Court of Appeal Finds for the Taxpayer
By Paul Farmer and Alex Psaltis
The Court of Appeal today handed down judgment in the Prudential Test Case in the CFC & Dividend GLO. The judgment dismisses HMRC’s appeal and upholds Henderson J’s decisions except on three minor computational issues.
The judgment is given following the ECJ’s ruling that the UK legislation in force at the material time unlawfully refused UK companies a credit for foreign underlying corporation tax paid by their foreign portfolio holdings.
The central issue was whether Prudential, as a recipient of foreign portfolio dividends, was entitled to claim a credit at the foreign nominal (or statutory) corporation tax rate (rather than at the actual underlying tax rate, which would be impossible for Prudential to prove). The Court of Appeal, upholding Henderson J’s judgment, held that Prudential could claim either a nominal rate credit or an actual tax credit. Prudential therefore succeeded on its claim, and it was unnecessary for the Court to consider whether the EU principle of effectiveness exempted Prudential from the need to show the actual tax paid in order to make its claim. HMRC had agreed that in that event Prudential’s claims in relation to dividend income from non EU countries would also succeed.
HMRC were refused permission to raise the argument that in the event that credit was given at the nominal rate, that nominal rate should be the rate of the profit source of the dividend (which again would be impossible for Prudential to prove) as opposed to that of the foreign dividend paying company. The Court also rejected HMRC’s attempt to run a series of other new or late points, including limitation, change of position and the argument that the flow of the EU income through and out of the UK group had to be traced in order to determine the amount of unlawful ACT. That argument was also rejected on its merits.
The Court found that the conforming interpretation previously given by the Court of Appeal to section 231 ICTA 1988 in Test Claimants in the FII Group Litigation v HMRC [2010] EWCA Civ 103 provided the answer to how to determine the amount of unlawful ACT. The Court considered that the conforming interpretation to section 231 described in the FII case was to be achieved by modifying section 231 to create a tax credit in respect of foreign dividends assessed by reference to the relevant foreign nominal or effective rate of tax (whichever is the higher), capped at the UK nominal rate of tax. This interpretation meant that no change was needed to the other ACT provisions which ought to operate in the normal way on the tax credit in respect of the foreign dividends.
The Court held that it was bound by the Court of Appeal’s decision in Littlewoods establishing the right to compound interest on repayments of unlawful tax (but noted that the decision was the subject of a pending appeal in the Supreme Court).
This article appears in the JHA April 2016 Tax Newsletter, which also includes:
