The Supreme Court has handed down its judgment in the long-running FII GLO case. The Supreme Court provisionally held by a majority of 5:2 that FA 2004 s 320 was unlawful, and it unanimously held that FA 2007 s 107 was unlawful and should be disapplied. The Court also held that there was no requirement for any positive action by HMRC to collect the unlawful tax, and the mere ‘demand’ on the face of the statute, if unlawful with regard to EC treaty/TFEU freedoms, was sufficient to engage a Woolwich remedy. The judgment means that claimants with common law mistake claims made prior to 8 September 2003 have had their claims reinstated. Claimants with common law mistake claims made after 8 September 2003 but before 1 April 2010 have to wait for the third referral of FII GLO to the CJEU.
On 23 May the Supreme Court handed down its judgment in the long-running FII GLO case (Test Claimants in the FII Group Litigation v CIR and another [2012] UKSC 19). This article seeks to summarise that decision and the related CJEU and domestic litigation and to analyse its implications for FII GLO claimants and the rest of the UK tax community.
The issues considered were all remedy as opposed to ‘liability’, ie, underlying tax technical issues. The case essentially concerned access to the Limitation Act 1980 s 32(1)(c) extended time limit for common law mistake of law claims, which could basically be made within six years of the claimant becoming aware of their mistake of law, normally taken (per Deutsche Morgan Grenfell Group PLC v CIR [2006] UKHL 49) to be the date of the relevant CJEU decision as regards EU law claims for overpaid tax.
First, were either of FA 2004 s 320 or FA 2007 s 107 lawful? FA 2004 s 320 blocked access to the Limitation Act 1980 s 32(1)(c) extended time limit for ‘Kleinwort Benson’ mistake of law claims for tax overpaid more than six years before the claim, unless the claim had been made before 8 September 2003. FA 2007 s 107 retrospectively blocked such common law claims even if made prior to 8 September 2003. Neither provision included any transitional relief.
As part of the analysis of the (un)lawfulness of s 320 and s 107, the Supreme Court heard submissions on the Woolwich unlawful demand common law remedy. Would the Woolwich remedy be a sufficient common law remedy on its own, as the Court of Appeal had held? Irrespective of the answer to this, did the EU law principles of the need for an effective and equivalent remedy, and legal certainty and the preservation of legitimate expectations, protect mistake of law claims? Did the extended time limit in Limitation Act 1980 s 32(1)(c) apply to Woolwich claims (as applied in Woolwich Equitable Building Society v CIR [1992] STC 65)? And did Woolwich claims actually require some positive action from HMRC to collect the unlawful tax?
Lastly, was TMA 1970 s 33 capable of being construed as an exhaustive statutory remedy in any circumstances? The Court of Appeal had held that by reading s 33 down, or rather excising the prevailing practice exclusion from s 33, having regard to the CJEU decision in Fantask ([1997] ECR I-6783), s 33 was capable of being construed as an exhaustive remedy, given the July 2005 House of Lords Autologic ([2005] UKHL 54) 3:2 judgment that statutory claim procedures must be accessed before any recourse pre the 1 April 2010 cut-off could be had to common law remedies.
The Supreme Court provisionally held by a majority of 5:2 that s 320 was unlawful, with Lords Sumption and Brown disagreeing with the majority. Because the Court was split, ie, the matter was not held to be acte clair, the s 320 issue has been referred to the CJEU, the third referral in this case.
The Supreme Court unanimously held that s 107 was unlawful and should be disapplied. This reinstates six FII GLO claims made pre-8 September 2003, including the claims made by the lead test claimant.
Regarding Woolwich, and taking the last point first, the Supreme Court held that there was no requirement for any positive action by HMRC to collect the unlawful tax, and the mere ‘demand’ on the face of the statute, if unlawful with regard to EC treaty/TFEU freedoms, was sufficient to engage a Woolwich remedy. This was actually the position in the Woolwich case itself, where Woolwich had paid the new Building Society tax under protest, but without anything akin to an assessment by Inland Revenue. The unlawfulness derived from the enabling statutory instrument seeking to extend collection of income tax in some circumstances back to the 1985/6 income tax year even though the primary legislation only contained powers for tax collection from the 1986/7 income tax year onwards.
The Supreme Court also held that the s 32(1)(c) extended time limit didn’t apply to Woolwich common law claims. This laid the ground for the split between their Lordships on s 320.Lords Hope, Walker, Reed, Clarke and Dyson considered that the EU law requirements for an effective as well as equivalent remedy and for legal certainty and preservation of legitimate expectations meant that the s 320 summary removal of the right to mistake of law claims without any prospective transitional period denied claimants an effective remedy and also breached the principle of preservation of legitimate expectations. There was no EU law requirement on the UK to provide the common law mistake of law remedy route in parallel to the Woolwich unlawful demand common law remedy, but given that this was what the UK had done, it had to respect EU law as regards the mistake of law remedy, notwithstanding the possible availability of a parallel Woolwich unlawful demand remedy.
Lords Sumption and Brown sought to distinguish M&S teacakes and the German Rewe I case on the grounds that in those cases there had been only one remedy available, hence the need for an adequate prospective transitional period when the time limit for that single remedy had been shortened. They also drew a parallel with the Italian Edilizia Industriale Siderurgica Srl or ‘Edis’ case, where the CJEU had held that denial of access to a regime with more generous time limits but which was applicable only to claims between private individuals wasn’t a breach of the taxpayer’s EU law rights.
On the Edis point, mistake of law is not confined to actions between private individuals/companies. Plus cases such as FII GLO itself re the FIDs regime being optional and the CJEU Dutch referred Gielen case and the option for a self-employed cross-border person to elect Dutch residency suggest that distinguishing M&S teacakes/Rewe I as single remedy cases may run counter to CJEU case law holding that if an option exists under Member State domestic law, then that individual option on its own must comply with EU law.
Lastly, the Supreme Court held that TMA 1970 s 33 couldn’t be read down to excise the prevailing practice exclusion, because this was a fundamental aspect of s 33, and so under the ‘does it go with the grain test?’ for reading down in cases such as Ghaidan v Godin-Mendoza [2004] 2 AC 557, the prevailing practice exclusion couldn’t be read down/out notwithstanding the CJEU decision in Fantask.
Claimants with common law mistake claims made prior to 8 September 2003 have had their claims reinstated. Claimants with common law mistake claims made after 8 September 2003 but before 1 April 2010 have to wait for the third referral of FII GLO to the CJEU, so probably until next year before an Advocate General’s opinion.
Regarding the remaining liability, ie, underlying tax technical issues, the AG’s opinion as regards the second CJEU FII GLO referral/February 2012 hearing is due on 28 June. This concerns two principal issues, viz did the reference to tax rate in the original CJEU December 2006 FII GLO decision as regards the equivalence or otherwise of the former UK taxation of foreign dividends as compared with exclusion of UK to UK inter-company dividends refer to effective as opposed to statutory tax rates? And did the CJEU’s first decision in favour of the taxpayer re the requirement for EU/EEA non-UK dividends to carry a tax credit apply irrespective of the level at which either the foreign tax or the ACT had been paid (the so-called ‘corporate tree’ points)?
The CFC and Dividend GLO, which Henderson J had ordered to be stayed behind FII GLO pending resolution of the remedies limitation issues, will presumably now be revived as the majority of claims were apparently issued prior to 8 September 2003, and so we shouldn’t have to wait for the outcome of the third referral in FII GLO to the CJEU of the s 320 point. It’s the CFC and Dividend GLO which will eventually decide on the remedy for the UK’s breach of the EC treaty freedoms regarding portfolio dividends, given the absence of either double tax relief for underlying tax or exemption where less than 10% of voting power is held.
Lastly, what are the implications of the Supreme Court’s decision with regard to TMA 1970 s 33? If the s 320 re-referral wins, then given that the Supreme Court has said that s 33 can’t be read down to exclude the prevailing practice exception, it is arguable that the attempted statutory closure of common law mistake claims from 1 April 2010 would have to give way to an adequate prospective transitional period for common law extended time limit mistake claims as the new FA 2009 four-year overpayment relief similarly contains a prevailing practice exclusion, in the same way as in Fleming having regard to M&S teacakes the VAT claims procedure had to be temporarily opened up again. Plus, the decision regarding s 33 surely has implications for the Reg 14 claims procedure in the 1.5% stamp taxes GLO.
Jarndyce and Janrdyce, which Dickens based on actual cases in Chancery in the 1850s, finally ground to a halt when the estate had been exhausted. In 2012, the spectre of a disorderly exit of Greece from the euro and the consequent loss of up to 10% of GDP even in countries such as Germany and the knock-on implications for other indebted Eurozone economies is the much greater worry, given that Germany is the UK’s second biggest trading partner and about half of the UK’s exports go to the Eurozone. Businesses should be preparing for both the final outturn of FII GLO and contingency planning including at the tax level for a Eurozone exit.
Peter Cussons, International Corporate Tax Partner, PwC
