This month’s Chartered Accountants Tax Case digest looks at the outcome of the long running case of the Franked Investment Income (“FII”) Group Litigation. The case originally arose out of the UK’s tax treatment of dividends received from non-resident subsidiaries and the difference in tax treatment compared with the UK domestic rules which applied at the time to dividends received from UK resident companies.

This decision considered several points of interest in respect of the quantification of taxpayers’ claims and the appropriate level of credit which should be applied, which had first been decided by the High Court in its judgment of December 2014.

The decision of the Supreme Court is being hailed as a landmark decision for civil cases in determining how mistakes of law should be treated when extending the limitation period under section 32 of the Limitation Act 1980.

Background

The appeal before the Supreme Court arose in the course of long-running proceedings known as the Franked Investment Income (“FII”) Group Litigation. The FII Group Litigation comprised many claims in respect of the way in which advance corporation tax and corporation tax were previously charged on dividends received by UK-resident companies from non-resident subsidiaries.

The Respondents to the appeal were claimants within the FII Group Litigation whose cases had been selected to proceed as test claims on certain common issues (“the Test Claimants”).

The Test Claimants’ case was that the differences between their tax treatment and that of wholly UK-resident groups of companies breached the EU Treaty provisions which guaranteed freedom of establishment and free movement of capital. They sought repayment by HMRC of the tax wrongly paid, together with interest, dating back to the UK’s entry to the EU in 1973.

Restitutionary claims for the recovery of money must normally be brought within six years from the date on which the money was paid. As an exception to that general rule, section 32(1)(c) of the Limitation Act 1980 provides that, in respect of an “action for relief from the consequences of a mistake”, the limitation period only begins to run when the claimant “has discovered the … mistake … or could with reasonable diligence have discovered it.”

Before the Court of Appeal, the Test Claimants argued that, where a claimant is seeking to recover money paid under a mistake of law, the effect of section 32(1)(c) is to postpone the commencement of the limitation period until such time as the true state of the law is established by a judicial decision from which there lies no right of appeal.

In their cases, the Test Claimants said that this was when, in 2006, the Court of Justice of the European Union decided that relevant aspects of the UK tax regime were incompatible with EU law. Conversely, HMRC argued that time instead began to run in 2001, when the Court of Justice decided that other aspects of the UK tax regime breached EU law. The Court of Appeal found in favour of the Test Claimants on this issue.

On appeal to the Supreme Court, HMRC argued that section 32(1)(c) of the Limitation Act 1980 applies only to mistakes of fact and not to mistakes of law, or alternatively that the Test Claimants could reasonably have discovered their mistake more than six years before they issued their claims in 2003. On either approach, a proportion of the claims would be time-barred.

Decision

The Supreme Court unanimously allowed the Test Claimants appeal, but for differing reasons. The majority held that section 32(1)(c) of the Limitation Act 1980 applied to claims for the restitution of money paid under a mistake of law, with time beginning to run when the claimant discovers or could with reasonable diligence have discovered their mistake in the sense of recognising that they have a worthwhile claim. It left the application of that test to the facts of this case for the High Court.

The full judgment in this case is available from:- https://www.supremecourt.uk/cases/uksc-2016-0228.html