All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

European Court of Justice says UK method of limiting reclaims in FII group litigation is unlawful


British legislation withdrawing a method of recovering tax charged in breach of EU law, “without notice and retroactively”, is against EU law, the European Court of Justice decided today in its verdict in the Franked Investment Income Group Litigation case.

The Court ruled that the withdrawal of the Kleinwort Benson cause of action – allowing the recovery of tax paid under a mistake of law – should have included transitional arrangements, adding that the UK legislation also infringes the principles of legal certainty and the protection of legitimate expectations.

In his opinion in the case in September, Advocate General Wathelet, a former president of the ECJ, had sided with the taxpayer – UK-based media multinational Aegis – in a case that the UK Supreme Court had referred to the European Court after a split decision in May 2012.

“HMRC is studying the CJEU opinion carefully, but we must now wait for the Supreme Court’s ruling,“ said a HMRC spokesperson.

“This result is 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,” said Chris Morgan, head of tax policy and head of the EU law group at KPMG in the UK.

"This is not unexpected,” said Peter Cussons, head of PwC’s EU tax group. “It would have been a bit surprising if the Court had gone against its former president’s opinion.”

Advance corporation tax

Advance corporation tax, in force in the UK from 1973 to 1999, was a tax on company profits payable in advance by a company as soon as it paid a dividend.

Where a company paying the dividend had a UK parent and they opted for group taxation, they were treated for ACT purposes as a single company and the ACT was no longer payable by the subsidiary but by the parent company, as soon as that company in turn distributed dividends. However, the exception was available only to companies whose parent company was resident in the UK.

The FII GLO arose after the UK enacted law on June 24 2004 that said that, from September 8 2003, the Kleinwort Benson cause of action would not apply in relation to a mistake of law concerning UK tax. September 8 2003 was the date on which Aegis, the multinational communications group, introduced a claim on the basis of the Kleinwort Benson cause of action, seeking to recover ACT paid between 1973 and 1999.


The law, which introduced section 320 into Finance Act 2004, limiting the UK’s obligation to refund the advance corporation tax paid but not due, came three years after the ECJ decided in its judgment in Metallgesellschaft and Others in March 2001 that the ACT system was incompatible with EU freedom of establishment and free movement of capital principles and a year after a July 2003 UK High Court ruling in Deutsche Morgan Grenfell that said the Kleinwort Benson cause of action could be used to obtain restitution of tax paid under a mistake of law.

“This is the third ECJ verdict in the FII GLO and could have general application across all GLOs, for example, those on stamp taxes and cross-border loss relief“ said Cussons. “Now the case goes back to the domestic courts and I would be gobsmacked if there weren’t appeals and cross-appeals to the Court of Appeal and the Supreme Court, so we could be looking at 2016 for finality.”

The case has been listed for four weeks in May 2014 in the High Court, when all outstanding issues, including how to quantify claims, are due to be litigated.

Joseph Hage Aaronson are the solicitors representing the claimants in this case.


More to follow...

More from across our site

The Indian Union Budget made some significant changes that will affect taxpayers, as Ranjeet Mahtani, Saurabh Shah, and Meetika Baghel of Dhruva Advisors explain.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
This week the Biden administration has run into opposition over a proposal for a federal gas tax holiday, while the European Parliament has approved a plan for an EU carbon border mechanism.
12th annual awards announce winners
Businesses need to improve on data management to ensure tax departments become much more integrated, according to Microsoft’s chief digital officer at a KPMG event.
Businesses must ensure any alternative benchmark rate is included in their TP studies and approved by tax authorities, as Libor for the US ends in exactly a year.
Tax directors warn that a lack of adequate planning for VAT rule changes could leave businesses exposed to regulatory errors and costly fines.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree