Case of the week: Tax

Test Claimants in the Franked Income Group Litigation v Revenue & Customs Commissioners (2012) UKSC 19. Lord Brown; Lord Clarke; Lord Dyson; Lord Hope; Lord Reed; Lord Sumption; Lord Walker.

23 May 2012

The Supreme Court referred to the European Court of Justice (ECJ) the question of whether Parliament could, through the Finance Act 2004 s.320, lawfully curtail the extended limitation period under the Limitation Act 1980 s.32(1)(c) in respect of claims for the restitution of tax paid under a mistake.

Appeal allowed in part

The test claimants appealed claims for losses caused by the UK’s alleged breaches of EU law in its tax treatment of dividends received by UK-resident companies from non-resident subsidiaries.

The claimants were companies belonging to groups that had UK-resident parents and foreign subsidiaries. The claim was that the differences between their tax treatment and that of wholly UK-resident groups breached the EC Treaty, causing a loss.

The ECJ ruled that the UK rules on corporation tax on overseas dividends were, in some respects, incompatible with EU law, leaving two potential remedies to the claimants. The issues were: whether Parliament could lawfully curtail, without notice, the extended limitation period for the mistake claim; whether a Woolwich restitution remedy could be a sufficient remedy for repayment claims brought on the basis of EU law; whether EU law protected the mistake claims; and whether the curtailment of the extended limitation period for mistake claims infringed the EU law principles of effectiveness, legal certainty, legitimate expectations and rule of law.

Also, whether the restitution and damages remedies sought by the claimants were excluded by the Taxes Management Act 1970; whether the extended limitation period applied to Woolwich claims; and whether Woolwich restitution applied only to tax demanded by the Inland Revenue.

Appeal allowed in part

The first issue was approached on the basis that a Woolwich claim would have been available had it been brought in time. The central question was whether EU law required each member state to make available an adequate remedy or whether it required every remedy recognised in domestic law to be available so that the taxpayer might choose the most advantageous.

The court had therefore to decide whether Woolwich alone could provide the claimants with a remedy. The court was divided on whether Woolwich alone was sufficient to meet the requirements of effectiveness and equivalence.

The majority held that it was not and therefore breached EU law.

They held that the principle of equivalence required that the rules regulating the right to recover taxes levied in breach of EU law had to be no less favourable than those governing similar domestic actions. There were two domestic law remedies, and therefore both had to be available to the claimants.

Lords Sumption and Brown, however, held that the Woolwich remedy with a normal limitation period was an effective way of asserting the claimant’s EU right, Woolwich considered. Given that division of opinion, a suitably drafted question would have to be referred to the ECJ.

The restitution and damages remedies pursued by the claimants were not excluded by the 1970 act.

It could be read compatibly with EU law if it was construed as not impliedly setting itself up as providing an exclusive right to recover overcharged tax and excluding a right of action on common law grounds. The appeal on issue would therefore be allowed.

The extended limitation period under of the act did not apply to a Woolwich claim. The appeal on issue would therefore be dismissed.

The Woolwich remedy did not apply only to tax demanded by the Inland Revenue. Where tax was purportedly charged without lawful parliamentary authority, a claim for repayment arose regardless of any official demand. The Woolwich principle covered all sums paid to a public authority in response to, and sufficiently causally connected with, a requirement to pay tax that was without lawful authority. The appeal would therefore be dismissed.

For the test appellants Franked Income Group Litigation

Graham Aaronson QC, Pump Court Tax Chambers

Laurence Rabinowitz QC, One Essex Court

David Cavender QC, One Essex Court

Simon Whitehead, partner, Dorsey & Whitney (Europe)

Paul Chaisty QC, Kings Chambers

Mark Harper, Kings Chambers

For the respondents Revenue & Customs Commissioners

David Ewart QC, Pump Court Tax Chambers

Rupert Baldry QC, Pump Court Tax Chambers

Andrew Burrows QC, Fountain Court

Kelyn Bacon, Brick Court Chambers

Sarah Ford, Brick Court Chambers


Commentary: Daniel Jowell QC

As the franked investment income case heads to Luxembourg for the third time, the European Court of Justice (ECJ) will be asked how the principles of effectiveness, equivalence and legitimate expectations apply where a member state’s law allows for two concurrent claims (a Woolwich claim and a DMG claim), each of which might potentially be used to vindicate a right under EU law. In particular: can a member state retrospectively curtail the limitation period of one such claim without notice?

If logic is the life of the law then the ECJ will follow Lord Sumption, who reasoned that as the Woolwich claim would have been regarded as effective enough on its own had the DMG claim never existed, therefore the principle of effectiveness must still be satisfied when the DMG claim is removed. But strict logic may not enter into it.

As regards what legitimate expectations existed, and when, the ECJ will not seek to second guess the Supreme Court as to what relative weight the claimants could or should have given to the judgment of the Court of Appeal in 2003 or to the views of academics. But it may well hold that such considerations are irrelevant on the basis that the rule that prohibits curtailment of limitation periods without notice is founded on a general principle of legal certainty and does not depend on any such assessment of what the specific claimants could or could not ‘count on’ at the time. It might also be attracted to the approach of Lord Reed, who reasoned that the principle of equivalence means that, once a member state has made available an alternative remedy, the effectiveness of that remedy must be considered independently of the other.


Daniel Jowell QC, Brick Court Chambers