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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...

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