Test Claimants in the Franked Investment Income Group Litigation v Revenue and Customs [2021] UKSC 31

UK companies receiving dividends from non-resident subsidiaries challenged differential tax treatment compared to wholly UK-resident groups. The Supreme Court addressed multiple issues including compound interest claims, restitution for unused double taxation relief, and enrichment questions arising from unlawfully levied advance corporation tax under EU law.

Facts

The Franked Investment Income Group Litigation concerned UK-resident companies that received dividends from non-resident subsidiaries and claimed the tax treatment they received was discriminatory compared to wholly UK-resident groups of companies. Under the Income and Corporation Taxes Act 1988, UK companies paying dividends were liable for advance corporation tax (ACT). The differential treatment resulted in the levying of taxes which the claimants argued were unlawful under EU law, specifically articles 49 and 63 of the Treaty on the Functioning of the European Union concerning freedom of establishment and free movement of capital.

Issues

Principal Legal Questions

The appeal raised multiple disparate issues including: (1) whether the claimants could recover compound interest for tax paid prematurely; (2) the nature of remedy required by EU law for set-off of group relief and management expenses; (3) whether the Revenue were enriched taking into account shareholder credits; (4) whether double taxation convention credits should reduce the Revenue’s enrichment; (5) whether the standstill provisions protected the DV provisions after the EUFT rules; and (6) computational questions regarding surrendered ACT.

Judgment

Compound Interest and Period of Prematurity

The Supreme Court held that following its decision in Prudential Assurance Co Ltd v Revenue and Customs Comrs, there was no common law claim to compound interest on unlawfully levied ACT based on restitution. The Court stated:

Once it is understood that the claim to interest is not truly based on unjust enrichment but on the failure to pay a debt on the due date, the conclusion inevitably follows that interest can be awarded on the claims within categories (b) and (c) under section 35A of the 1981 Act.

The Revenue’s appeal on issues 10 and 26(a) succeeded.

Group Relief and Management Expenses

The Court allowed the claimants’ appeal, finding that where tax was paid due to inability to carry forward unused double taxation relief credits, a San Giorgio claim lies for recovery. The Court held:

The levying of the tax in question was unlawful under EU law, because it involved the less favourable treatment of foreign-sourced dividends than domestic-sourced dividends.

Enrichment and Shareholder Credits

The Court rejected the Revenue’s argument that shareholder tax credits should reduce their enrichment, agreeing with Henderson J that:

[T]he obligation to pay ACT on the one hand, and the entitlement to tax credits on the other, were the subject of independent statutory provisions, neither of which was made conditional upon the other.

Standstill Provisions

The claimants’ appeal succeeded. The Court found the EUFT rules enacted in 2001 meant the tax regime was not that which existed on 31 December 1993, therefore the standstill provision in article 64(1) TFEU ceased to apply from 31 March 2001.

Implications

This judgment represents significant clarification of remedies available for breaches of EU law in tax matters. It confirms that compound interest claims in restitution are not available following Prudential, while affirming that San Giorgio claims extend to indirect economic double taxation resulting from inability to carry forward unused DTR credits. The decision has substantial implications for the calculation of damages in tax litigation involving EU law breaches and reinforces the principle that EU law requires equivalent treatment of foreign-sourced and domestic-sourced dividends.

Verdict: The Revenue’s appeal succeeded on issues concerning compound interest for the period of prematurity (issues 10 and 26(a)). The claimants’ appeals succeeded on issues concerning group relief and management expenses (issues 11 and 13), double taxation convention credits (issue 15), and the standstill provisions (issue 3). The Revenue’s appeal on enrichment and shareholder credits (issues 17 and 18) failed. The claimants’ appeal on surrendered ACT failed.

Source: Test Claimants in the Franked Investment Income Group Litigation v Revenue and Customs [2021] UKSC 31