judgment in Österreichische Salinen (Case C-437/08), the Supreme Court found that it was clear that the DTR provisions, in preventing the carrying forward of unused DTR, gave rise to indirect economic double taxation and a difference in treatment as between domestic-source and foreign-source dividends was in breach of EU law. In terms of the appropriate remedy, the offending DTR provisions must be disapplied. In respect of corporation tax already incurred as a result of the inability to carry forward DTR, a remedy is available in restitution to recover the corporation tax plus interest subject to the law of limitation.

The full judgment is available from:- https://www.bailii.org/uk/cases/UKSC/2021/31.pdf