On 18 December 2014 the High Court (Henderson J) gave judgment on the quantification issues arising in the FII group litigation following a hearing in May and June of this year. In relation to the Schedule D Case V tax charge on EU-source dividends, Henderson J confirmed the finding in his judgment in Prudential (2013) that effect was to be given to the ECJ’s judgments in FII (ECJ) I and II by granting a foreign underlying tax credit at the higher of the nominal and actual rates. However, whereas Prudential’s dividends were from portfolio holdings for which there was no underlying tax information, the FII claimants’ dividends were from holdings in group companies. They could therefore be expected to make proportionate inquiries into the actual and nominal tax rates applicable in the State in which the profits were earned. The nominal rate credit was to be calculated by following as closely as possible the existing statutory machinery; in particular, where dividend income passed through a mixer company a blended nominal rate had to be determined (rather than disaggregating the income as HMRC had argued). The Judge also gave provisional views on two situations which did not arise on the test cases: first, where EU-source income was taxed in an intermediate company on its way to the UK, the relevant nominal rate was that of the intermediate company (if higher than that of the ultimate source country); secondly, while in principle a nominal rate credit was not required for income originating in a third country (even where it was paid to the UK via an EU mixer company), where the income was taxed in the EU on its way to the UK the income would attract a nominal rate credit at the rate of the intermediate company.
The judgment also deals with detailed issues relating to the quantification of the Claimants’ ACT claims. Here again Henderson J followed the principle that the solution adopted should do as little violence as possible to the UK machinery, upholding the Claimants’ methodology based on an adaption of the ACT return (CT61) system. The Judge held further that HMRC had failed to demonstrate that on the facts they had changed their position so as to make restitution unconscionable: there was no short term relationship between taxation and spending and even in the longer term no causal relationship had been shown. The Judge also confirmed his rulings in Prudential that restitution should be by way of compound interest (the parties having agreed that the appropriate rate was the ten year moving average of the yield rate on ten year gilts).
The Test Claimants in the FII Group Litigation v HMRC [2014] EWHC 4302 (Ch), 18 December 2014
Originally printed in International Tax Review, 16 September 2014
By Nicola Hine
On 2 September 2014, the Court of Appeal handed down its latest judgment (the third from the Court of Appeal) in the long running Franked Investment Income Group Litigation (“FII GLO”) case. This particular appeal dealt with an important point of principle: that taxpayers should be entitled to have finality in long running cases. If HMRC were allowed to re-open arguments which had been decided against them, it could increase the uncertainty of litigation and the protracted nature of tax disputes.
The Court of Appeal decided the UK tax authorities should not be allowed to change their defence in the Franked Investment Income Group Litigation on the issue of liability as that aspect of the case has already been finalised. As a result, the appeal was dismissed.
This is a further success for the Claimants in this action and, hopefully, brings the case closer to reaching its conclusion.
Continue reading on International Tax Review.
Originally printed inInternational Tax Reviewon 4 April 2014
By Robert Waterson & Samantha Wilson
The taxpayer can claim a resounding victory in the third round of the long-running Littlewoods interest case in which judgment was handed down in the High Court in London on March 28 (Littlewoods Retail Limited and others v Commissioners for HMRC [2014] EWHC 868 (Ch)).
Though the background to Littlewoods is concerned with the recovery of unlawfully levied VAT, the decision is rooted in the application of general principles of EU law. The judgment therefore has important and positive implications for all taxpayers who have sought recovery of taxes paid but not due under rights derived from, or freedoms guaranteed by, the European Treaty.
Continue reading on International Tax Review (subscription required).
Originally printed in Tax Journal on 4 April 2014
Robert Waterson considers the High Court decision in Littlewoods concerning the recovery of compound interest on overpaid VAT, which was handed down on 28 March 2014 in the High Court. This substantial judgment represents a comprehensive win for the taxpayer and is relevant to the many hundreds of companies which have claims pending for the recovery of compound interest in respect of overpaid VAT (as well as certain direct tax disputes concerning EU law).
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By Nicola Hine
The ECJ has delivered judgment today in Case C-80/12 Felixstowe Dock and Railway Company and Ors, a consortium relief case referred from the FTT. The ECJ ruled that legislation which disallowed consortium relief in circumstances where a link company was based in Luxembourg breached the freedom of establishment.
The claimants were UK resident companies who were part of a Hong Kong owned group. Consortium relief had been claimed for losses of a UK resident consortium company. The “link company” (being the company common to both the consortium and the group within the meaning of s406(1)(a) ICTA 1988) was Luxembourg resident. The loss making consortium company elected to surrender its losses to the UK claimant group in order to off set those losses against the group’s taxable profits. HMRC rejected the claims on the basis that the link company was neither UK resident nor did it carry on a trade in the UK through a permanent establishment, as required by the legislation.
The claimants appealed and the FTT referred the matter to the ECJ for preliminary ruling. The ECJ found that the UK legislation produced a difference in treatment as between domestic link companies and those based in other Member States. Such a disparity may only be permissible where it may be justified by an ‘overriding reason in the public interest’ or where the circumstances are not objectively comparable. As to the latter, the Court found that the comparability of a domestic and cross-border situation was undisputed. On the former, no reasons of public interest were advanced by the UK government, and the question of whether such a justification was left for the national court to decide. Although this point was remitted to the FTT, the ECJ made it clear that the restriction created by the legislation could not be justified by “overriding reasons in the public interest relating to the objective of preserving a balanced allocation of powers of taxation between the Member States or to combating purely artificial arrangements”.
The important feature of the judgment is that, the presence of intermediate companies, or parent companies, based outside the EU/EEA did nothing to affect this analysis. The Court ruled that neither the residence of a company’s shareholders, nor the residence of ultimate parent and intermediate companies, had any bearing on the unlawfulness of the consortium relief provisions or the rights of EU resident companies to rely on the freedom of establishment. The freedom of establishment was already engaged by the residence of the link company; the claimant companies can rely on this restriction themselves as they are linked to the company and the restriction affects their own taxation.
This decision is useful in the context of claims by corporate groups engaging EU law where the ultimate parent is not EU resident.
This article appears in the JHA April 2014 Tax Newsletter.
The Trustees of the BT Pension Scheme v HMRC [2014] EWCA Civ 23
By Alice McDonald
The BT Pensions Scheme case concerns claims by a large number of pension funds to recover credits under section 231 ICTA 1988 upon the receipt of non-resident dividends in circumstances where such credits were received on dividends from UK resident companies. The current litigation concerns whether or not the claims were not made in time.
Claims could be made for the payment for tax credit within 6 years under section 43 TMA 1970. Claims were also made as High Court claims in restitution.
The previous courts and tribunals who have heard this case have all concluded that all of those claims which were not made as claims for tax credits under s43 TMA within the six year period were out of time.
Two issues have reached the Court of Appeal. The first is whether the six year time period under s43 TMA properly applied to these claims as a matter of statutory construction. The Court of Appeal has now held that it clearly does. The second is whether the imposition of the six year period is contrary to EU law on grounds of legal certainty. A further hearing will now be listed in the Court of Appeal to determine that second issue.
This article appears in the JHA January 2014 Tax Newsletter, which also features:
FII and Dividend Tax Update
Exit Taxes by Amita Chohan
Unjust Enrichment Defence Compatible with Equal Treatment by Alice McDonald
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By Amita Chohan and Rachel Garwood
Budget 2014 was announced today. A key feature of the Chancellor’s speech concerned HMRC’s draft legislation (published on 28 February 2014) to be included in the Finance Bill 2014 in respect of mistake-based time limits.
Currently, s107 of the Finance Act 2007 imposes a time limit of six years for causes of action that arose before 8 September 2003 and removes the impact of s32(1)(c) of the Limitation Act by maintaining that the limitation period for mistake-based claims runs from the time when tax was paid.
HMRC’s draft legislation will remove the application of s107 to causes of action that concern charges to direct tax contrary to EU law. Fundamentally, this amendment aims to mirror the decision of the Supreme Court in FII where it was found that s107 is incompatible with EU law in the context of a claim concerning tax that was charged in breach of the fundamental freedoms. The proposed revision will be implemented in the form of s107(5A) and (5B) in the Finance Act 2007.
This article appears in the JHA March 2014 Tax Newsletter, which also features:
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By Alice McDonald
On 27 February 2014 Advocate-General Kokott gave her Opinion in three joined cases concerning the Dutch fiscal unity regime. Under this system companies within a corporate group may file a single tax return and have their liability for Dutch corporation tax calculated on a consolidated basis as a single tax entity.
The relevant issue in SCA Group Holding & Ors was whether companies which were part of a multinational corporate group but themselves established in the Netherlands could take advantage of the fiscal unity regime. The Dutch tax authority held that such companies established in the Netherlands were unable to do so, on the basis that without the linked non-resident companies, there would be no corporate group to speak of.
The three joined cases before the ECJ concerned different group structures, although each had the common feature of having members of the corporate group established in another Member State. The Advocate-General considered that there was a restriction of freedom of establishment in respect of both a non-resident parent company with foreign subsidiaries, and a resident parent company with foreign subsidiaries. She also considered that there was no justification for these restrictions.
This article appears in the JHA March 2014 Tax Newsletter, which also features:
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By Amita Chohan
Advocate-General Kokott’s opinion in Nordea Bank was delivered on 13 March 2014.
Danish rules provide that a company resident in Denmark can deduct the losses of branches permanently established in another member state and that the losses of a foreign branch can be recaptured in the event of a ‘partial’ or complete transfer of the activities of the foreign branches to an associated company, which is also established in the same member state as the permanent establishment.
Nordea Bank Danmark A/S (Danish company) is the legal successor to a Danish bank, which held permanently established bank ‘branches’ in Sweden, Finland and Norway. These branches made losses, which were set off against Danish profits. The branches were closed following the creation of Nordea Group. Around half of the employees of the closed branches were taken over by the Swedish, Finnish and Norweigan banks that took part in the merger that formed Nordea Group. The acquiring banks could not deduct the losses of the closed branches from their profits. The Danish tax authorities regarded this event as a ‘partial’ transfer and consequently sought to recapture the loss relief granted.
The A-G opined that the Danish rules in question were incompatible with EU law. Notably, she considered that the prevention of tax evasion could not justify the way in which the Danish rules restricted the freedom of establishment and that these rules were unnecessarily excessive. Key features of the A-G’s opinion included: (1) the observation that the Danish rules are disproportionate as they would also apply to cases where a foreign permanent establishment is in liquidation; and (2) the rules fail to acknowledge the possibility that companies may have reasonable commercial grounds for transferring activities.
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The decision of the High Court in the Littlewoods case on the availability of compound interest on claims for the recovery of unlawfully levied VAT was handed down today by Mr Justice Henderson. The Claimants have been successful. The judgment has significance for all EU claims where compound interest is sought.
In the lengthy judgment, Henderson J confirmed that claimants with claims founded in EU law are entitled an “adequate indemnity” for the loss they suffered by paying the undue VAT measured by reference to compound interest. The judge, in rejecting HMRC’s arguments, has concluded that the actual use to which Government may have put the amounts of overpaid tax is irrelevant.
A hearing to determine the wording of the final order will take place on 30 April 2014. This matter is very likely to proceed on appeal to the Court of Appeal.
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