Test Claimants in the Franked Investment Income GLO v HMRC

25 October 2021

On 23 July 2021, the Supreme Court (“UKSC”) delivered its decision in Test Claimants in the Franked Investment Income Group Litigation v HMRC [2021] UKSC 31. This is the third judgment given by the UKSC in this long-running litigation concerning the tax treatment of dividends received by UK-resident companies from non-resident subsidiaries, compared with those paid and received within wholly UK-resident groups of companies.

This note discusses the three most significant issues – in financial terms – that were decided by the UKSC: (1) the remedy for claims in respect of unduly levied Advance Corporation Tax (“ACT”), which had been set off against lawful mainstream corporation tax (“MCT”); (2) the lawfulness of the UK statutory provisions which prevented double taxation relief (“DTR”) from being carried forward; and (3) whether HMRC could set off payments of tax credits which had been made to the claimants’ shareholders against the restitution due to the claimants for unlawful ACT.

Remedy for claims – Unlawful ACT which had been set off against lawful MCT

First, the UKSC established that the claimants’ remedy for claims related to the time value of the unlawful ACT, which had been set off against lawful MCT, was governed by section 85 of the Finance Act 2019 (the “FA 2019”). The UKSC decided that neither compound interest nor simple interest under section 35A of the Senior Courts Act were available.

The UKSC rejected the claimants’ contention that they should receive an award of compound interest for the time value of money in the so-called “period of prematurity”, i.e. the period between the date of payment of unlawful ACT and the date on which that ACT was set off against lawful MCT. The UKSC also rejected the claimants’ alternative petition for simple interest under section 35A of the Senior Courts Act. The distinction between an award of simple interest under the Senior Courts Act, and under section 85 of the FA 2019 was important because the latter imposes a 6-year limitation period, whilst section 35A claims to interest could, it was claimed, benefit from the extended limitation period available under section 32(1)(c) of the Limitation Act 1980.

The UKSC concluded that HMRC were not barred from contesting an award of compound interest due to action estoppel, issue estoppel, abuse of process, lack of jurisdiction, or by HMRC’s concession that compound interest was due following the judgment in Sempra Metals. The UKSC noted that, in Prudential, the company’s claim for compound interest would have been rejected if HMRC had not accepted the claim. The circumstances were different in this case because HMRC had sought, and been given permission to, resile from the concession that compound interest was due to the claimants.

The claimants’ alternative argument (that interest under section 35A of the Senior Courts Act was due) was also rejected, on the basis that section 35A only applied where proceedings for the recovery of a debt or damages had been instituted before the High Court. Since restitution of the unlawful ACT had been made without that type of proceedings being instituted, the UKSC concluded that section 35A did not apply.

Remedy in respect of unused DTR

UK statutory provisions which prevented DTR from being carried forward were held to be in breach of EU law. The UKSC concluded that any unused DTR (calculated on a Foreign Nominal Rate basis) must be available to be applied against other income in future years – notwithstanding any provisions to the contrary in UK law. Furthermore, the UKSC held that the claimants could seek restitution of taxes which had already been paid because of the inability under UK law to carry forward unused DTR, plus an award of interest.  

Shareholders’ credits

Finally, the UKSC decided that HMRC was not entitled to set off payments of tax credits paid to the claimants’ ultimate shareholders against the restitution due to the claimants for unlawful ACT. The UKSC concluded that the levy of ACT had no bearing on the shareholder’s entitlement to a tax credit under section 231 of the Income and Corporation Taxes Act 1988. Therefore, it could not be considered in the calculation of the claimants’ compensation.

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