High court grants summary judgment against HMRC in FII Group Litigation claims

In the recent case of Evonik Degussa UK Holdings Ltd & Ors v Revenue And Customs [2016] EWHC 86 (Ch), the High Court granted a number of claimants summary judgment in relation to part of their claims in the Franked Investment Income Group Litigation (FII Group Litigation).

The Court allowed the applications on the basis that: (1) the law in relation to the payment of advance corporation tax (ACT) on foreign income dividends (FIDs) had been settled in FII (High Court) II [2014] EWHC 4302 and HMRC had no real prospect of success of arguing against that decision; (2) the Civil Procedure Rules (CPR) allowed for part of the claimants' claims to be summarily determined; and (3) although the claimants' applications for summary judgment had been made prematurely, HMRC had not objected at the appropriate time and had therefore waived its right to object. 

Background

This judgment is the latest instalment in the long-running FII Group Litigation which began as long ago as 2003.

The claimant companies all belong to groups with UK resident parents with overseas subsidiaries resident elsewhere in the European (EU) and in third countries. Broadly, the FII Group Litigation concerns the lawfulness, under EU law, of UK rules which:

• imposed corporation tax on dividends received by UK parent companies from subsidiaries resident in other EU member states, and (in some contexts) from subsidiaries resident in third countries (Schedule D Case V);
• imposed ACT on dividends paid by a UK resident company which had received dividends from companies resident in other member states, but did not impose ACT on dividends paid by a UK resident company which had received dividends from UK resident companies; and
• introduced the FIDs regime obliging UK resident companies to pay (and subsequently reclaim), the ACT in respect of a FID.

The claimants claimed:

• restitution of the unlawfully levied Schedule D Case V tax;
• restitution of the unlawfully levied and unutilised ACT;
• interest on the unlawfully levied but utilised ACT (from the date of payment to utilisation); and
• interest on the above amounts from the date of payment (or utilisation) until repayment.

The European Court of Justice (ECJ) gave its first judgment in the FII Group Litigation on 12 December 2006, confirming the following:

• Schedule D Case V was only compatible with the EU treaty if the domestic tax rate charged on EU dividends was no higher than the rate applied to domestic dividends and a tax credit is granted that is at least equal to the tax paid in the distributing stage;
• the ACT regime was unlawful so far as it applied to EU dividends; and
• the FID regime was unlawful so far as it applied to both EU and third party dividends.

Since 2006, the progress of the FII Group Litigation has been long and winding, with the High Court giving a judgment in November 2008; the Court of Appeal in February 2010; the Supreme Court in May 2012 and the ECJ providing two further judgments in November 2012 and December 2013.

The litigation then returned to the High Court for rulings on issues of quantification. The High Court delivered its judgment in FII (High Court) II [2014] EWHC 4302, on 18 December 2014. 

Facts

In the instant case, seven groups of claimants who were enrolled in the FII Group Litigation issued applications for summary judgment against HMRC under CPR 24.2, or alternatively interim payments in respect of their claims for restitution of ACT paid in respect of the FIDs. Their claims related to the period from 1 July 1994, when the FID regime was introduced in the UK, to 5 April 1999, when ACT was abolished.

The claimants' applications were heard by Mr Justice Henderson. 

High Court decision

The judge considered the following three questions: 

1.         Has the unlawfulness under EU law of the ACT paid by the claimants on their FIDs been established so clearly that there is no real prospect of HMRC successfully defending their claims for restitution of that ACT and its time value?

This was the central question to be answered in determining the applications. HMRC submitted that the answer to the above question was in the negative on the basis that there was still a prospect that the Court of Appeal would grant it permission to appeal on the FID issues when its application for permission was renewed at a forthcoming appeal hearing, and that the Court of Appeal (or, on further appeal, the Supreme Court) would take a different view of the law from that taken by Henderson J in FII (High Court) II [2014] EWHC 4302. The judge asked himself whether the law in relation to the payment of ACT on FIDs had been settled. In his view, there was no reason to depart from the conclusions he had reached in FII (High Court) II [2014] EWHC 4302 in relation to the FID claims and he did not consider that HMRC's arguments to the contrary had any real prospect of success. 

2.         Is summary judgment available to the claimants even if they do not seek judgment on either the whole of their claim or on a particular issue, but rather on part of their overall claim for restitution?

This was the first of two 'technical' objections raised by HMRC as to why the claimants should not be granted summary judgment. This was based on the wording of CPR 24.1 and 24.2 which HMRC argued precluded such an application. The judge disagreed with HMRC stating that the position is "put beyond reasonable doubt" because Practice Direction 24 provides that the word "claim" includes a part of a claim. The judge said that he found HMRC's submission a "startling one" and that such a restriction would serve no conceivable purpose and would be "contrary to the overriding objective, and would be a trap for the unwary". 

3.         Were the claimants' applications made prematurely because the claimants did not apply for the stay imposed on their claims by the FII Group Litigation Order to be lifted either before or when they made their applications?

This was the second technical objection raised by HMRC. In the judge's view, HMRC must have been aware earlier of its right to object to the claimants' applications on this ground, but it had refrained from asserting this right either at a previous case management conference or when the applications were listed for trial. A waiver or acquiescence was therefore established and also arguably a promissory estoppel. The judge commented, at paragraph 80, that "if there was no reasonable prospect of a defence to the whole or part of the FID ACT claims, considerations of fairness and justice dictate that the claimants should be able to obtain an effective remedy at the earliest convenient opportunity, without being made to wait several more years until the FII Group Litigation has finally reached its conclusion".

The Court granted summary judgment to the claimants, except in relation to:

i.  claims for restitution in the form of compound interest, for the periods after utilisation or repayment of the relevant ACT because the Supreme Court had granted HMRC leave to appeal in relation to this issue; and

ii. part of one of the claimant's claims which was subject to proceedings before the First-tier Tribunal. 

Comment

Given that the value of the claims (including compound interest) totalled approximately £207 million, it is perhaps not surprising that HMRC strongly resisted the claimants' applications. It is interesting to note that the Court was informed that the reason the claimants did not formally apply for the stay to be lifted was due to their apprehension that, if given notice of their intention to apply for summary judgment, HMRC might take immediate steps to prevent them from obtaining the benefit of judgment in their favour, whether by procuring the enactment of fresh legalisation or otherwise. The judge commented that "experience has shown that such fears are by no means fanciful" (see paragraph 70 of the judgment).