Test Claimants in the Franked Investment Income Group Litigation & Ors v Revenue and Customs [2020] UKSC 47

UK-resident companies challenged the tax treatment of dividends from foreign subsidiaries as contrary to EU law, seeking restitution of tax paid under mistake of law dating back to 1973. The Supreme Court departed from Deutsche Morgan Grenfell on when limitation runs under section 32(1)(c) of the Limitation Act 1980.

Facts

The Franked Investment Income (FII) Group Litigation concerns claims by UK-resident companies with non-resident subsidiaries seeking restitution of tax paid under the advance corporation tax (ACT) regime and Schedule D Case V provisions of ICTA 1988. The claimants contended this tax treatment was incompatible with the EU freedoms of establishment and free movement of capital, with claims dating back to the UK’s accession to the EU in 1973. Given the lengthy period involved, the claimants relied on section 32(1)(c) of the Limitation Act 1980 to postpone the commencement of the six-year limitation period for restitution claims based on mistake of law.

The proceedings generated three references to the Court of Justice and multiple domestic appeals. The BAT claim was selected as the test claim. Following the decision of the House of Lords in Deutsche Morgan Grenfell [2007] 1 AC 558, it was assumed that section 32(1)(c) applied to mistakes of law (per Kleinwort Benson [1999] 2 AC 349) and that the limitation period ran from the date of an authoritative judicial decision establishing the mistake.

Issues

The principal issues were: (1) whether the Revenue was barred by res judicata, issue estoppel, or abuse of process from challenging Kleinwort Benson and Deutsche Morgan Grenfell at this late stage; (2) whether Deutsche Morgan Grenfell was correctly decided in holding that a mistake of law is only discoverable under section 32(1)(c) when authoritatively established by a final judicial decision; and (3) whether Kleinwort Benson was correctly decided in holding that section 32(1)(c) applies to claims for recovery of money paid under a mistake of law.

Arguments

Revenue’s arguments

The Revenue argued that the Supreme Court should depart from Deutsche Morgan Grenfell, contending that a claimant could with reasonable diligence have discovered a mistake of law well before any authoritative judicial determination. They drew on academic criticism, particularly Dr Samuel Beswick’s articles on discoverability of mistakes of law.

Claimants’ arguments

The claimants argued that the Revenue was barred from raising these challenges due to res judicata, issue estoppel, and abuse of process, given concessions made in earlier phases of the litigation and the admission that BAT’s mistake claims were not time-barred. They contended they would suffer serious prejudice through wasted costs and the need for further quantification trials.

Judgment

Preliminary issues

The court (unanimously on this point) held that the Revenue was not barred from advancing its challenge. Cause of action estoppel did not apply as the concessions concerned limitation (a defence to an otherwise valid claim), not the existence of the cause of action. Issue estoppel did not arise because Issue P (on limitation) was left for a later phase of the litigation. Abuse of process was not made out: the FII litigation involved novel, evolving legal issues at the frontier of EU and domestic law, and the Revenue’s failure to raise the wider challenge earlier, while unfortunate, was not culpable or abusive.

In exercising its discretion to permit withdrawal of the concession, the court weighed the prejudice to claimants against the importance of the legal questions and the public interest in not upholding claims based on an incorrect understanding of the law.

Departure from Deutsche Morgan Grenfell

The majority (Lord Reed, Lord Hodge, Lord Lloyd-Jones and Lord Hamblen) held that Deutsche Morgan Grenfell was wrongly decided on limitation and departed from it. The court identified a logical paradox: a claimant could be unable to ‘discover’ the existence of his cause of action even after bringing his claim, as the mistake was only discoverable when the final court decided in his favour. This frustrated Parliament’s purpose in enacting limitation periods.

The court preferred Lord Brown’s dissenting approach, holding that a mistake of law is discoverable when the claimant knows, or could with reasonable diligence know, of the mistake ‘with sufficient confidence to justify embarking on the preliminaries to the issue of a writ, such as submitting a claim to the proposed defendant, taking advice and collecting evidence’ – in short, when a worthwhile claim arises. This approach aligned with authorities on analogous provisions of the 1980 Act (sections 11, 14, 14A) as explained in Haward v Fawcetts and AB v Ministry of Defence, and with the treatment of fraud under section 32(1).

Kleinwort Benson upheld

The court declined to depart from Kleinwort Benson on the scope of section 32(1)(c). Although the reasoning in that case was not wholly convincing, giving the words their ordinary meaning supported the inclusion of mistakes of law. The purpose of section 32(1)(c) – to postpone the limitation period where the claimant could not reasonably know of the circumstances giving rise to his cause of action – applied equally to mistakes of law. The potential for disruption was significantly reduced once the discoverability test was properly understood.

Dissent

Lord Briggs, Lord Sales, and Lord Carnwath dissented, holding that Kleinwort Benson should be overruled on this point. They considered that section 32(1)(c) was never intended by Parliament to apply to mistakes of law, given the state of the law in 1939 and the Law Revision Committee’s recommendations. They doubted the workability of Lord Brown’s test and considered it would seriously impede judicial development of the common law under the 1966 Practice Statement.

Implications

The decision recalibrates the law on limitation for restitution claims based on mistake of law. Section 32(1)(c) continues to apply to such claims, but the limitation period now runs from when a reasonably diligent claimant could recognise the existence of a worthwhile claim, not from when an authoritative court ruling establishes the mistake. This significantly reduces the scope for very old claims and protects legal certainty and the security of settled transactions.

The standard is objective: how a person carrying on a business of the relevant kind would act, with adequate but not unlimited resources and a reasonable sense of urgency. The burden is on the claimant to show that the mistake could not have been discovered without exceptional measures.

The decision matters most immediately to the Revenue and claimants in the FII, ACT, CFC and Dividend, FID, and Stamp Taxes group litigations, as it will substantially reduce the temporal scope of recoverable claims relating to tax paid contrary to EU law. More broadly, it affects any restitution claim based on mistake of law, notably those arising from retrospective judicial changes to settled law.

The court emphasised that its decision operates within a framework of limitation statutes aimed at producing certainty, and that the defence of change of position and the courts’ caution about overturning settled rules remain important safeguards. The specific date on which the BAT claimants could have discovered their mistake was remitted to the High Court for determination on evidence.

Verdict: Appeal on Issue 28 allowed. The Supreme Court departed from the decision in Deutsche Morgan Grenfell in relation to discoverability under section 32(1)(c) of the Limitation Act 1980, holding that the limitation period runs from when the claimant could, with reasonable diligence, recognise that a worthwhile claim arises, rather than from the date of an authoritative judicial decision. The decision in Kleinwort Benson, that section 32(1)(c) applies to mistakes of law, was upheld. Issue 28 was remitted to the High Court to allow amendment of pleadings and determination of the date when the limitation period commenced.

Source: Test Claimants in the Franked Investment Income Group Litigation & Ors v Revenue and Customs [2020] UKSC 47