Franked Investment Income ('FII') Group Litigation: ECJ strikes down UK's retroactive curtailment of limitation period for making mistake-based tax restitution claims

On 12 December 2013 the Court of Justice of the European ('ECJ') ruled, in line with the Advocate-General's opinion dated 5 September 2013, that section 320 Finance Act 2004 ('section 320') breached EU law.

Background

There are two common law restitutionary remedies applicable in relation to tax payments:

• Woolwich claims for restitution of tax unlawfully demanded or levied[1]. Section 5 Limitation Act 1980 provides that the time limit for making such a claim is 6 years from the date of the payment.

• Deutsche Morgan Grenfell ('DMG') claims for restitution of tax paid under mistake of law[2]. The House of Lords held in Kleinwort Benson[3] that claims could be made for restitution of payments made under mistake of law. It was not clear whether that decision applied in the tax context. The House of Lords subsequently confirmed in DMG that Kleinwort Benson claims could be made to recover tax paid under mistake of law and that the claimant could opt for either a Woolwich or DMG restitutionary remedy. The limitation period for claims to recover payments made under mistake of law is extended by section 32(1)(c) Limitation Act 1980 ('section 32(1)(c)') to a period of 6 years from the date the person making the payment discovered or could with reasonable diligence have discovered the mistake.

On 8 September 2003, the UK Government announced that it would be introducing legislation relating to actions to recover tax where payments were made under a mistake of law. This was achieved by section 320, which excluded the operation of section 32(1)(c) in relation to tax cases brought on or after 8 September 2003, and section 107 Finance Act 2007, which excluded the operation of section 32(1)(c) in relation to tax cases brought before 8 September 2003. Both sections 320 and 107 applied retroactively and contained no transitional provisions.

Following the DMG decision the UK Government applied to the ECJ to re-open the proceedings in the case which resulted in the judgment of 12 December 2006 (Case C‑446/04 Test Claimants in the FII Group Litigation [2006] ECR I‑11753) in order to limit the temporal effects of that judgment. The ECJ refused that application.

In the current proceedings the Supreme Court decided unanimously that section 107 FA 2007 was incompatible with EU law, but was divided as to whether section 320 was so incompatible. It therefore referred the latter issue to the ECJ. For the purposes of that reference the Supreme Court selected as test cases the claims made on 8 September 2003 for recovery of advance corporation tax ('ACT') mistakenly paid by members of the Aegis group of companies (‘Aegis’) over the period 1973 to 1999. Under section 32(1)(c), the relevant limitation period began to run from the date of discovery of the mistake of law giving rise to the payment of the tax – that is, 8 March 2001, the date of delivery of the judgment in Metallgesellschaft and Others (Cases C-397/98 and C-410/98).

The Supreme Court referred the following questions to the ECJ for a preliminary ruling:

1. Where under the law of a Member State a taxpayer can choose between two alternative causes of action in order to claim restitution of taxes levied contrary to Articles 49 and 63 TFEU and one of those causes of action benefits from a longer limitation period, is it compatible with the principles of effectiveness, legal certainty and legitimate expectations for that Member State to enact legislation curtailing that longer limitation period without notice and retrospectively to the date of the public announcement of the proposed new legislation?
2. Does it make any difference to the answer to Question 1 that, at the moment when the taxpayer issued its claim using the cause of action which benefited from the longer limitation period, the availability of the cause of action under national law had only been recognised (i) recently and (ii) by a lower court and was not definitively confirmed by the highest judicial authority until later?

Parties' contentions before the ECJ

Aegis argued in the Supreme Court that it followed from the judgment in Case C‑62/00 Marks & Spencer [2002] ECR I‑6325 that section 320 was contrary to the EU law principles of effectiveness, legal certainty and the protection of legitimate expectations. Aegis contended that the breach of those principles consisted in the fact that section 320, in excluding, without notice and retroactively, the limitation period for its claim, deprived it of the opportunity of making a claim which would otherwise have been made within the time-limits. This rendered excessively difficult or impossible the exercise of the rights it derived under EU law.

The UK contended that EU law required only that there be an effective remedy for enforcing rights under EU law. That requirement was satisfied by the Woolwich cause of action. Provided such a remedy remained available, it was immaterial that section 320 curtailed the extended limitation period applicable to an alternative domestic remedy so as to bring it in line with the limitation period for the Woolwich cause of action. The UK also contended that there was no certainty as to whether tax paid under a mistake of law could be recovered until the House of Lords gave its judgment of 25 October 2006, after Aegis had issued its proceedings. In such a situation reasonable persons could not have assumed that they would recover the overpaid tax, relying on the extended limitation period applicable to the Kleinwort Benson cause of action. There was therefore no breach of the principles of legal certainty or the protection of legitimate expectations.

ECJ's decision

Question 1

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.

As to the principle of effectiveness, whilst this does not preclude national legislation curtailing the period in which claims may be brought for recovery of sums paid but not due, and whilst a limitation period of six years which starts to run on the date of payment of the tax appears in itself to be reasonable, the new legislation must also provide for transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims which taxpayers were entitled to submit under the previous legislation. This requirement was not satisfied in this case.

The principle of legal certainty requires that rules involving negative consequences for individuals should be clear and precise and their application should be predictable for those subject to them. Limitation periods must be fixed in advance if they are to serve their purpose of ensuring legal certainty.

The principle of the protection of legitimate expectations precludes a national legislative amendment which retroactively deprives a taxpayer of the right enjoyed prior to that amendment to obtain repayment of taxes collected in breach of EU law.

Question 2

It makes no difference to the answer to the first question that, when the taxpayer issued its claim, the availability of the cause of action with 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. What matters is that at the material time a taxpayer had under national law a right to bring proceedings for recovery of sums paid but not due on the basis of that cause of action.

Comment

This decision represents a particularly expensive blow to the UK Exchequer as it enables members of the FII Group to make claims for periods dating back to 1973. The decision also applies more generally to other cases such as the SDRT/Stamp Duty Group litigation. It is likely that HMRC will seek to limit the damage caused to this decision by putting taxpayers to strict proof in relation to any claim that is made. This means claimants may be required to prove there was a mistake of law and that this mistake caused the payment in question to be made. Claimants may also be required to provide cogent evidence showing when they became aware of their mistake and/or the date on which the mistake could have been discovered by the exercise of due diligence.

[1] See Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70.

[2] See Deutsche Morgan Grenfell Group plc v IRC [2007] AC 558.

[3] Kleinwort Benson Limited v Lincoln City Council [1999] 2 AC 349