HMRC has suffered a further defeat in the long-running legal battle over the Franked Investment Income Group Litigation (FII GLO) (Case C-362/12) concerning claimants' rights to claim back overpaid tax, after a third judgment from the Court of Justice of the European Union (CJEU).
The latest ruling determined unreservedly that the UK's introduction of section 320 Finance Act 2004 (which sought to limit the length of time over which claims based on mistake of law could be made) was unlawful, contravening EU principles of effectiveness, legal certainty and legitimate expectation.
Chris Morgan, head of tax policy and head of the EU law group at KPMG in the UK, described the result as 'potentially an expensive blow to HMRC'.
This is because many of the claimants in the FII GLO have lodged claims in the High Court for repayments of tax that run back until the beginning of the Advance Corporation Tax (ACT) regime in 1973. A series of judgments have already determined that the UK's previous tax treatment of dividends that were paid to UK parent companies by their overseas subsidiaries was contrary to EU law. Section 320 of the Finance Act 2004 was intended to curtail the risk of such costs to HMRC in respect of UK tax rules that are, many years after their introduction, found by the CJEU to be incompatible with EU law.
Morgan said: 'However the case does not represent a windfall for companies. ACT was always meant to be an advance payment of corporation tax to be set off against the main corporation tax liability. As the claimants in the FII GLO were not able to offset the ACT, it effectively became a long term loan to the Exchequer. Today's judgment confirms the loan must be repaid.'
The current CJEU ruling originates from the Supreme Court decision of 23 May 2012 which looked at two pieces of blocking legislation introduced as a result of taxpayer action seeking a repayment of tax under 'mistake of law' as part of the Finance Act in 2004 and 2007.
The Supreme Court decided unanimously that the FA 2007 legislation was contrary to EU law. However, it was divided on its view of the FA 2004 legislation and therefore referred the issue back to the CJEU.
In its latest ruling, the CJEU said that in a situation in which, under national law, taxpayers have a choice between two possible causes of action as regards the recovery of tax levied in breach of EU law, one of which benefits from a longer limitation period, the principles of effectiveness, legal certainty and the protection of legitimate expectations preclude national legislation curtailing that limitation period without notice and retroactively.
Secondly, the CJEU ruled it makes no difference if at the time when the taxpayer issued its claim, the availability of the cause of action affording the longer limitation period had been recognised only recently by a lower court and was not definitively confirmed by the highest judicial authority until later.
Richard Doran, EU tax litigation specialist, at KPMG in the UK said: 'However, this is not yet the end of the road for the claimants in the FII GLO. The case will return to the High Court in early 2014. This hearing should determine any outstanding issues between the parties, including how the claims should be valued.'
