Test Claimants in the Franked Investment Income Group Litigation & Others (Respondents) v Commissioners of Inland Revenue (Appellant) (2)

Trinity Term

[2021] UKSC 31
On appeals from: [2010] EWCA Civ 103

and [2016] EWCA Civ 1180

HMRC	Test Claimants

David Ewart QC Jennifer MacLeod Elizabeth Wilson Barbara Belgrano	Graham Aaronson QC
Jonathan Bremner QC

Frederick Wilmot-Smith

(Instructed by HMRC	(Instructed by Joseph
Solicitor’s Office (Bush	Hage Aaronson LLP)

House))

LORD REED AND LORD HODGE: (with whom Lord Briggs, Lord Sales and Lord Hamblen agree)

1. This is the third occasion on which important legal questions arising out of the Franked Investment Income Group Litigation (“FII Group Litigation”) have come before this court. As we explain more fully below, the questions of law arise out of the tax treatment of dividends received by UK-resident companies from non- resident subsidiaries, as compared with the treatment of dividends paid and received within wholly UK-resident groups of companies.

2. As the issues which have been raised in this appeal are disparate, involving both issues of principle and issues relating to the quantification of the claimants’ claims, and in view of the length of the judgment, it may be helpful to explain at the outset how the judgment is structured. The matters raised on these appeals are dealt with in the following order:

(1)	General introduction (paras 3-9).
(2)	Overview of the tax provisions (paras 10-20).
(3)	The history of the proceedings (paras 21-51).

(4) Matters determined by agreement between the parties following the decision of this court in Prudential Assurance Co Ltd v Revenue and Customs Comrs [2018] UKSC 39; [2019] AC 929 (paras 52-57).

(5)	Res judicata, issue estoppel, no jurisdiction and abuse of process

(paras 58-84).

(6) Whether and on what basis the claimants are entitled to recover interest for tax which they have paid prematurely (paras 85-118).

(7) The nature of the remedy required by EU law in respect of the set off

of group relief and management expenses (paras 119-159).
(8) Whether the revenue were enriched as a matter of English law taking
into account the interaction of ACT with shareholder credits and whether EU
law precluded an argument that the revenue were not enriched by reason of
that interaction (paras 160-193).

(9) Does it make any difference that the UK group had a non-resident parent which received double taxation treaty credits? (paras 194-200).

(10) Are the DV provisions permitted by virtue of the standstill provisions of article 57(1) (now article 64(1) of the TFEU) in light of the Eligible Unrelieved Foreign Tax Rules? (paras 201-222).

(11) When and to what extent unlawfully charged ACT should be regarded as surrendered (paras 223-232).

(12)	Summary and conclusions (paras 233-234).

1.         General Introduction

3. The FII Group Litigation was established by the FII Group Litigation Order (“the FII GLO”) made on 8 October 2003. Since then the Group Litigation has been conducted against the backdrop of perhaps unprecedented developments in the law both domestically and on the plane of the law of the European Union, some of which have been the product of this group litigation.

4. Under the FII GLO certain claims were selected as test claims and the remaining claims were stayed. The questions which arise in these appeals concern the claims made by various members of the British American Tobacco group (“BAT”), which have been the test claimants for many of the claims in the FII Group litigation. A question also arises in relation to an application by seven claimants enrolled in the FII Group Litigation for summary judgment for the restitution of unlawfully levied tax which we discuss in paras 50-51 below. There is also a question which relates to a claim by FCE Bank plc (“FCE”), a UK registered company which was and is part of the worldwide group of companies ultimately owned by the Ford Motor Company of Michigan, United States of America.

5. The questions concern now-repealed provisions of the Income and Corporation Taxes Act 1988 (“ICTA”) which provided for the system of advance corporation tax (“ACT”) under section 14 and Part VI (“the ACT provisions”) and the taxation of dividend income from non-resident sources under section 18 (Schedule D, Case V) (“the DV provisions”). ACT was abolished for distributions made on or after 5 April 1999, and the DV provisions were repealed for dividend income received on or after 1 April 2009.

6. The principal claims in the FII GLO which are the subject of these appeals are claims for the repayment of tax insofar as it was unlawful under EU law. The test claimants claim that the differences in their tax treatment and that of wholly UK-resident groups of companies breached the provisions of article 43 (freedom of establishment) and article 56 (free movement of capital) of the EC Treaty (“EC”) and their predecessor articles (now articles 49 and 63 of the Treaty on the Functioning of the European Union (“TFEU”)). In this judgment we refer to the provisions of the TFEU, which should be read as including the predecessor provisions. The claims date back to the accession of the UK to the EU in January 1973 and the introduction of ACT in April of that year. As in our judgment of November 2020 we use expressions such as “the EU” and “EU law” anachronistically to include earlier incarnations of what is now known as the EU. We also refer to judgments on references as being made by the Court of Justice of the European Union (“CJEU”) whether it or its predecessor court, the European Court of Justice, handed down those judgments. The test claimants also advanced a claim for damages in accordance with the principles of EU law established in Francovich v Italy (Case C-479/93) [1995] ECR I-3843, given effect in our domestic law in R v Secretary of State for Transport, Ex p Factortame (No 5) [2000] 1 AC 524. As we record below, the damages claim failed at first instance. It forms no part of this appeal.

7. As this court explained more fully in its recent judgment (Test Claimants in the Franked Investment Income Group Litigation v Revenue and Customs Comrs [2020] UKSC 47; [2020] 3 WLR 1369) there have been several other sets of proceedings that have raised issues which also arise in the FII Group Litigation. The ACT Group Litigation addresses UK legislation which prevented UK-resident subsidiaries of foreign parent companies from making group income elections, obliging them to pay ACT when they paid dividends to their foreign parents. The Controlled Foreign Companies (“CFC”) and Dividend Group Litigation concerns claims that the treatment of dividends paid by foreign subsidiaries to UK-resident companies was contrary to EU law, which are similar to those in the FII GLO, but relate to “portfolio” holdings of less than 10% of the shares of the relevant companies (“the portfolio dividends GLO”). The Foreign Income Dividends (“FID”) Group Litigation concerns claims by pension funds or life companies that the absence of a tax credit in respect of foreign income dividends, in contrast to domestic dividends, is contrary to EU law. There are also the Littlewoods proceedings concerning claims to restitution based on the payment of VAT which was paid under a mistaken understanding of EU law. Huge amounts of money have been at stake and have resulted in every arguable point being taken. There has as a result been a very protracted series of related proceedings which have driven the development of both English law and EU law.

8. Among the developments of English law was the decision of the House of Lords in Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Inland Revenue Comrs [2007] UKHL 34; [2008] AC 561 (“Sempra Metals”). This decision, which was reached in the ACT Group Litigation, was to the effect that compound interest was payable on the amounts awarded by the court, whether in damages or in restitution. More recently, this court has refined its approach to restitutionary claims. The first case was Investment Trust Companies v Revenue and Customs Comrs [2017] UKSC 29; [2018] AC 275, a test case concerned with the restitution of VAT charged incompatibly with EU law. Thereafter, in Littlewoods Ltd v Revenue and Customs Comrs [2017] UKSC 70; [2018] AC 869, this court held that common law claims to restitution of VAT, together with any right to compound interest based on Sempra Metals, had been effectively excluded by the statutory provisions governing the recovery of VAT. Significantly, this court also held that the CJEU had recognised that an award of compound interest was not necessary in order to comply with the EU principle of effectiveness. In 2018, this court, having regard to Investment Trust Companies, held that Sempra Metals had been incorrectly decided in that it required compound interest to be paid on restitutionary awards, and departed from it: Prudential Assurance Co Ltd v Revenue and Customs Comrs [2018] UKSC 39; [2019] AC 929 (“Prudential”). In that case this court held (para 73) that no claim arose in unjust enrichment for the time value of money to the restitution of which the claimant was legally entitled: “[t]here is no right to interest on the basis of unjust enrichment: failure to pay a sum which is legally due is not a transfer of value, and does not give rise to an additional cause of action based on unjust enrichment.” Prudential was a case in the portfolio dividends GLO. We will return to the decisions in Sempra Metals and Prudential, and the consequences of the latter decision for the FII Group Litigation, in section 6 of this judgment.

9. Before addressing the substantive questions of law raised in this appeal it may be helpful to give a brief outline of the tax provisions which are the subject of the litigation. It is then necessary to consider some of the history of the proceedings in the FII GLO. This is because the claimants contend that the revenue are barred from denying the claimants’ entitlement to compound interest for the time value of money during periods when they have paid tax prematurely (“the period of prematurity”). The claimants argue this bar (i) on the ground of cause of action estoppel, (ii) on the ground of issue estoppel, (iii) because a denial of the claim amounts to an abuse of process and (iv) because this court has no jurisdiction.

2.         Overview of the tax provisions: ACT, Corporation Tax and FIDs

10. Under section 14 of ICTA a UK-resident company which paid dividends to its shareholders was liable to pay ACT, which was calculated by reference to the amount or value of the distribution made. That company had an entitlement to set off the ACT which it had paid on the distribution in a particular accounting period against the amount of mainstream corporation tax (“MCT”) for which it was liable in respect of that accounting period, subject to certain restrictions. If the liability of the company for MCT in that accounting period was insufficient to allow it to set off the ACT in full, the surplus ACT could be carried back to a previous accounting period or carried forward to a later one. The surplus ACT could also be surrendered to subsidiaries of that company, which could set it off against the amounts for which they themselves were liable in respect of MCT. Surplus ACT could be surrendered only to UK-resident companies.

11. When a UK-resident company received dividends from another UK-resident company it was not liable to MCT on those distributions: section 208 ICTA.

12. If a UK-resident company made a payment of dividends to another UK- resident company, section 231(1) of ICTA conferred a tax credit in favour of the recipient company equal to such proportion of the value of the distribution as corresponded to the rate of ACT in force at the time of the distribution. Section 231(1) also conferred a similar tax credit on individual shareholders resident in the UK.

13. The dividend so received by a UK-resident company and the tax credit

together constituted “franked investment income” (“FII”) in the hands of the
company receiving the dividend: section 238(1) of ICTA 1988.

14. A UK-resident company which received dividends from another UK-resident company, the payment of which gave rise to an entitlement to a tax credit, could recover the amount of ACT paid by the latter company by deducting it from the amount of ACT which it itself had to pay when it made a distribution to its own shareholders, with the result that it was liable for ACT only on the excess.

15. A group of companies comprising UK-resident companies could also elect to be taxed as a group (“group income election”), in which case companies belonging to that group could make distributions up the group hierarchy and postpone payment of ACT until the parent company made a distribution by way of dividend: section 247 ICTA.

16. From 1 July 1994 a UK-resident company receiving dividends from a non- resident company could elect that a dividend which it paid to its shareholders should be treated as a foreign income dividend (“FID”). ACT was payable on the FID, but, to the extent to which the FID matched the foreign dividends received, the UK- resident company could claim repayment of the surplus ACT. While ACT was payable within 14 days of the end of the quarter in which the dividend was paid, surplus ACT was repayable when the resident company became liable for MCT, namely nine months after the end of the accounting period.

17. A UK-resident company receiving dividends from a non-resident company was liable to pay MCT (under the DV provisions) on those dividends. If the recipient company or its parent controlled directly or indirectly 10% or more of the voting rights in the company making the distribution, the recipient company was entitled to a tax credit by reference to the foreign tax paid by that subsidiary. The relief was available to the recipient company only by way of offset against that company’s MCT payable on the income concerned.

18. When the UK-resident company, which had received such dividends, itself made a distribution to its own shareholders, it was liable to account for ACT. The tax credit mentioned in para 17 above could not be deducted from the amount of ACT for which the UK-resident company was liable when it paid dividends to its own shareholders. The UK-resident company was therefore liable to accumulate surplus ACT.

19. As we have said, at the heart of the claims for restitution in the FII GLO litigation are the differences between the tax treatment of the claimants, which have received distributions from subsidiaries resident outside the UK, on the one hand, and the tax treatment of UK-resident companies which received distributions from their UK-resident subsidiaries on the other. It was this differential treatment which resulted in the levying of taxes which were unlawful under EU law.

20. It can also be observed that the issue of the claim for the time value of money in respect of the period of prematurity has arisen both where ACT was unlawfully levied but was later set off against lawful MCT and where ACT was paid on FIDs and surplus ACT was repaid at a later date.

3.         The history of the proceedings

21. The FII GLO proceedings have been complex and extended. As we have said, they have involved appeals to this court, of which this is the third, and three references to the CJEU. They have raised legal questions of exceptional complexity and novelty.

22. The FII GLO, which was made on 8 October 2003, defined the type of claims falling within the scope of the GLO, identified the initial claimants, and provided a procedure enabling further claimants to be added to the group register. It set out common issues of fact or law which arose for determination, without prejudice to the power of the High Court to add to or vary them. It also laid down a procedure for selecting claims to proceed as test cases and for amending, removing and adding to the common issues. Claims not selected as test claims were stayed. The FII GLO has been amended on 11 occasions since 2003 by orders of the High Court.

23. Various issues for determination were listed in Schedule 3 to the FII GLO under the headings (A) to (Q). Among the issues listed was a question (issue (I)) that, if the court concluded that it was contrary to EU law that dividends received from companies resident in another member state of the EU/EEA were unable to be franked investment income:

“… is a company resident in the UK entitled to compensation for the payment of ACT upon the distribution of the funds deriving from those dividends received from companies resident in other member states of the EU/EEA and, if so, in what circumstances and how is that compensation to be calculated?”

Issue (N) asked essentially the same question in relation to dividends received from companies resident in a territory beyond the member states of the EU/EEA.

24. On 12 December 2003 Park J issued an order that the BAT claim proceed as the test case in relation to issues (A) to (P). He directed that the claim by Aegis Group plc (“Aegis”) proceed as the test case in relation to issue (Q). We are not concerned in this appeal with issue (Q), which called into question the legality of retrospective statutory provisions curtailing the period of limitation. That matter was determined by this court in the first FII appeal in 2012. The BAT claim sought inter alia the restitution of tax payments made between 1973 and the issue of the claim, with compound interest, on the basis that the tax had been paid pursuant to a mistake of law or unlawful demands.

The first reference to the CJEU

25. The trial of the BAT claim began on 28 June 2004 but it was immediately apparent that a preliminary reference to the CJEU would be needed on the many issues of EU law arising. Without delivering a judgment, Park J directed that a reference be made.

26. On 12 December 2006 the CJEU gave its judgment on the reference: Test Claimants in the FII Group Litigation v Inland Revenue Comrs (Note) (Case C- 446/04) [2012] 2 AC 436 (“FII (CJEU) 1”). It said at para 184 that “[i]t is clear from case law that any less favourable treatment of foreign-sourced dividends in comparison with nationally-sourced dividends must be regarded as a restriction on the free movement of capital in so far as it is liable to make the acquisition of holdings in companies established in other member states less attractive”. In the absence of EU legislation, it was for the domestic legal system to lay down the relevant procedural rules governing actions for safeguarding EU rights, including the classification of claims, subject to the obligation of national courts and tribunals 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 the member state or withheld by it directly against the tax. The CJEU made a similar ruling at para 173 of its judgment, in relation to FIDs, holding that the FID regime was precluded by articles 49 and 63 of the TFEU because it obliged companies to pay and subsequently reclaim ACT on FIDs and did not give shareholders a tax credit in respect of those dividends.

Procedure following the first reference

27. Following the judgment of the CJEU, Rimer J in an order by consent dated 5 July 2007 directed that consecutive trials of the test claims of BAT and Aegis should proceed. The order provided that the first phase trials would try “all GLO issues raised by the test claims, including liability for restitution, save in so far as those issues concern causation or quantification” (para 12 of Rimer J’s order). The issues included the claims relating to EU dividends and subsidiaries and non-EU dividends and subsidiaries and included the questions as to whether a company was entitled to compensation and if so, in what circumstances and how that compensation was to be calculated: Issues (F), (I), (L) and (N). In para 1 of the order Rimer J directed the parties to use their best endeavours to agree a list of questions to be decided by the court in determining the GLO issues. In default of agreement any party was at liberty to apply to the court for directions.

28. As the Court of Appeal was later to record in para 10 of its judgment in 2016 ([2016] EWCA Civ 1180; [2017] STC 696 (“FII (CA) 2”)), the split between the first and second phases was labelled by way of shorthand as being between “liability” and “quantification”, but that was not quite accurate as the liability trial would consider issues of principle affecting remedy. The shorthand description was also not accurate because issues of principle relating to remedy were also addressed in the second phase: see para 43 below.

29.       The parties thereafter amended their pleadings.

The first trial before Henderson J

30. The trial proceeded over 13 days before Henderson J in July 2008 and he delivered his judgment in November of that year: Test Claimants in the FII Group Litigation v Revenue and Customs Comrs (formerly Inland Revenue Comrs) [2008] EWHC 2893 (Ch); [2009] STC 254 (“FII (HC) 1”).

31. In a discussion in FII (HC) 1 as to whether the test claimants’ remedies were in restitution or damages, Henderson J recorded that it was common ground that in so far as the claims fell within the San Giorgio principle in EU law (Amministrazione delle Finanze dello Stato v San Giorgio SpA (Case 199/82) [1983] ECR 3595) they should be classified in English law as claims for restitution. He also recorded that it was common ground that the English law of restitution, “as interpreted and clarified by the House of Lords in DMG [Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs [2006] UKHL 49; [2007] 1 AC 558] and Sempra Metals,” in general satisfied the EU law requirements of equivalence and effectiveness (para 236). Turning to address which of the claims fell within the San Giorgio principle, he recorded the revenue’s position in these terms (para 238):

“The Revenue argue for a narrow answer to this question. They concede no more than that the claimants are entitled to restitution of … unlawfully levied ACT, together with associated interest and loss of use claims, in cases where the claimant has itself paid the unlawful tax …” (Emphasis added)

As the revenue have pointed out in their submissions to this court, that concession, which supported Henderson J’s finding (para 240) that the San Giorgio principle extended to the repayment of unlawfully levied tax “and to associated interest and loss of use claims”, was consistent with the judgment of the House of Lords in Sempra Metals, which was binding on all courts at that time but which this court later departed from in its judgment in Prudential. Henderson J made similar findings in relation to the time value of the ACT in the FID claims between the dates of payment and repayment (para 268).

32. Henderson J rejected the claimants’ claim for Factortame damages, holding that they had failed to establish any sufficiently serious breach of EU law on the part of the revenue or any other organ of the UK Government (para 404). This finding is relevant to the interpretation of paragraph 11 of his order which we quote in the next paragraph.

33. Henderson J in his order dated 12 December 2008 made among others the following declarations:

“11. The Claimants’ claims for compensation and/or damages based on the principles set out in San Giorgio (Case 199/82) [1983] ECR 3595 (San Giorgio claims) extend to the repayment of unlawfully levied tax and to all claims for losses which are a direct consequence of the unlawful levying of tax.

…

13. The claims for unlawfully levied ACT referred to in paragraph 11 (and paragraph 12 to the extent it is concluded that Community law has been breached in those circumstances) would as a matter of English law fall within the proper scope of a mistake-based restitutionary claim, which mistake continued to be operative at the time the payments were made.

…

17. To the extent that Claimants paid unlawfully levied

ACT and/or corporation tax under Schedule D Case V, such
ACT and/or corporation tax was paid under a mistake.”

In his order Henderson J also ordered that:

“1. The following claims are successful in relation to the GLO issues determined in the trial:

(a) claims for repayment of corporation tax paid on

or after 1 January 1973 on dividends received from
companies resident in other EU member states;

(b) claims for the repayment of surplus ACT (including ACT purportedly utilised against unlawful corporation tax on dividends under 1(a)), or the time value of ACT utilised against lawful corporation tax or ACT refunded under the FID regime, paid on or after 1 January 1973, by Claimants which received dividend income from subsidiaries in other member states in so far as the ACT would not have been payable if dividend income from other EU member states had been treated as franked investment income;

(c) claims for the time value of ACT on third country FIDs paid on or after 1 July 1994 and refunded under the FID regime;

(d) claims for the repayment of interest based on claims under 1(a), (b) or (c).” (Emphasis added)

The first appeal to the Court of Appeal

34. The revenue appealed against Henderson J’s order. They did not challenge in that appeal the terms of Henderson J’s declaration 13. In a judgment dated 23 February 2010 and date-stamped 19 March 2010 ([2010] EWCA Civ 103; [2010] STC 1251) (“FII (CA) 1”) the court addressed 20 of the 23 issues raised in the appeal, the details of which are not relevant to this narrative. The revenue succeeded before the Court of Appeal in defending statutory provisions which purported to reduce the limitation period available in relation to the test claimants’ claims based on mistake of law. The Court of Appeal in its order dated 19 March 2010 but date- stamped on 20 April 2010 also directed that a further reference should be made to the CJEU, in order to seek clarification of its judgment in FII (CJEU) 1 [2012] 2 AC 436. The reference was made by order of Henderson J on15 December 2010.

35. In its order of 19 March/20 April 2010 the Court of Appeal varied Henderson J’s order 1, which we have quoted in para 33 above, so that it read:

“The following claims are successful in relation to the GLO
issues determined in the trial:

(a) claims for the repayment of surplus ACT or the time value of ACT utilised against corporation tax or ACT refunded under the FID regime, paid on or after 1 January 1973, by Claimants which received dividend income from subsidiaries established in other member states in so far as (i) the ACT paid was not due after taking into account the tax credit available under section 231 ICTA 1988 in respect of those dividends and (ii) claims are made within the applicable limitation periods;

(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 in so far as (i) the ACT paid was not due after taking into account the tax credit available under section 231 in respect of those dividend and (ii) the claims are made within the applicable limitation periods;

(c) claims for interest based on claims under (a) and (b) above.” (Emphasis added)

The first appeal to the Supreme Court

36. In November 2010 this court granted both parties permission to appeal on four issues relating to remedy, including the question whether the availability of claims for the repayment of unlawfully levied tax in accordance with the principle set out in Woolwich Equitable Building Society v Inland Revenue Comrs [1993] AC 70 (“Woolwich”) was a sufficient remedy and whether the statutory provisions purporting to curtail without notice the extended limitation period under section 32(1)(c) of the Limitation Act 1980 (“the Limitation Act”) were compatible with EU law. Permission was subsequently granted for a fifth issue also to be argued, concerned with the application of section 32(1)(c) to a Woolwich claim. The revenue did not seek to challenge Henderson J’s first order as amended by the Court of Appeal which we have set out in para 35 above.

37. This court delivered its judgment on 23 May 2012 ([2012] UKSC 19; [2012] 2 AC 337 “FII (SC) 1”), addressing the matters raised in the appeal. Among other things this court held that section 107 of the Finance Act 2007, which purported to exclude claims made against the Revenue before 8 September 2003 for restitution of money paid by mistake from the scope of the extended limitation period under section 32(1)(c) of the Limitation Act, was contrary to EU law.

38. As a result of disagreement among the Justices of this court on the effect of EU law on the validity of section 320 of the Finance Act 2004, this court by order dated 25 July 2012 made a further reference to the CJEU asking a question concerning the validity in EU law of legislation curtailing the period of limitation with retrospective effect and without effective notice.

The CJEU judgments on the second and third references

39. On 13 November 2012 the Grand Chamber of the CJEU delivered its

judgment ((Case C-35/11) [2013] Ch 431 “FII (CJEU) 2”) on the reference to which
we have referred in para 34 above, clarifying its earlier judgment.

40. On 12 December 2013 the Third Chamber of the CJEU delivered its judgment ((Case C-362/12) [2014] AC 1161 “FII (CJEU) 3”) on the reference from this court, ruling that legislation curtailing, retroactively and without any transitional arrangements, the period in which a taxpayer could seek repayment of sums levied in breach of EU law was precluded by the principles of effectiveness, legal certainty and the protection of legitimate expectations.

41. As a result of this court’s ruling and the ruling of the CJEU on the third reference the Revenue’s defence based on section 320 of the Finance Act 2004 and section 107 of the Finance Act 2007 failed. The litigation then progressed to its second phase in which the courts addressed the matters that had not been determined in the first phase.

The “quantification” trial before Henderson J

42. The parties amended their pleadings in 2013 and 2014 in the light of the judgments of this court and the CJEU. The revenue in their re-amended defence admitted that the claimants were entitled to restitution measured by “interest at a conventional rate” from the date of payment of ACT until it was set off.

43. Among the issues which were to be addressed at the second stage of the FII

proceedings and in Henderson J’s judgment ([2014] EWHC 4302 (Ch); [2015] STC
1471 “FII (HC) 2”) were issues 25 and 26(a) which were in these terms:

“25. … what is the measure of restitution due to the
Claimants:

(a)	Are the Claimants entitled to restitution of:
(i) The principal sum of unlawfully paid tax;

(ii) The time value of the unlawfully paid tax if paid too early; and

(iii) Interest on both of those sums?
(b)	If not, how is the restitution due to the claimants

to be computed?

26(a)

Should interest be simple or compound?”

A similar issue also arose where ACT had been paid on FIDs and surplus ACT was repaid at a later date. That formed part of issue 10.

44. Having regard to the judgment of the House of Lords in Sempra Metals, the revenue conceded that the claimants were entitled to compound interest for the period of prematurity. Henderson J recorded this concession in the narrative section of his order dated 30 January 2015 following the quantification trial:

“13. The parties agreeing the following answers to the GLO issues or aspects of them: …

(d) Restitution of the time value of the prematurely paid (ie utilised) ACT, from the dates of payment until the dates of utilisation has to be measured by reference to compound interest.”

45.       In that order Henderson J made the following declaration on the measure of

restitution:

“23.	Issues 25 and 26(a) are answered as follows:
(A)	The restitution to which the claimants are entitled has

three main elements.

(i) First, the Claimants are entitled to restitution of the full amounts of the principal sums of unlawfully paid tax (both overpaid Case V corporation tax and overpaid and unutilised ACT);

(ii) Secondly, they are entitled to restitution of the time value of the prematurely paid (ie utilised) ACT, from the dates of payment until the dates of utilisation. It is common ground that the time value of these claims has to be measured by reference to compound interest; and

(iii) Thirdly, they are entitled to restitution of the time value of the amounts recoverable under each of the above headings, from the dates of payment (or the dates of utilisation of ACT payments in the second category) until the date when restitution is made.” (Emphasis added)

A similar declaration was also made in relation to issue 10, declaring that “[t]he claimants are in principle entitled to recover the time value of all of the ACT which they were obliged to pay under the FID regime, from the dates of payment until the dates when the ACT was repaid to them”. Henderson J’s finding that there was a claim in restitution for the time value of money in the period of prematurity and that it was to be measured by reference to compound interest was consistent with his judgment in Prudential Assurance Co Ltd v Revenue and Customs Comrs [2013] EWHC 3249 (Ch); [2014] STC 1236, paras 204-208, 241-242, in which he analysed the CJEU’s judgment in Littlewoods Retail Ltd v Revenue and Customs Comrs (Case C-591/10) [2012] STC 1714 ECJ as requiring the payment of compensation for the time value of money and treated the question of compound interest as governed by the judgment of the House of Lords in Sempra Metals.

46. In the same order, Henderson J granted the revenue permission to appeal against this declaration of the measure of restitution (order 9(n)).

47. The Revenue did not seek to challenge the determination of issue 26(a) before the Court of Appeal as they accepted that that court was bound by its decision in Littlewoods v Revenue and Customs Comrs [2015] EWCA Civ 515; [2016] Ch 373, which applied the judgment of the House of Lords in Sempra Metals. But in para 345 of its judgment dated 24 November 2016 (“FII (CA) 2”) the Court of Appeal recorded its understanding that “the parties wish[ed] to reserve their position on one or more of [the remedies issues dealt with by the judge but which had not been the subject of substantive argument] should the matter go, once again, to the Supreme Court.”

48. The Court of Appeal refused the Revenue’s application for permission to

appeal to this court in an order dated 24 November 2016 but stated in a note at the
end of the order:

“The court’s blanket refusal of permission should not be taken as an indication that it does not consider any of the points raised worthy of consideration by the Supreme Court; and on Issue 26(a) HMRC should be entitled to take advantage of any success that they may have on this issue in the pending Littlewoods appeal. …”

49. The revenue applied for permission to appeal to this court. The applications were stayed pending this court’s determination of the appeals in Littlewoods and Prudential. After those judgments had been handed down, this court in an order dated 8 April 2019 granted permission to appeal in respect of issue 10 (insofar as it relates to the Sempra issue) and issue 26(a). Permission was thus given to raise the question whether interest should be simple or compound, and this court expressly permitted the revenue to withdraw their earlier concession in respect of Sempra interest. By directions dated 10 July 2019 this court clarified that the permission to withdraw the concession was without prejudice to the test claimants’ entitlement to argue that, even if the revenue were to succeed in their argument as to the law, the consequences should not apply in the present case.

50. We mention also the summary judgment in relation to FID claims, which has given rise to the same question as issue 10 in this appeal. Several groups of claimants enrolled in the FII Group Litigation applied to Henderson J for summary judgment under CPR rule 24.2 in respect of their claims for restitution of ACT paid on FIDs in the period between 1994 and 1999: see the judgment dated 22 January 2016 (Evonik Degussa UK Holdings Ltd v Revenue and Customs Comrs [2016] EWHC 86 (Ch)). As all but one of the claimants had been repaid the ACT in accordance with the FID scheme the principal issues were the claims for restitution (i) for the time value of money in the period of prematurity and (ii) for the period after utilisation or repayment of the relevant ACT. Before Henderson J it was common ground that compound interest was the appropriate measure of restitution until utilisation or repayment because of the House of Lords’ decision in Sempra Metals. Henderson J held that the claims for summary judgment succeeded in relation to the period of prematurity but declined to give summary judgment for compound interest in the periods after utilisation or repayment because of the pending appeal to this court in Littlewoods.

51. Henderson J refused the revenue’s application for permission to appeal this judgment. The Court of Appeal adjourned the revenue’s application to appeal to be heard with the substantive appeal. In FII (CA) 2, in its order dated 24 November 2016, the court granted permission to appeal on issue 10 and against the summary judgment, but dismissed the appeals on those matters: see also para 192 of the court’s judgment. This court in its order dated 8 April 2019 granted the revenue the limited permission to appeal on issue 10 mentioned in para 49 above. In other words, the revenue were not allowed to challenge the finding that all ACT charged on FIDs was unlawful, but were allowed to raise the question of what was the appropriate remedy for the time value of money during the period of prematurity in relation to unlawfully charged ACT, including ACT levied on FIDs.

4.         The matters determined by agreement following this court’s judgment in

Prudential

52. This court’s judgment in Prudential determined several legal issues which were of relevance to this appeal. In the statement of facts and issues the parties recorded their agreement on the determination of this appeal in relation to the following issues.

53. On issue 11 in FII (CA) 1, in so far as it concerned the extent to which a remedy was required by EU law in respect of the set off of ACT, the Revenue’s appeal should be allowed. A claim in restitution does not lie to recover lawful ACT set off against unlawful MCT.

54. On issue 11 in FII (CA) 2, which concerned when and to what extent unlawfully charged ACT should be regarded as repaid and utilised, the claimants’ appeal should be allowed. The unlawful ACT must be treated as having been utilised first against the unlawful MCT charge. Where there is no unlawful MCT against which to set the unlawful ACT which has been paid, the residual unlawful ACT is to be treated as utilised against lawful MCT.

55. On issue 12 in FII (CA) 2, which concerned how ACT is to be treated where FII is carried back to an earlier year, the claimants’ appeal should be allowed. Domestic FII which is carried back to an earlier quarter under paragraph 4 of Schedule 13 to ICTA 1988 is to be regarded as having been applied to relieve only lawful ACT.

56. In their written case the claimants record a further concession which Mr Jonathan Bremner QC confirmed in his oral submissions. Before this court the agreed formulation of issue 26(a) was:

“Should interest be simple or compound? In particular, on what basis can the claimants recover for the periods of prematurity?”

In their case the claimants explain that for the purpose of computing interest the claims comprise three elements: (1) restitution for unlawful ACT utilised against lawful MCT or repaid from the date of payment until the date of utilisation or repayment (ie the period of prematurity); (2) interest thereon until judgment; and (3) surplus unlawful ACT, unlawful ACT which was utilised against unlawful DV tax and cash payments of unlawful DV tax plus interest on each of these from the date of payment of the unlawful tax until judgment. The claimants concede, correctly in our view, that following the judgment of this court in Prudential the claims for interest for elements (2) and (3) above should be computed on a simple interest basis under section 35A of the Senior Courts Act 1981.

57. In relation to element (1), the period of prematurity, the claimants submit that the revenue are barred from denying their entitlement to compound interest. As a fallback the claimants argue that interest on their mistake-based claims for the period of prematurity should be computed on a simple interest basis under section 35A of the Senior Courts Act. We discuss this issue in section 6 of this judgment.

5.         Res judicata, issue estoppel, no jurisdiction and abuse of process

58. The claimants’ case that the Revenue are barred from contesting an award of compound interest for the time value of money in the period of prematurity is that there was a definitive finding in the first phase of the litigation that their claim to recover the time value of money in the period of prematurity succeeded, that that claim was recognised as a claim in restitution, and that the parties had agreed in accordance with the judgment of the House of Lords in Sempra Metals that compound interest should be paid. Mr Bremner points out that Henderson J’s declaration 11 (para 33 above) followed the wording of GLO issues (I) and (N) (para 23 above). No challenge was mounted to that declaration in the first phase of the litigation and in particular no challenge was mounted to the judgment of the House of Lords in Sempra Metals when the litigation first reached this court in 2012. They plead alternatively cause of action estoppel, issue estoppel, abuse of process and lack of jurisdiction.

59. The Revenue in response deny that any of the legal principles which the claimants assert is applicable. The only applicable legal principle which had been in issue was whether the Revenue should be allowed to withdraw their concession concerning compound interest. This court had allowed the Revenue to withdraw that concession in its order of 8 April 2019, as clarified in its directions dated 10 July 2019 (para 49 above).

60. The various principles which the claimants invoke are underpinned by the same legal policies, “that there should be finality in litigation and that a party should not be twice vexed in the same matter”: Johnson v Gore Wood & Co [2002] 2 AC 1, 31, per Lord Bingham of Cornhill. Those policies are reinforced by the need for efficiency and economy in the conduct of litigation. In Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [2013] UKSC 46; [2014] AC 160, para 55 Lord Neuberger of Abbotsbury stated:

“The purpose of res judicata is not to punish a party for failing to take a point, or for failing to take a point properly, any more than to punish a party because the court which tried its case may have gone wrong. It is … to support the good administration of justice, in the public interest in general and the parties’ interest in particular.”

Bearing those purposes in mind, we address each of the principles in turn.

61. In Virgin Atlantic Airways Ltd (above), in a judgment expounding on the law

of res judicata with which the other Justices agreed, Lord Sumption described cause
of action estoppel thus (para 17):

“… once a cause of action has been held to exist or not to exist, that outcome may not be challenged by either party in subsequent proceedings.” (Emphasis added)

He stated that it is “a form of estoppel precluding a party from challenging the same cause of action in subsequent proceedings”. He quoted the speech of Lord Keith of Kinkel in Arnold v National Westminster Bank plc [1991] 2 AC 93, which described this estoppel in these terms (p 104D-E):

“Cause of action estoppel arises where the cause of action in the later proceedings is identical to that in the earlier proceedings, the latter having been between the same parties or their privies and having involved the same subject matter. In such a case the bar is absolute in relation to all points decided unless fraud or collusion is alleged, such as to justify setting aside the earlier judgment. The discovery of new factual matter which could not have been found out by reasonable diligence for use in the earlier proceedings does not, according to the law of England, permit the latter to be reopened. … Cause of action estoppel extends also to points which might have been but were not raised and decided in the earlier proceedings for the purpose of establishing or negativing the existence of a cause of action.”

62.       Lord Sumption stated (para 22) that Arnold was authority for the following

propositions:

“(1) Cause of action estoppel is absolute in relation to all points which had to be and were decided in order to establish the existence or non-existence of a cause of action.

(2) Cause of action estoppel also bars the raising in subsequent proceedings of points essential to the existence or non-existence of a cause of action which were not decided because they were not raised in the earlier proceedings, if they could with reasonable diligence and should in all the circumstances have been raised.”

63.       In para 26 he stated:

“Where the existence or non-existence of a cause of action has been decided in earlier proceedings, to allow a direct challenge to the outcome, even in changed circumstances and with material not available before, offends the core policy against the re-litigation of identical claims.”

64. It is not disputed on this appeal that cause of action estoppel can arise from a determination by the court on an admission by a party to the litigation (Thoday v Thoday [1964] P 181, 198 per Diplock LJ). The Revenue did not challenge the claimants’ assertion, relying on Fidelitas Shipping Co Ltd v V/O Exportchleb [1966] 1 QB 630, 642 per Diplock LJ; Arnold (above), 106, that it can apply not only in subsequent proceedings but at a later stage in the same proceedings. We do not need to address those questions.

65. In our view, there is no such estoppel in the circumstances of this case. While the parties used as shorthand the descriptions of “liability” and “quantification” to describe the two phases of the GLO litigation, it is important to bear in mind the nature of the judicial exercise at the first phase. Henderson J described his task in this phase in para 6 of his judgment in FII (HC) 1 as being to decide “questions of principle which can be stated in fairly abstract terms, without reference to the particular underlying facts”. He continued:

“The pleadings play an essential role in defining the issues and laying the necessary factual foundations for the questions of law which have to be decided, but in group litigation of this nature the pleadings tend to recede into the background once the stage of trial has been reached.”

66. Henderson J in declarations 11 and 13 and in order 1(b) (para 33 above) determined that the claims which had been successful included a claim for the time value of money in the period of prematurity. The Court of Appeal in amending his order 1(a) and (b) (para 35 above) also recognised as successful a claim for the time value of money during that period. Those orders were made at a high level of generality to the effect (i) that San Giorgio claims extended to losses which were the consequence of the unlawful levying of taxes and (ii) that they would as a matter of domestic law fall within the scope of a mistake-based restitutionary claim. The statement that the claims were successful in relation to the period of prematurity (para 35 above) was also a statement of abstract principle. Neither Henderson J nor the Court of Appeal made any determination as to the appropriate measure of compensation for the time value of money which EU law required in accordance with the San Giorgio principle. That was left over to the second phase of the GLO litigation.

67. Issues 25 and 26(a) in the second phase were designed to address the questions of the measure of any restitution and whether interest should be simple or compound in order to satisfy the claimants’ San Giorgio claims (para 43 above). It is clear from the formulation of those issues that the parties and the courts did not treat the general declarations made in the first phase of the litigation as determining those matters. The wording of Issue 25, which was not appealed to this court, is informative: it asks whether the claimants are entitled to restitution of among others the time value of the unlawfully paid tax if paid too early.

68. In light of the judgment of the House of Lords in Sempra Metals the Revenue conceded at trial in FII (HC) 2 that there was a claim in restitution for compound interest in relation to the prematurity period and Henderson J gave effect to that concession. As we have recorded, the Court of Appeal acknowledged that the question whether interest should be simple or compound was still open in its order of 24 November 2016 (para 48 above), and after this court handed down its judgment in Prudential, it allowed the Revenue to withdraw its concession (para 49 above).

69. The claimants also plead issue estoppel. In Virgin Atlantic Airways Ltd (para 60 above), para 17 Lord Sumption described this estoppel as:

“the principle that even where the cause of action is not the same in the later action as it was in the earlier one, some issue which is necessarily common to both was decided on the earlier occasion and is binding on the parties.”

70.       In Thoday (para 64 above), p 198, Diplock LJ described issue estoppel in

these terms:

“There are many causes of action which can only be established by proving that two or more conditions are fulfilled. Such causes of action involve as many separate issues between the parties as there are conditions to be fulfilled by the plaintiff in order to establish his cause of action; and there may be cases where the fulfilment of an identical condition is a requirement common to two or more different causes of action. If in litigation upon one such cause of action any of such separate issues as to whether a particular condition has been fulfilled is determined by a court of competent jurisdiction, either upon evidence or upon admission by a party to the litigation, neither party can, in subsequent litigation between one another upon any cause of action which depends upon the fulfilment of the identical condition, assert that the condition was fulfilled if the court has in the first litigation determined that it was not, or deny that it was fulfilled if the court in the first litigation determined that it was.” (Emphasis added)

71. In Fidelitas Shipping Co Ltd v V/O Exportchleb (above), 642 Diplock LJ expressed the view that in an action in which certain questions of fact or law are tried and determined before others and an interlocutory judgment is given, the parties are bound by the determination of that issue in subsequent proceedings in the same action and their only remedy is to appeal the interlocutory judgment. He saw this as an example of issue estoppel.

72.       In Arnold (above), p 105 Lord Keith said that issue estoppel

“may arise where a particular issue forming a necessary ingredient in a cause of action has been litigated and decided and in subsequent proceedings between the same parties involving a different cause of action to which the same issue is relevant one of the parties seeks to re-open that issue.” (Emphasis added)

He referred to the passage in Diplock LJ’s judgment in Thoday which we have quoted above and, by reference to Diplock LJ’s judgment in Fidelitas Shipping (above), observed that issue estoppel had been extended to cover the case where in subsequent proceedings it is sought to raise a point which might have been but was not raised in the earlier proceedings (p 106).

73. In our view there is no issue estoppel on this question in this GLO litigation. It is clear that the parties proceeded to trial in the first phase under the assumption that, if EU law required compensation to be paid for the time value of money in the period of prematurity, the remedy, in the light of the then recent decision of the House of Lords in Sempra Metals, was the payment of compound interest. But, beyond a statement of general principle in the courts’ orders in the first phase, the availability of compensation by means of restitution was an issue left over to the second phase and appeared in issues 25 and 26(a) in that phase. It is therefore not necessary to consider whether the revenue could with reasonable diligence and should have raised the issue of compound or simple interest in the first phase.

74. The claimants also argue that the revenue are guilty of an abuse of process in seeking to challenge their entitlement to compensation for the period of prematurity. They found on the judgment of Sir James Wigram V-C in Henderson v Henderson (1843) 3 Hare 100, 114-115 which was addressed by the House of Lords in Johnson v Gore Wood. In his speech in the latter case (p 31) Lord Bingham stated that to establish an abuse the court had to be satisfied that “the claim or defence should have been raised in the earlier proceedings if it was to be raised at all” (emphasis added). He stated that this involved:

“a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before.”

75. Similarly, in Brisbane City Council v Attorney General for Queensland

[1979] AC 411, 425, Lord Wilberforce, in delivering the judgment of the Judicial
Committee of the Privy Council, stated that the doctrine

“ought only to be applied when the facts are such as to amount to an abuse: otherwise there is a danger of a party being shut out from bringing forward a genuine subject of litigation.”

76. It is not disputed that the doctrine of abuse of process can apply to separate stages within one litigation as well as to separate legal proceedings.

77. But for the court to uphold a plea of abuse of process as a bar to a claim or a defence it must be satisfied that the party against whom the bar is asserted is abusing the process of the court by oppressing the other party by repeated challenges relating to the same subject matter. It is not sufficient to establish abuse of process for a party to show that a challenge could have been raised in a prior litigation or at an earlier stage in the same proceedings. The party must go further and show that it should have been raised at that earlier stage and that it is abusive to raise the matter at the later stage.

78. We are satisfied that there is no such abuse on this issue. The FII GLO litigation and the related GLO litigations proceeded against a background in which both domestic and EU law were in a state of significant development and interacted with each other in this GLO litigation. Henderson J in FII (HC) 2 (para 468) correctly spoke of “a complex and evolving legal landscape”. The three judgments of the CJEU on references in the FII GLO litigation in 2006, 2012 and 2013 together with judgments on references in other relevant proceedings, and the now three appeals to this court in the FII GLO litigation as well as the appeals to the House of Lords in Sempra Metals and to this court in Littlewoods and Prudential, are testimony to the evolving nature of that landscape. Issues which affect the FII GLO litigation have been decided in the other legal proceedings such as Littlewoods and the portfolio dividends GLO (including in Prudential) and vice versa. Against that background, it is unsurprising that questions that are of central importance to the claims in the FII GLO litigation have only recently been decided or are yet to be decided.

79. The final bar which the claimants assert is that this court has no jurisdiction to entertain the revenue’s appeal on issue 26(a). The claimants observe that this court’s jurisdiction arises under section 40(2) of the Constitutional Reform Act 2005, which provides for an appeal “from any order or judgment of the Court of Appeal in England and Wales in civil proceedings”. They correctly submit that no appeal lies to this court where permission to appeal to the Court of Appeal has been refused and refer to section 54(4) of the Access to Justice Act 1999 which provides:

“No appeal may be made against a decision of a court under this section to give or refuse permission (but this subsection does not affect any right under rules of court to make a further application for permission to the same or another court).”

The claimants submit that a similar bar should apply as a matter of necessary implication where a litigant has not sought permission to appeal to the Court of Appeal.

80. The short answer to this challenge, as Mr David Ewart QC submits for the Revenue, is that one determines the scope of the Court of Appeal’s jurisdiction by reference to the order granting permission to appeal. In para 9 of his order of 30 January 2015 Henderson J granted the Revenue permission to appeal against his declaration 23, which covered issues 25 and 26(a). The Revenue therefore had an unrestricted right to challenge Henderson J’s rulings on both issues before the Court of Appeal. In the event, the Revenue did not invite the Court of Appeal to determine the question of the claimants’ entitlement to compensation in respect of the period of prematurity in a manner contrary to the decision of the Court of Appeal in Littlewoods, which then bound that court. The Court of Appeal dismissed the Revenue’s appeal on, among others, declaration 23, refused permission to appeal to this court but recognised that the Revenue should be able to take advantage of their pending appeal to this court in Littlewoods (para 48 above). There is in any event no basis for implying into section 54(4) of the Access to Justice Act 1999 the term which the claimants advance. The subsection means what it says, and imposes no bar on a party from taking a point on appeal which it has not taken in the courts below. The court uses its common law powers to regulate the taking of such points on appeal.

81. The claimants also submit that this court should not allow the Revenue to withdraw their concession to the prejudice of the claimants. They advance four grounds. First, they point out that the Revenue had conceded the existence of restitutionary claims for the period of prematurity, and that those claims were to be measured by compound interest, until September 2018. The claimants submit that they would have made different decisions in the FII GLO litigation if they had known that the concession might be withdrawn, as the claim for the period of prematurity is a major portion of the claimants’ claims and is the entire claim for some claimants in the GLO. Secondly, previous judgments in the litigation had been made on the basis that there was a restitutionary remedy to recover the time value of utilised ACT in the period of prematurity, and the Revenue had relied on the existence of a restitutionary remedy in its unsuccessful attempt to defend the statutory curtailments of the limitation period. Thirdly, the exposure of the Exchequer to substantial claims based on that remedy, which the Revenue had conceded, informed the enactment of a 45% tax charge on restitution interest in Part 8C of the Corporation Tax Act 2010. If the Revenue were to succeed in persuading this court that the claimants were entitled only to interest under section 85 of the Finance Act 2019 (“the 2019 Act”, which we discuss below) this additional tax charge would result in the claimants being deprived of the effective remedy which EU law mandates. Fourthly, the withdrawal of the concession as against the claimants involved treating them adversely in comparison with the claimants in Prudential, in which this court did not allow the Revenue to resile from its admission that the claimants had mistake-based claims for the period of prematurity.

“Where a company (‘the surrendering company’) has paid an amount of advance corporation tax in respect of a dividend or dividends paid by it in an accounting period, it may under this section surrender the benefit of so much of that amount as is available for surrender, or any part of that amount that is available for surrender, to any company which was a subsidiary of it throughout that accounting period.”

A parent company, which had paid ACT in an accounting period, could thus surrender so much of its ACT as was available for surrender to any company which was a subsidiary of it throughout that accounting period. Subsection (1A) provided that the surrender took effect on the surrendering company making a claim. By virtue of subsection (2) the surrender had the effect that the subsidiary was treated as having paid the surrendered amounts of ACT which were thereby available to be set off against its own MCT liability.

225. The claimants submit that the provisions for group income election (sections 247-248) and these provisions for the surrender of surplus ACT to a subsidiary or subsidiaries show that Parliament intended that a group of companies should be able to utilise ACT on a corporate group basis. They submit that the computation of compensation in relation to the utilisation of surplus ACT by means of the surrender under section 240 should operate in the same way as this court has held in Prudential that it should operate in relation to the automatic set off by a company of its ACT against its MCT liability under section 239. A company’s ACT in the context of these claims comprised an undifferentiated combination of lawfully charged ACT and unlawfully charged ACT, which was purportedly set off against that company’s undifferentiated MCT liability comprising both lawful and unlawful MCT or surrendered to a subsidiary. In the operation of section 239, which addressed the use by a company of its ACT against its own liabilities to MCT, this court held in Prudential that unlawful ACT was to be regarded as having been utilised first against its unlawful MCT liability. The claimants submit that under section 240, which, in their submission, operated the ACT system on a group corporate basis, unlawful ACT was likewise to be treated as having first been surrendered to those subsidiaries which had unlawful MCT against which it would be utilised.

226. In order to address this submission it is necessary to look in more detail at what this court decided in Prudential, before considering whether the approach adopted in that case can properly be applied to surrenders of ACT within a corporate group.

227. In Prudential this court addressed questions concerning the utilisation of ACT on the hypothesis that an undifferentiated fund of lawful and unlawful ACT was purportedly set off against an amount of MCT which was itself in part lawful and in part unlawful. In this context, the first question which this court addressed was whether the unlawful ACT in the undifferentiated pool of ACT, which was (purportedly) utilised against an unlawful MCT liability, was to be regarded as a pre-payment of the unlawful MCT liability, or was to be regarded as partly lawful ACT and partly unlawful pro rata. This court decided that a charge to MCT that was unlawful was a nullity because there was no liability to pay that tax. As a result, ACT, whether lawful or unlawful, which the company had paid, could not automatically be set off against unlawful MCT under section 239(1). The court held that the lawful ACT which had not been set off against a lawful MCT liability had remained available to the paying company to be set off against lawful ACT in the same or other accounting periods. The unlawful ACT was to be treated as if it had been purportedly utilised first against the unlawful MCT liability and was therefore recoverable by the claimants, except in so far as, in the absence of sufficient matching unlawful MCT, it was to be treated as utilised against a lawful MCT liability.

228. In our view this reasoning cannot be applied to the surrender by a parent company to its subsidiary or subsidiaries of surplus ACT under section 240.

229. It is not disputed that, as the claimants submit, the ACT system was to a degree intended to work on a corporate group basis. As Henderson J explained in FII (HC) 1 (paras 34-36) in his summary of the evidence of Mr Kenneth Hardman, head of tax at BAT Industries plc, BAT would arrange its affairs so that dividends would be paid between UK resident members of the group up to the level of the ultimate parent company under a group income election. As a result, when the ultimate parent company made a distribution to its shareholders, it alone had to pay ACT. The ultimate parent could then take advantage of section 240 to surrender its surplus ACT to whichever companies within the group had available unrelieved MCT liabilities against which parts of the parent’s surplus ACT could be utilised. But the fact that BAT operated in this way does not assist the claimants.

230. The use of the option of surrender of ACT in section 240 will as a matter of historical fact have involved the parent surrendering parts of its surplus ACT to a particular subsidiary or subsidiaries. Those subsidiaries will have received the surplus ACT, some of which will have been lawfully levied and some of which will not. The statutory mechanism in section 240 deems the particular subsidiary, to which the parent company has surrendered all or part of its surplus ACT, to be the person who has paid the surrendered ACT. That is the extent of the deeming provision. It did not treat the parent company’s ACT liability as if it belonged to the corporate group as a whole. It provided for the parent’s surplus ACT to be surrendered to particular subsidiaries and to be set off against each subsidiary’s individual liability to MCT. As a matter of historical fact parent companies used the option available in section 240 of ICTA to surrender particular sums of their surplus ACT to particular subsidiaries. There is no basis for treating the undifferentiated pool of the parent company’s surplus ACT surrendered to each particular subsidiary otherwise than as partly lawful and partly unlawful pro rata.

231. There is a further practical difficulty with the claimants’ suggestion of a regime by which unlawful ACT is first attributed to unlawful MCT. That can be illustrated by an example which the revenue put forward. Parent company A has paid £100 ACT, of which £70 is lawful and £30 unlawful. Company A then surrenders £50 ACT to each of two subsidiaries, Companies B and C. Company B has £20 unlawful MCT and Company C has none. If £20 of the unlawful ACT were matched with the £20 unlawful MCT paid by Company B, it would be necessary to decide which company was to be treated as receiving the residual £10 unlawful ACT. There would be no obvious basis to treat the surrender of that residue of unlawful ACT as made to Company B or Company C.

232. For these reasons we are satisfied that surrenders of ACT which actually took

place should be treated as having been composed of lawful and unlawful ACT on a
pro rata basis. The claimants’ appeal on this issue fails.

12.       Summary and conclusion

233. As we have dealt with disparate grounds of appeal in this judgment it may be useful to summarise our conclusions at its end. We have concluded:

(1) Matters agreed or conceded as a consequence of related litigation (paras 52-57): effect will be given to those agreements and concessions in the court’s order.

(2) Res judicata and abuse of process (paras 58-84): the claimants’ submissions are rejected.

(3) The basis on which the claimants are entitled to recover interest for tax which they have paid prematurely in relation to the period of prematurity (issues 10 and 26(a) of FII (CA) 2) (paras 85-118): the Revenue’s appeal succeeds.

(4) The remedy in respect of group relief and management expenses (issues 11 and 13 of FII (CA) 1) (paras 119-159): the claimants’ appeal succeeds.

(5) Enrichment: whether credits allowed to the ultimate shareholders under section 231 of ICTA are to be taken into account in reduction of the Revenue’s enrichment (issues 17 and 18 in FII (CA) 2) (paras 160-193): the Revenue’s appeal fails.

(6) Enrichment: whether credits paid to a non-resident parent under a double taxation convention are to be taken into account in reduction of the Revenue’s enrichment (issue 15 in FII (CA) 2) (paras 194-200): the claimants’ appeal succeeds.

(7) Whether the DV provisions are protected by article 64 TFEU after the EUFT rules were brought into operation in 2001 (issue 3 in FII (CA) 1) (paras 201-222): the claimants’ appeal succeeds.

(8) When and to what extent should unlawfully charged ACT be regarded as surrendered to a subsidiary (Issue 11 in FII (CA) 2) (paras 223-232): the claimants’ appeal fails.

234. Having upheld the Revenue’s appeal in relation to issue 10 above, we would recall the summary judgment of 22 January 2016 pronounced by Henderson J in Evonik Degussa UK Holdings Ltd v Revenue and Customs Comrs: see para 50 above.

JUDGMENT

Test Claimants in the Franked Investment Income Group Litigation (Respondents) v Commissioners

for Her Majesty’s Revenue and Customs

(Appellant)

before

Lord Reed, President
Lord Hodge, Deputy President
Lord Briggs
Lord Sales

Lord Hamblen

JUDGMENT GIVEN ON

23 July 2021

Heard on 7, 8, 9 and 10 December 2020