Royal Courts of Justice
Fetter Lane, London, EC4A 1NL
B e f o r e :
| (1) THE PRUDENTIAL ASSURANCE COMPANY LIMITED
(2) PRUDENTIAL HOLBORN LIFE LIMITED
|- and -
|THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS
Mr David Ewart QC, Mr Rupert Baldry QC, Professor Andrew Burrows QC (Hon) and Ms Barbara Belgrano (instructed by the General Counsel and Solicitor to HMRC) for the Defendants
Hearing dates: 15, 16, 17, 18 and 19 July 2013
Crown Copyright ©
Mr Justice Henderson:
|II. The taxation of life assurance and pension business: an overview||13-28|
|III. The history of the FII litigation||29-37|
|IV. The decisions of the ECJ In Haribo and Accor||38-64|
|V. The decision of the ECJ in FII (ECJ) II||65-79|
|VI. Issues concerning the corporation tax charge on portfolio dividends||80-123|
|VII. Issues concerning the ACT charge on the onward payment of portfolio dividends||124-130|
|VIII. The technical life assurance issues||131-151|
|(1) Attribution of profits under section 89 of the Finance Act 1989||131-135|
|(2) The increased claim for payment of tax credits under section 242 of ICTA 1988||136-143|
|(3) Issues concerning the absence of a section 438(6) election||144-151|
|IX. Third country portfolio dividends||152-161|
|(2) Change of position||167-193|
|(3) On what basis is interest payable?||194-247|
|XI. Limitation issues||248-259|
|XII. Claims under the Tax Acts and the Autologic principle||260-263|
(1) How should the admitted invalidity under EU law of the Case V charge to corporation tax on portfolio dividends be remedied, whether by a conforming construction or disapplication of the offending domestic legislation?
(2) Did the ACT charge on the onward distribution in the UK of portfolio dividends received from abroad infringe Article 63 TFEU (free movement of capital), and (if so) how should the invalidity be remedied?
(3) Technical issues relating to the special taxation regime applicable to insurance companies, in the light of the answers to issues in categories (1) and (2) above.
(4) Issues relating to third country portfolio dividends, and the extent to which the test claimants can rely on Article 63 in relation to them.
(5) Remedies: in relation to each of the above categories, is there a valid Woolwich and/or mistake-based restitutionary claim, and if so in what amount? Are any restitutionary defences available to the Revenue, including in particular change of position, and (if so) are the requirements of any such defence satisfied, and to what extent?
(6) Interest: on what basis is interest payable on any sums the claimants are entitled to recover?
(7) Limitation: to what extent are the claims barred by a six year limitation period, and to what extend is the claim for recovery under a mistake of law barred by section 320 of the Finance Act 2004?
(8) Should any of the claims be stayed on Autologic principles, for example because they relate to open years, or years in which a claim for unilateral double taxation relief under section 790 of the Income and Corporation Taxes Act 1988 ("ICTA 1988") could have been made on the date when the pleadings were begun?
II The taxation of life assurance and pension business: an overview
"Except as otherwise provided by the Corporation Tax Acts, corporation tax shall not be chargeable on dividends and other distributions of a company resident in the United Kingdom, nor shall any such dividends or distributions be taken into account in computing income for corporation tax."
"Exemption from corporation tax shall be allowed in respect of income from, and chargeable gains in respect of, investments and deposits of so much of an insurance company's long term business fund, as is referable to pension business."
By virtue of section 438(2), however, this exemption did not "exclude any sums from being taken into account as receipts in computing profits or losses for any purpose of the Corporation Tax Acts". The profit earned for the company by carrying on the pension business was taxed under Case VI of Schedule D, but applying Case I principles, as profit from underwriting: see section 436(1). In this way the insurance company was taxed on its share of the pension income and gains, at the full rate of corporation tax, while the policy holders' share was exempt. The exemption for the policy holders' share reflected the fact that pension policy holders were taxed on receipt of their pensions, and unlike the holders of life assurance policies they did not receive the proceeds already taxed at the basic or lower rates.
"(3) Subject to subsection (6) below, the exclusion by section 208 from the charge to corporation tax of franked investment income shall not prevent such income being taken into account as part of the profits in computing under section 436 income from pension business.
(6) If for any accounting period there is, apart from this subsection, a profit arising to an insurance company from pension business and computed under section 436, and the company so elects as respects all or any part of its relevant franked investment income arising in that period, subsections (3) to (5) above shall not apply to the franked investment income to which the election relates."
For the purposes of subsection (6), "relevant" FII meant the shareholders' share of FII referable to pension business, "shareholders' share" having the same meaning as for the purposes of section 89 of the Finance Act 1989.
III The history of the FII litigation
"46. It is thus clear from case-law that, whatever the mechanism adopted for preventing or mitigating the imposition of a series of charges to tax or economic double taxation, the freedoms of movement guaranteed by the Treaty preclude a Member State from treating foreign-sourced dividends less favourably than nationally-sourced dividends, unless such a difference in treatment concerns situations which are not objectively comparable or is justified by overriding reasons in the general interest (see, to that effect, Case C-315/02 Lenz  ECR I-7063, paragraphs 20 to 49, and Case C-319/02 Manninen  ECR I-7477, paragraphs 20 to 55)
47. As regards the question whether a Member State may operate an exemption system for nationally-sourced dividends when it applies an imputation system to foreign-sourced dividends, it must be stated that it is for each Member State to organise, in compliance with Community law, its system for taxing distributed profits and, in particular, to define the tax base and the tax rate which apply to the company making the distribution and/or the shareholder receiving them, in so far as they are liable to tax in that Member State.
48. Thus, Community law does not, in principle, prohibit a Member State from avoiding the imposition of a series of charges to tax on dividends received by a resident company by applying rules which exempt those dividends from tax when they are paid by a resident company, while preventing, through an imputation system, those dividends from being liable to a series of charges to tax when they are paid by a non-resident company.
49. In order for the application of an imputation system to be compatible with Community law in such a situation, it is necessary, first of all, that the foreign-sourced dividends are not subject in that Member State to a higher rate of tax than the rate which applies to nationally-sourced dividends.
50. Next, that Member State must prevent foreign-sourced dividends from being liable to a series of charges to tax, by offsetting the amount of tax paid by the non-resident company making the distribution against the amount of tax for which the recipient company is liable, up to the limit of the latter amount.
51. Thus, when the profits underlying foreign-sourced dividends are subject in the Member State of the company making the distribution to a lower level of tax than the tax levied in the Member State of the recipient company, the latter Member State must grant an overall tax credit corresponding to the tax paid by the company making the distribution in the Member State in which it is resident.
52. Where, conversely, those profits are subject in the Member State of the company making the distribution to a higher level of tax than the tax levied by the Member State of the company receiving them, the latter Member State is obliged to grant a tax credit only up to the limit of the amount of corporation tax for which the company receiving the dividends is liable. It is not required to repay the difference, that is to say, the amount paid in the Member State of the company making the distribution which is greater than the amount of tax payable in the Member State of the company receiving it.
53. Against that background, the mere fact that, compared with an exemption system, an imputation system imposes additional administrative burdens on taxpayers, with evidence being required as to the amount of tax actually paid in the State in which the company making the distribution is resident, cannot be regarded as a difference in treatment which is contrary to freedom of establishment, since particular administrative burdens imposed on resident companies receiving foreign-sourced dividends are an intrinsic part of the operation of a tax credit system."
(a) the Member State does not impose a higher rate of tax on foreign dividends than it does on national dividends; and
(b) it gives a credit for the amount of tax paid by the foreign company, up to (but not in excess of) the amount of tax paid by the national company on the dividends.
IV The decisions of the ECJ in Haribo and Accor
"1. The present cases once again concern the taxation of foreign dividends. Austrian law on corporation tax contains rules which are intended to prevent the double imposition of corporation tax on corporate profits distributed in the form of dividends, once at the level of the company making the distribution and a second time at the level of the recipient company. In the case of national dividends such economic double taxation is prevented by the dividends being exempt from corporation tax at the level of the recipient company. In the case of foreign dividends, however, the question whether an exemption is granted, a credit is merely given for the foreign corporation tax, or neither, depends on the size of the holding, the previously paid tax and the origin.
2. In the case of portfolio dividends from other European Union ("EU") States, that is to say dividends from shareholdings of less than 10%, exemption and crediting appear to be frustrated, as a rule, because the recipient is not able to provide the necessary information on previously paid foreign corporation tax. In such cases, economic double taxation therefore occurs "
(a) unconditional exemption for domestic dividends (broadly equivalent to the exemption in section 208 of ICTA 1988);
(b) exemption subject to fulfilment of various conditions for foreign portfolio dividends;
(c) unconditional exemption for foreign non-portfolio dividends (i.e. from holdings of more than 10%; before 2009 the threshold was 25%); and
(d) where exemption was not available under (b) or (c), a tax credit for foreign tax corresponding to Austrian corporation tax.
"(a) the exact name of the company making the distribution in which the taxpayer has the holding;
(b) a precise indication of the size of the holding;
(c) a precise indication of the rate of corporation tax to which the company making the distribution is subject in the State in which it is established. If it is not subject to the normal tax regime of the State in which it is established (in that, for example, it has the benefit of a more favourable rate of tax, a personal tax exemption or significant tax exemptions or reductions), the rate of tax actually applicable must be given;
(d) an indication of the amount of corporation tax charged on the taxpayer's holding in the light of the above parameters;
(e) a precise indication of the rate of the withholding tax actually levied, restricted to the rate of withholding tax under the relevant double taxation convention;
(f) a calculation of the tax creditable."
"99. Furthermore, as the Austrian Government observes, the notice of 13 June 2008 has simplified the evidence necessary in order to receive a credit for the foreign tax in that, when calculating the tax paid abroad, account is taken of the following formula. The profit of the company distributing dividends must be multiplied by the nominal rate of corporation tax applicable in the State where that company is established and by the holding of the recipient company in the capital of the company distributing dividends. Such a calculation requires only limited co-operation on the part of the company distributing dividends or of the investment fund when the holding concerned is possessed through such a fund."
"Is [European Union] law infringed if for foreign portfolio dividends from [States of the European Union or States party to the EEA Agreement] the imputation method is to be applied in so far as the requirements for the exemption method are not met, although both the proof of the requirements for the exemption method (comparable taxation, amount of the foreign tax rate, absence of personal or subject-based exemptions of the foreign corporation) and the data necessary for the crediting of foreign corporation tax cannot be provided by the shareholder, or can be provided only with great difficulty?"
Question 3 then asked whether EU law was infringed in the case of third country portfolio dividends, in circumstances where the legislation granted neither an exemption nor a tax credit. If Question 3 was answered in the affirmative, Question 4(a) asked whether EU law would still be infringed if, in order to remove discrimination against third country holdings, the imputation method were adopted, but proof of the foreign tax already paid could not be proved, or could be proved only with disproportionate effort.
"89. In those circumstances the imputation method enables dividends from non-resident companies to be accorded treatment equivalent to that accorded, by the exemption method, to dividends paid by resident companies. Application of the imputation method to dividends from non-resident companies makes it possible to ensure that foreign-sourced and nationally-sourced portfolio dividends bear the same tax burden, in particular where the State from which the dividends come applies, in the context of corporation tax, a lower tax rate than that applicable in the Member State where the company receiving the dividends is established. In such a case, exempting dividends from non-resident companies would give taxpayers that have invested in foreign holdings an advantage compared with those having invested in domestic holdings.
90. In light of the equivalence between the exemption and imputation methods, the difficulties that the taxpayer might encounter in order to prove that the conditions for the tax exemption of dividends received from non-resident companies are met are, in principle, irrelevant when determining whether Article 63 TFEU precludes legislation such as that at issue in the main proceedings. The only consequence that those difficulties, or even impossibility for the taxpayer to furnish the proof sought, will have is that the imputation method, which is equivalent to the exemption method, will be applied to the dividends which the taxpayer receives from non-resident companies.
91. As to the administrative burden imposed on the taxpayer in order to qualify for the imputation method, it has already been held that the mere fact that, compared with an exemption system, an imputation system imposes additional administrative burdens on taxpayers cannot be regarded as a difference in treatment which is contrary to the free movement of capital (see, to this effect, Test Claimants in the FII Group Litigation, paragraph 53).
92. According to the referring tribunal, the administrative burden thereby imposed on a company receiving portfolio dividends by the national legislation at issue in the main proceedings could, however, prove excessive.
93. Haribo explains in this regard that, unlike portfolio dividends paid by resident companies, which are exempt, portfolio dividends paid in Austria by companies established in another Member State or in a non-Member State party to the EEA Agreement and received through an investment fund are normally subject, in Austria, to corporation tax of 25% because of the excessive administrative burden imposed on the taxpayer. According to Haribo, the exemption and imputation methods are equivalent only in cases where proof of the corporation tax paid abroad can in fact be adduced or can be without disproportionate effort.
94. On the other hand, the Austrian, German, Italian, Netherlands and United Kingdom Governments and the Commission contend that the administrative burden imposed on the company receiving portfolio dividends is not excessive. The Austrian Government stresses in this regard that the Notice of 13 June 2008 simplified significantly the evidence necessary in order to receive a credit for the foreign tax.
95. It must be born in mind that the tax authorities of a Member State are entitled to require the taxpayer to provide such proof as they may consider necessary in order to determine whether the conditions for a tax advantage provided for in the legislation at issue have been met and, consequently, whether to grant that advantage (see, to this effect, Case C-136/00 Danner  ECR I-8147, paragraph 50; Case C-422/01 Skandia and Ramstedt  ECR I-6817, paragraph 43; and Case C-318/07 Persche  ECR I-359, paragraph 54).
96. Admittedly, if it were to prove that, because of an excessive administrative burden, it is in fact impossible for companies receiving portfolio dividends from companies established in Member States other than the Republic of Austria and in non-Member States party to the EEA Agreement to benefit from the imputation method, the legislation would not enable the economic double taxation of such dividends to be prevented, or even to be mitigated. In circumstances of that kind, the imputation method and the exemption method, which does enable the imposition of a series of charges to tax on the dividends distributed to be avoided, cannot be considered to lead to equivalent results.
97. However, inasmuch as a Member State is, in principle, free, to avoid the imposition of a series of charges to tax on portfolio dividends received by a resident company by opting for the exemption method when the dividends are paid by a resident company and for the imputation method when they are paid by a non-resident company , additional administrative burdens which are imposed on the resident company, in particular the fact that the national tax authority demands information relating to the tax that has actually been charged on the profits of the company distributing dividends in the State in which the latter is resident, are an intrinsic part of the very operation of the imputation method and cannot be regarded as excessive (see, to this effect, Test Claimants in the FII Group Litigation, paragraphs 48 and 53). In the absence of such information, the tax authorities of the Member State where the company receiving foreign-sourced dividends is established are not, in principle, in a position to determine the amount of corporation tax paid in the State of the company making the distribution that must be credited against the amount of tax payable by the recipient company.
98. Whilst the company receiving dividends does not itself have all the information relating to the corporation tax that has been charged on the dividends distributed by a company established in another Member State or in a non-Member State party to the EEA Agreement, such information is known, in any event, to the latter company. Accordingly, any difficulty that the recipient company may have in providing the information required relating to the tax paid by the company distributing dividends is connected not to the inherent complexity of the information but to a possible lack of co-operation on the part of the company that has the information. As the Advocate General states in point 58 of her Opinion, the inadequate flow of information to the investor is not a problem for which the Member State concerned should have to answer."
"55. In the present cases, the problem actually resides purely in the realm of fact. Thus, Haribo claims that in the case of a portfolio holding in a foreign corporation through a domestic investment fund it is not even possible to ascertain the corporation from which the dividends originate.
56. In my opinion, these problems of proof cannot in themselves make it disproportionate to apply an only conditional exemption method with a possible switchover to the imputation method, as provided for in Austrian law for portfolio dividends from other EU/EEA States.
57. Such a provision does not require anything that is actually impossible. The necessary information is in fact available somewhere, namely from the respective companies which distributed the dividends and possibly also from the domestic investment funds through which the company shares eligible for dividends are held. If obtaining that information entails considerable, cost-intensive effort, the investor must consider which is more favourable for him: proving the previous foreign charge to tax or relinquishing the exemption or credit.
58. Even if such proof should ultimately not be possible because the shareholder is not in a position, de facto or de jure, to obtain that information, this must nevertheless be attributed to the shareholder's sphere. It is in the interest of both the foreign companies and the domestic investment fund to organise the portfolio investment as attractively as possible. This includes providing the shareholder with the necessary information so that he can benefit from the possibility of preventing or mitigating economic double taxation in his state of residence. The inadequate flow of information to the investor is not a problem for which the Member State should have to answer."
"104. In light of the foregoing, the answer to the second question referred therefore is that Article 63 TFEU must be interpreted as not precluding legislation of a Member State under which portfolio dividends which a resident company receives from another resident company are exempt from corporation tax whilst portfolio dividends which a resident company receives from a company established in another Member State or in a non-Member State party to the EEA Agreement are subject to that tax, provided, however, that the tax paid in the State in which the last-mentioned company is resident is credited against the tax payable in the Member State of the recipient company and the administrative burden imposed on the recipient company in order to qualify for such a credit are not excessive. Information demanded by the national tax authority from the company receiving dividends that relates to the tax that has actually been charged on the profits of the company distributing dividends in the State in which the latter is resident is an intrinsic part of the very operation of the imputation method and cannot be regarded as an excessive administrative burden."
"171. Accordingly, Article 63 cannot be interpreted as obliging a Member State to provide, in its tax legislation, that a credit is to be granted for the withholding tax levied on dividends in another Member State in order to prevent the juridical double taxation resulting from the parallel exercise by the Member States concerned of their respective powers of taxation of the dividends received by a company established in the first Member State (see, to this effect, Case C-513/04 Kerckhaert and Morres  ECR I-10967, paragraphs 22 to 24).
172. The same finding is called for a fortiori where the juridical double taxation results from the parallel exercise by a Member State and a non-Member State of their respective powers of taxation, as follows from paragraphs 119 and 120 of the present judgment."
"that the person liable for the tax furnishes evidence which is in its sole possession and relating with respect to each dividend concerned, in particular to the rate of taxation actually applied and the amount of tax actually paid on profits made by its subsidiaries established in the Member States other than France, whereas, with respect to subsidiaries established in France that evidence, known to the administration, is not required?"
" preclude legislation of a Member State intended to eliminate economic double taxation of dividends, such as that at issue in the main proceedings, which allows a parent company to set off against the advance payment, for which it is liable when it redistributes to its shareholders dividends paid by its subsidiaries, the tax credit applied to the distribution of those dividends if they originate from a subsidiary established in that Member State, but does not offer that option if those dividends originate from a subsidiary established in another Member State, since, in that case, that legislation does not give entitlement to a tax credit applied to the distribution of those dividends by that subsidiary."
"92. a Member State must be in a position to determine the amount of the corporation tax paid in the State in which the distributing company is established that must be the subject of the tax credit granted to the recipient parent company. Therefore, contrary to what Accor maintains, it is not sufficient to provide evidence that the distributing company has been taxed, in the Member State in which it is established, on the profits underlying the dividends distributed, without providing information relating to the nature and rate of the tax actually charged on those profits."
"99. As regards compliance with the principle of effectiveness, it should be noted, first, that the evidence required should enable the tax authorities of the Member State of taxation to ascertain, clearly and precisely, whether the conditions for obtaining a tax advantage are met, but it does not need to take any particular form and the assessment must not be conducted too formalistically (see, to that effect, Meilicke and Others, paragraph 46).
100. Secondly, it is for the national court to determine whether the evidence concerning the rate of taxation actually applied and the amount of tax actually paid on the profits underlying the distribution of the dividends will not prove virtually impossible or excessively difficult to obtain, in particular in the light of the legislation of the Member State in which the distributing company is established concerning the avoidance of double taxation, the registration of corporation tax to be paid, and the retention of administrative documents or accounts.
101. The request for production of that information should moreover be made within the statutory period for retention of administrative documents or accounts, as laid down by the law of the Member State in which the subsidiary is established. As Accor observes, in order for it to receive the tax credit it should not be required to provide documents covering a period significantly longer than the statutory period for retention of administrative documents and accounts."
"102. In the light of the foregoing, the answer to the third question is that the principles of equivalence and effectiveness do not preclude the reimbursement to a parent company of [sums which ensure equality of treatment], being subject to the condition that the person liable for the tax furnish evidence which is in its sole possession and relating, with respect to each dividend concerned, in particular to the rate of taxation actually applied and the amount of tax actually paid on profits made by subsidiaries established in other Member States, whereas, with respect to subsidiaries established in France, that evidence, known to the administration, is not required. Production of that evidence may however be required only if it does not prove virtually impossible or excessively difficult to furnish proof of payment of the tax by the subsidiaries established in the other Member States, in the light in particular of the provisions of the legislation of those Member States concerning the avoidance of double taxation, the recording of the corporation tax which must be paid and the retention of administrative documents. It is for the national court to determine whether those conditions are met in the case before the national court."
V The decision of the ECJ in FII (ECJ) II
"An obligation on the Member State where the company receiving dividends resides to exempt foreign-sourced dividends from corporation tax would affect the competence of the Member State concerned to tax, in compliance with the principle of non-discrimination, the profits thereby distributed at the rate prescribed by its own legislation."
"43. It must in fact be held that the tax rate applied to foreign-sourced dividends will be higher than the rate applied to nationally-sourced dividends within the meaning of the case-law cited in paragraph 39 of the present judgment, and therefore that the equivalence of the exemption and imputation methods will be compromised, in the following circumstances.
44. First, if the resident company which pays dividends is subject to a nominal rate of tax below the nominal rate of tax to which the resident company that receives the dividends is subject, the exemption of the nationally-sourced dividends from tax in the hands of the latter company will give rise to lower taxation of the distributed profits than that which results from application of the imputation method to foreign-sourced dividends received by the same resident company, but this time from a non-resident company also subject to low taxation of its profits, inter alia because of a lower nominal rate of tax.
45. Application of the exemption method will give rise to taxation of the distributed nationally-sourced profits at the lower nominal rate of tax applicable to the company paying dividends, whilst application of the imputation method to foreign-sourced dividends will give rise to taxation of the distributed profits at the higher nominal rate of tax applicable to the company receiving dividends.
46. Second, exemption from tax of dividends paid by a resident company and application to dividends paid by a non-resident company of an imputation method which, like that laid down in the rules at issue in the main proceedings, takes account of the effective level of taxation of the profits in the State of origin also cease to be equivalent if the profits of the resident company which pays dividends are subject in the Member State of residence to an effective level of taxation lower than the nominal rate of tax which is applicable there.
47. The exemption of the nationally-sourced dividends from tax gives rise to no tax liability for the resident company which receives those dividends irrespective of the effective level of taxation to which the profits out of which the dividends have been paid were subject. By contrast, application of the imputation method to foreign-sourced dividends will lead to an additional tax liability so far as concerns the resident company receiving them if the effective level of taxation to which the profits of the company paying the dividends were subject falls short of the nominal rate of tax to which the profits of the resident company receiving the dividends are subject.
48. Unlike the exemption method, the imputation method therefore does not enable the benefit of the corporation tax reductions granted at an earlier stage to the company paying dividends to be passed on to the corporate shareholder.
49. Accordingly, the determination which the referring court was called upon to make by the Court, in paragraph 56 of its judgment in Test Claimants in the FII Group Litigation, relates both to the applicable nominal rates of tax and to the effective levels of taxation. The "tax rates" to which paragraph 56 refers relate to the nominal rate of tax and the "different levels of taxation by reason of a change to the tax base" relate to the effective levels of taxation. The effective level of taxation may be lower than the nominal rate of tax by reason, in particular, of reliefs reducing the tax base."
"60. As to the proportionality of the restriction, whilst application of the imputation method to foreign-sourced dividends and of the exemption method to nationally-sourced dividends may be justified in order to avoid economic double taxation of distributed profits, it is not, however, necessary, in order to maintain the cohesion of the tax system in question, that account be taken, on the one hand, of the effective level of taxation to which the distributed profits have been subject to calculate the tax advantage when applying the imputation method and, on the other, of only the nominal rate of tax chargeable on the distributed profits when applying the exemption method.
61. The tax exemption to which a resident company receiving nationally-sourced dividends is entitled is granted irrespective of the effective level of taxation to which the profits out of which the dividends have been paid were subject. That exemption, in so far as it is intended to avoid economic double taxation of distributed profits, is thus based on the assumption that those profits were taxed at the nominal rate of tax in the hands of the company paying dividends. It thus resembles a grant of a tax credit calculated by reference to that nominal rate of tax.
62. For the purpose of ensuring the cohesion of the tax system in question, national rules which took account in particular, also under the imputation method, of the nominal rate of tax to which the profits underlying the dividends paid have been subject would be appropriate for preventing the economic double taxation of the distributed profits and for ensuring the internal cohesion of the tax system while being less prejudicial to freedom of establishment and the free movement of capital.
63. It is to be observed in this connection that in Haribo , paragraph 99, the Court, after pointing out that the Member States are, in principle, allowed to prevent the imposition of a series of charges to tax on dividends received by a resident company by applying the exemption method to nationally-sourced dividends and the imputation method to foreign-sourced dividends, noted that the national rules in question took account, for the purpose of calculating the amount of the tax credit under the imputation method, of the nominal rate of tax applicable in the State where the company paying dividends was established.
64. It is true that calculation, when applying the imputation method, of a tax credit on the basis of the nominal rate of tax to which the profits underlying the dividends paid have been subject may still lead to a less favourable tax treatment of foreign-sourced dividends, as a result in particular of the existence in the Member States of different rules relating to determination of the basis of assessment for corporation tax. However, it must be held that, when unfavourable treatment of that kind arises, it results from the exercise in parallel by different Member States of their fiscal sovereignty, which is compatible with the Treaty (see, to this effect, Kerckhaert and Morres, paragraph 20, and Case C-96/08 CIBA  ECR I-2911, paragraph 25).
65. In light of the foregoing, the answer to the first question is that Articles 49 TFEU and 63 TFEU must be interpreted as precluding legislation of a member state which applies the exemption method to nationally-sourced dividends and the imputation method to foreign-sourced dividends if it is established, first, that the tax credit to which the company receiving the dividends is entitled under the imputation method is equivalent to the amount of tax actually paid on the profits underlying the distributed dividends and, second, that the effective level of taxation of company profits in the Member State concerned is generally lower than the prescribed nominal rate of tax."
"71. It should be recalled for this purpose that a resident company receiving foreign-sourced dividends is, in relation to the objective of preventing economic double taxation pursued by the rules at issue in the main proceedings, in a situation comparable to that of a resident company receiving nationally-sourced dividends. In the light of that objective, it is apparent from the answers given to the second and fourth questions in the judgment in Test Claimants in the FII Group Litigation that Articles 49 TFEU and 63 TFEU preclude legislation of a Member State which, as regards foreign-sourced dividends alone, does not take account of corporation tax already paid on the distributed profits.
72. As is clear from paragraph 62 of the present judgment, the obligation imposed on a resident company by national rules, such as those at issue in the main proceedings, to pay ACT when profits from foreign-sourced dividends are distributed is, in fact, justified only in so far as that advance tax corresponds to the amount designed to make up for the lower nominal rate of tax to which the profits underlying the foreign-sourced dividends have been subject compared with the nominal rate of tax applicable to the profits of the resident company.
73. In this connection, it is of little account whether the non-resident company which pays dividends to its resident parent company is itself liable for corporation tax, provided, however, that the distributed profits have been subject to corporation tax."
VI Issues concerning the corporation tax charge on portfolio dividends
"1. In light of [the reasoned order and the decisions in FII (ECJ) I and FII (ECJ) II] is it possible to give the domestic legislation a conforming construction? Specifically, should the legislation be interpreted so as to entitle the Claimant to a tax credit to set against D V tax charged on Portfolio Dividends and, if so, what is the appropriate amount of the tax credit?
2. Alternatively, should the domestic legislation be disapplied and, if so, how should that disapplication be given effect? "
"790 Unilateral relief
(1) To the extent appearing from the following provisions of this section, relief from income tax and corporation tax in respect of income and chargeable gains shall be given in respect of tax payable under the law of any territory outside the United Kingdom by allowing that tax as a credit against income tax or corporation tax, notwithstanding that there are not for the time being in force any arrangements under section 788 providing for such relief.
(2) Relief under subsection (1) above is referred to in this Part as "unilateral relief".
(4) Credit for tax paid under the law of the territory outside the United Kingdom and computed by reference to income arising or any chargeable gain accruing in that territory shall be allowed against any United Kingdom income tax or corporation tax computed by reference to that income or gain
(5) Subsection (4) above shall have effect subject to the following modifications, that is to say
(c) credit shall not be allowed by virtue of subsection (4) above for overseas tax on a dividend paid by a company resident in the territory unless
(i) the overseas tax is directly charged on the dividend, whether by charge to tax, deduction of tax at source or otherwise, and the whole of it represents tax which neither the company nor the recipient would have borne if the dividend had not been paid; or
(ii) the dividend is paid to a company within subsection (6) below;
(6) Where a dividend paid by a company resident in the territory is paid to a company falling within subsection (6A) below which either directly or indirectly controls, or is a subsidiary of a company which directly or indirectly controls
(a) not less than 10% of the voting power in the company paying the dividend;
and the company receiving the dividend shows that the conditions specified in subsection (7) below are satisfied;
any tax in respect of its profits paid under the law of the territory by the company paying the dividends shall be taken into account in considering whether any, and if so what, credit is to be allowed in respect of the dividend.
(6A) A company falls within this subsection if
(a) it is resident in the United Kingdom; or
(b) it is resident outside the United Kingdom but the dividend mentioned in subsection (6) above forms part of the profits of a permanent establishment of the company's in the United Kingdom."
In the case of portfolio dividends, the credit for withholding tax (where it is not provided under double tax arrangements) is provided by sections 790(4) and (5)(c)(i), but a credit for underlying tax, although falling within the general wording of subsection (4), is excluded by subsections (5)(c)(ii), (6) and (6A).
"While the tax legislation in question in the main proceedings rests on the basis of a link between the tax advantage and the corresponding levy by providing for a tax credit for dividends received from a non-resident company in which the resident parent company holds not less than 10% of the voting power, the need for such a direct link must in fact lead to the same tax advantage being granted to companies receiving dividends from non-resident companies, in which the resident parent company holds less than 10% of the voting power, since those companies are also obliged to pay corporation tax on distributed profits in the State in which they are resident (see, to that effect, Test Claimants in the FII Group Litigation, paragraph 93)."
It seems to me that in this passage the Court may well be saying that the necessary direct link did indeed exist, but the UK was nevertheless unable to rely on the defence because the failure to grant a credit for underlying tax to portfolio dividends was disproportionate. If that is right, the fuller discussion in FII (ECJ) II was making essentially the same point, but with greater analytical clarity and a focus on nominal as well as effective rates of tax.
"the obligation on the English courts to construe domestic legislation consistently with Community law obligations is both broad and far-reaching. In particular [the obligation]:  is not [to be] constrained by conventional rules of construction (per Lord Oliver of Aylmerton in Pickstone v Freemans Plc  AC 66, 126B);  does not require ambiguity in the legislative language (per Lord Oliver in the Pickstone case, at p126B and per Lord Nicholls of Birkenhead in Ghaidan v Godin-Mendoza  2 AC 557, para 32);  is not an exercise in semantics or linguistics (per Lord Nicholls in Ghaidan's case, at paras 31 and 35; per Lord Steyn, at paras 48-49; per Lord Rodger of Earlsferry, at paras 110-115);  permits departure from the strict and literal application of the words which the legislature has elected to use (per Lord Oliver in Litster v Forth Dry Dock & Engineering Co Ltd  1 AC 546, 577A; per Lord Nicholls in Ghaidan's case, at para 31);  permits the implication of words necessary to comply with Community law obligations (per Lord Templeman in the Pickstone case, at pp 120H-121A; per Lord Oliver in the Litster case, at p 577A);  [accepts that] the precise form of the words to be implied does not matter (per Lord Keith of Kinkel in the Pickstone case, at p 112D; per Lord Rodger in Ghaidan's case, at para 122; per Arden LJ in R (IDT Card Services Ireland Ltd) v Customs and Excise Comrs  STC 1252, para 114);  [is only constrained to the extent that] the meaning should "go with the grain of the legislation" and be compatible with the underlying thrust of the legislation being construed": see per Lord Nicholls in Ghaidan v Godin- Mendoza  2 AC 557, para 33; Dyson LJ in Revenue and Customs Comrs v E B Central Services Ltd  STC 2209, para 81;  [must not lead to an interpretation being adopted] which is inconsistent with a fundamental or cardinal feature of the [national] legislation since this would cross the boundary between interpretation and amendment (see per Lord Nicholls, at para 33, Lord Rodger, at paras 110-113 in Ghaidan's case; per Arden LJ in R (IDT Card Services Ireland Ltd) v Customs and Excise Comrs  STC 1252, paras 82 and 113)  cannot require the courts to make decisions for which they are not equipped or give rise to important practical repercussions which the court is not equipped to evaluate: see the Ghaidan case, per Lord Nicholls, at para 33; per Lord Rodger, at para 115; per Arden LJ in the IDT Card Services case, at para 113."
"39. My understanding is that the information required to calculate an underlying tax rate can vary depending on the country from which it is received. However, the following information is typically required:
- a notice of assessment to tax or copy of the self assessment as appropriate;
- if the dividend resolution specifies the profits from which the dividend has been paid, a copy of the dividend resolution itself is required;
- details of the percentage shareholding the UK company has in the company paying the dividend;
- copies of the company's accounts for the relevant period giving, in particular, details of how the profits have been appropriated and details of reserve transfers, etc;
- details of dividends received if underlying tax relief is claimed in respect of those dividends.
40. While this level of detail can be obtained from a company's overseas subsidiaries there must be some considerable doubt as to whether companies over which we have no influence at all would be prepared to provide this information to us. It seems fairly obvious to me that there would be a natural reluctance on the part of these companies to divulge details of their underlying (and usually confidential) tax calculations to a company in a different jurisdiction that has no connection with them at all other than owning a very small percentage of their shares.
41. Prudential's claims, which cover the years from 1990 to 2007, include several thousand dividends. Even on the assumption that the relevant companies would be prepared to provide the information in principle, there would be onerous administrative requirements in obtaining it due to the numbers of accounting periods of different foreign companies that would have to be considered, not to mention the language difficulties and associated expense and delay in having all the relevant documentation translated into English. These logistical problems would of course be exacerbated considerably in relation to older years. I am unsure of the record-keeping requirements in the various jurisdictions but it is not inconceivable that many of the relevant documents for the earlier years do not even exist any more.
42. There is of course then the need to perform the relevant calculations for each dividend and possibly enter into discussions with UTG on the results, again, thousands of times over. The extract from the International Manual quoted above indicates that the information requirements and calculations will vary from country to country and of course Prudential has a very diverse portfolio.
43. It is therefore, in my view, completely unrealistic for a company like ours to be required to undertake this task."
"Q. In order to work out how much tax was actually paid by the company that paid you the dividend, you would need to ask the company in question?
Q. And there's no reason to suppose that had you made such a request, and had the company been willing to tell you, there is no reason to suppose the company itself wouldn't have known how much tax it had actually paid?
A. I would expect they should. We are talking about a very long time ago for some of these dividends."
"Information demanded by the national tax authority from the company receiving dividends that relates to the tax that has actually been charged on the profits of the company distributing dividends in the State in which the latter is resident is an intrinsic part of the very operation of the imputation method and cannot be regarded as an excessive administrative burden."
"Production of that evidence may however be required only if it does not prove virtually impossible or excessively difficult to furnish proof of payment of the tax by the subsidiaries established in the other Member States "
The claimants point out that there was no discussion of effectiveness in Haribo, where the issue was rather whether the administrative burden imposed on the company receiving portfolio dividends was excessive and thus nullified the relief from economic double taxation prima facie provided by the imputation system. If this is right, the claimants go on to submit that the appropriate way to provide them with an effective remedy would be either to disapply the Case V charge or to grant a credit based on the nominal rate of tax.
(a) the test claimants have failed on the facts to prove their entitlement to a tax credit for the underlying tax actually paid;
(b) this failure involves no breach by the United Kingdom of the principle of effectiveness; and
(c) there is therefore no reason either to disapply the requirement of proof, or to grant a tax credit at the nominal rate as a proxy.
In practice, however, these conclusions make little (if any) difference if I am right in my earlier conclusion that FII (ECJ) II required the UK to grant a credit at the nominal rate of corporation tax paid by the distributing company, quite separately from the credit for underlying tax actually paid. The only circumstances in which it might make a difference are the rare cases where the tax actually paid in a particular year exceeds tax at the nominal rate (for example as a result of balancing charges to match an earlier relief). I would also again emphasise that the credit granted is in any event capped at the UK nominal rate applicable to the dividend less withholding tax. The amount of credit needed to reach the cap and achieve de facto exemption for the dividend will therefore be no more than about 5 to 10% in cases where the dividend forms part of the policy holders' share under an I minus E calculation, and withholding tax is levied at a typical rate of 10 or 15%. In cases where the normal UK nominal rate of corporation tax applies, the gap to be bridged for complete relief would have been around 10% higher in most of the years in issue, but on the basis of the figures in Ms Hine's tables of nominal rates these conditions are again likely to have been satisfied in the great majority of instances.
VII Issues concerning the ACT charge on the onward payment of portfolio dividends
"1. Is the ACT charge on the onward distribution of portfolio dividends received by the claimant from the EU/EEA and third countries contrary to Article 63 TFEU?
2. Is it possible to give the domestic legislation a conforming construction? Specifically, should the legislation be interpreted so as to entitle the Claimant to a tax credit to set against the ACT payable on the onward distribution of Portfolio Dividends and, if so, what is the appropriate tax credit?
3. Alternatively, should the domestic legislation be disapplied and, if so, how should that disapplication be given effect?
4. What is the effect of the amounts paid by way of ACT being purportedly set off against MCT [mainstream corporation tax] paid but not due?"
"72. As is clear from paragraph 62 of the present judgment, the obligation imposed on a resident company by national rules, such as those at issue in the main proceedings, to pay ACT when profits from foreign-sourced dividends are distributed is, in fact, justified only in so far as that advance tax corresponds to the amount designed to make up for the lower nominal rate of tax to which the profits underlying the foreign-sourced dividends have been subject compared with the nominal rate of tax applicable to the profits of the resident company."
It is interesting to note the express link between this passage and paragraph 62 of the judgment, which made essentially the same point in relation to nominal rates of corporation tax. This is entirely consistent with the ECJ's standard jurisprudence to the effect that ACT is no more than an advance payment of MCT.
"(1) where a company resident in the United Kingdom makes a qualifying distribution and the person receiving the distribution is another such company the recipient of the distribution shall be entitled to a tax credit equal to such proportion of the amount or value of the distribution as corresponds to the rate of advance corporation tax in force for the financial year in which the distribution is made."
In the light of paragraph 72 of FII (ECJ) II, it appears to me that section 231(1) would have been compliant with EU law if it had also provided a credit in respect of dividends received from non-UK resident companies for (a) underlying tax to which the distributed profits had been subject, and (b) the nominal rate of corporation tax in the source State, but subject to an upper limit equal to the UK nominal rate of ACT. As before, I consider it clear that the foreign nominal rate referred to is that in force in the State of the company paying the dividend. It is equally clear that the credit must be capped at the level of the UK's nominal ACT rate (typically 25%). There could be no question of the UK ever charging ACT in respect of redistributed foreign dividends at any higher rate.
(a) that unlawful ACT set against unlawful MCT remains unutilised, and must be repaid; and
(b) that lawful ACT so utilised must also be repaid, because the Court of Appeal so held in FII (CA) at paragraph 151.
The only rider which I need to add is that the Court of Appeal's decision in paragraph 151 is subject to an application for permission to appeal to the Supreme Court which has yet to be determined.
VIII The technical life assurance taxation issues
(1) Attribution of profits under section 89 of the Finance Act 1989
(a) the amount, so far as unrelieved, of any FII arising in the period as respects which the company had made an election under section 438(6) of ICTA 1988;
(b) the shareholders' share of any other unrelieved FII arising in the period from investments held in connection with the business; and
(c) the shareholders' share of any foreign income dividends so arising.
The effect of these deductions from the Case I profits was to increase by a corresponding amount the policy holders' share which was taxed at the lower rate.
"1. Does section 89 infringe the Claimant's Treaty rights?
2. Is the Claimant entitled to deduct the Portfolio Dividends from the Schedule D Case I profits in the calculation provided for by section 89(2) and, if so, to what extent?"
(2) The increased claim for payment of tax credits under section 242 of ICTA 1988
"(1) Where a company has a surplus of franked investment income for any accounting period
(a) the company may, on making a claim for the purpose, require that the amount of the surplus shall for all or any of the purposes mentioned in subsection (2) below be treated as if it were a like amount of profits chargeable to corporation tax; and
(b) subject to subsection (4) below, the provisions mentioned in subsection (2) below shall apply in accordance with this section to reduce the amount of the surplus , and
(c) the company shall be entitled to have paid to it the amount of the tax credit comprised in the amount of franked investment income by which the surplus is so reduced.
(2) The purposes for which a claim may be made under subsection (1) above are those of
(c) the deduction of expenses of management under section 75 or 76;
"Can the Claimant claim an additional amount in respect of tax credits comprised in surplus UK FII under section 242(1)(c) to the extent that the setting aside or reduction of the D V charge on foreign source dividends under I minus E has the effect of increasing the claimant's excess management expenses?"
(3) Issues concerning the absence of a section 438(6) election
"Did the election regime under section 438(6) entail a less favourable treatment of Portfolio Dividends contrary to Article 63 TFEU and, if so, what was that less favourable treatment?"
"Where we received dividends from UK resident companies we always made s438(6) elections where the election reduced the company's liability to tax. Had it been possible to make an election for foreign dividends, and the tax computations for the year indicated that it would be beneficial to do so, we would obviously have done so."
IX Third country portfolio dividends
"1. In respect of which third countries from which the Claimant received dividends is it entitled to rely on Article 63? More particularly:
2. Is the Claimant entitled to rely on Article 63 in relation to dividends from third countries in respect of which the UK had no entitlement to obtain information relevant for ascertaining the amount of tax paid on the foreign profits?
3. If not, to what extent does the Claimant's entitlement depend on the terms of the information exchange clause in the agreement concerned?"
"that such entitlement will extend to claims in respect of dividends sourced from a third country where the claims can be verified by obtaining information from the competent authorities of third countries under rights conferred under the relevant double taxation convention."
"1. For each of the categories of claim [considered above]:
(i) Was there any unlawfully exacted tax so as to found a claim under Woolwich? If so what is the measure of the unlawfully exacted tax?
(ii) Did the claimant pay tax by mistake so as to found a claim in mistake? If so, what is the measure of the restitution?
(iii) Is there a restitutionary defence available e.g. defence of change of position, passing on, "fiscal chaos" and, if so, are the requirements of any such defence fulfilled and to what extent?
2. On what basis is interest payable?"
(a) such claims are to be characterised as San Giorgio claims under EU law;
(b) the overpaid tax (or its time value in the case of utilised ACT) is in principle recoverable by either a Woolwich claim or a mistake-based restitutionary claim, subject to defences and limitation; and
(c) the tax was in fact paid under an operative mistake, the mistake being that it was lawfully due and payable.
(a) that unlawful ACT which was utilised against lawful MCT is recoverable, on the same basis as in Hoechst;
(b) that unlawful ACT which was utilised against unlawful MCT is also recoverable, on the basis that the purported charge was a nullity; and
(c) lawful ACT which was utilised against unlawful MCT is recoverable because the Court of Appeal so held in FII (CA), but this is subject to the Revenue's pending application to the Supreme Court for permission to appeal against that conclusion.
(a) the change of position defence; and
(b) the basis on which interest should be payable.
(2) Change of position
"Further and/or alternatively, in so far as the Defendants were initially unjustly enriched, the Defendants have in good faith changed their position in consequence of the payments made by the Claimants and/or the equivalent payments made by other Claimants in the CFC and Dividend GLO such that it would now be inequitable and /or unconscionable to require the Defendants to make restitution of those sums. The sums in question formed part of the United Kingdom's tax revenue for the relevant year in which they were paid. Those sums have been irretrievably spent, in some cases many years ago."
"In my opinion, the two judgments referred to demonstrate that entitlement to repayment of sums unduly paid may be subject to exceptions, in particular circumstances other than passing on, resulting from other advantages that the person may have been granted by the authority for whose benefit the unlawful tax was levied. The ultimate conclusion is that the fact that the tax has been passed on does not constitute the only possible means of refusing repayment, which may be based on a possible unjust enrichment arising out of a parallel saving."
"20. None the less, since such a refusal of reimbursement of a tax levied on the sale of goods is a limitation of a subjective right derived from the legal order of the European Union, it must be interpreted narrowly. Accordingly, the direct passing on to the purchaser of the tax wrongly levied constitutes the sole exception to the right to reimbursement of tax levied in breach of European Union law.
21. The Court has also held that, even where it is established that the burden of the charge levied though not due has been passed on to third parties, repayment to the trader of the amount thus passed on does not necessarily entail his unjust enrichment, since even where the charge is wholly incorporated in the price, the taxable person may suffer as a result of a fall in the volume of his sales
22. Similarly, the Member State may not reject an application for reimbursement of an unlawful tax on the ground that the amount of that tax has been set off by the abolition of a lawful levy of an equivalent amount.
23. Although reimbursement of an unlawful levy to a trader who has passed on the amount to his customers can, in the conditions set out above, lead to unjust enrichment, that is not so in the case of an alleged abolition of other taxes in relation to the introduction of a tax contrary to European Union law.
24. That abolition falls within the ambit of choices made by the State in the field of taxation which express its general policy in economic and social matters
25. That conclusion cannot be called into question by the Court's judgments in Case 177/78 McCarren  ECR 2161 and Case 222/82 Apple and Pear Development Council  ECR 4083. Even if, in paragraph 25 of the judgment in McCarren and paragraph 41 of the judgment in Apple and Pear Development Council, the Court did not rule out that the national court, applying its national law, could take into consideration possible methods of refusing reimbursement of an unlawful tax other than passing on, it must be noted that the Court, in paragraph 20 of the present judgment, states that the direct passing on of the tax wrongly levied to the purchaser constitutes the sole exception to the right to reimbursement of tax levied in breach of European Union law."
"73. However, it is settled law that, since the disallowing of repayment in such circumstances entails placing a limitation on a subjective right derived from the EU legal order, that restriction must be narrowly construed (Weber's Wine World and Others, paragraph 95, and Lady & Kid and Others, paragraph 20).
74. Thus, it is apparent from paragraphs 20 and 25 of Lady & Kid and Others that the only exception to the right to repayment of taxes levied in breach of EU law is in a case in which a charge that was not due has been directly passed on by the taxable person to the purchaser."
"It is settled case-law that the right to a refund of taxes levied in a Member State in breach of EU law is the consequence and complement of the rights conferred on individuals by provisions of EU law prohibiting such taxes. There is only one exception to that obligation: where charges to tax have been passed on in their entirety to a third party and their reimbursement would bring about the unjust enrichment of the taxable person. That is not the position here."
"Where an action for the recovery of taxes under domestic law can be based either on the ground of mistake or on the ground of unlawful demand (or, as in the present case, on both grounds), it follows from the principle of equivalence that both grounds of action should also be available in similar circumstances to enforce an analogous right under EU law. So long as they must both be available, they must also both be effective. The principle of effectiveness therefore applies to both grounds of action (my emphasis)."
"47. If, however, in application of the principle of procedural autonomy, a Member State makes a number of legal remedies available to individuals, the second subparagraph of Article 19(1) TEU requires that each of those remedies ensure effective legal protection, and a legal remedy cannot offer "effective" protection unless the conditions in accordance with which it may be used and achieved a positive outcome are known in advance.
48. Accordingly, as soon as taxpayers choose one of the national legal remedies available under national law (in the present case, the Kleinwort Benson remedy) or have recourse to the only national legal remedy available, they must come under the protection offered by the general principles of EU law."
To similar effect, he then said in paragraph 53:
" the guarantees attaching to the principle of effectiveness apply to every legal remedy which national law makes available to claimants for the reimbursement of taxes levied in breach of EU law."
"Rejection of the mistake of law rule in the common law world
It is perhaps easier for us now to see that the policy underlying the rule can best be achieved, consistently with justice, by the recognition of a right of recovery subject to specified defences to cater for the fears which formerly appeared to require a blanket exclusion of recovery. However, the blossoming of scholarly interest in the development of a coherent law of restitution did not occur in the common law world until the middle of the 20th century There can be no doubt that it is this scholarly work which has provided the prime cause for the rejection of the mistake of law rule, either by legislation or by judicial decision, in countries throughout the common law world. This is due not only to specific criticism of the mistake of law rule as such, but still more to the combined effect of two fundamental changes in the law: first, recognition that there exists a coherent law of restitution founded upon the principle of unjust enrichment, and second, within that body of law, recognition of the defence of change of position. This is due essentially to the work of scholars. Once that work had been published and widely read it was, I believe, inevitable that in due course both doctrines would be recognised by the judges, the time of such acceptance depending very much on the accidents of litigation. In fact, in England both were accepted by this House in 1991, in the same case, Lipkin Gorman v Karpnale Ltd  2 AC 548. Once both had been recognised it became, in my opinion, also inevitable that the mistake of law rule should be abrogated, or at least reformulated, so that there should be a general right of recovery of money paid under a mistake, whether of fact or law, subject to appropriate defences. This is because a blanket rule of non-recovery, irrespective of the justice of the case, cannot sensibly survive in a rubric of the law based on the principle of unjust enrichment; and because recognition of a defence of change of position demonstrates that this must be proved in fact if it is to justify retention, in whole or in part, of money which would otherwise be repayable on the ground that the payee was unjustly enriched by its receipt. The combined effect is not only that the mistake of law rule can no longer be allowed to survive, but also that the law must evolve appropriate defences which can, together with the defence of change of position, provide protection where appropriate for recipients of money paid under a mistake of law in those cases in which justice or policy does not require them to refund the money. It is this topic which lies at the centre of the present appeals. As the argument before the appellate committee has demonstrated, the identification of such defences is by no means easy and, whatever your lordships' house may decide, the topic is likely to continue to engage the attention of judges, scholars and law reformers for some years to come."
"I would therefore conclude on issue (1) that the mistake of law rule should no longer be maintained as part of English law, and that English law should now recognise that there is a general right to recover money paid under a mistake, whether of fact or law, subject to the defences available in the law of restitution."
(a) the "wrongdoer" bar does not prevent the Revenue from here relying on the defence;
(b) there is no policy obstacle to the defence operating in respect of a mistake claim, although it cannot apply as a defence to a Woolwich claim;
(c) on the facts, the defence will succeed "if the sums have been spent on government projects/plans (or in reducing governmental borrowing) and cannot now be easily recouped"; and
(d) "at a high level of generality, restitution would here be inequitable in all the circumstances".
"Experience shows that questions which look deceptively simple when posed in the abstract may become far more complex and difficult, and new angles and implications may emerge, once they are put in a detailed factual context. It is a truism to say that no question of law can be decided in a factual vacuum; and even a decision which is based on a short statement of agreed facts can often turn out to be a deceptive short cut."
See The Claimants in the Loss Relief Group Litigation Order v Revenue and Customs Commissioners  EWHC 205 (Ch) at paragraph .
"To state the obvious, taxation is not imposed for its own sake, but in order to fund government expenditure. It is one of the two main ways in which public expenditure is funded, the other being public sector borrowing. One would expect government spending decisions, at a policy level, to be reached at least in part on the basis of the tax revenues which it has received in the past, and which it expects to receive in the future. Even if tax revenues are not spent immediately, common sense suggests that they will be used up over a fairly short period, and that it is probably safe to assume that tax receipts which predated the claims in the present case by more than six years, and therefore fell outside the scope of a Woolwich claim with its six-year limitation period, will have been exhausted well before the commencement of the action. As a matter of causation, no precise link can be demonstrated between particular receipts and particular items of government expenditure, but common sense again suggests that planned government expenditure would not have taken place at the level which it did but for the availability of the tax receipts which were taken into account in fixing departmental budgets. If all concerned, both the government and the taxpayers, proceeded on the footing that the tax was validly levied, I ask myself what is wrong with the argument that it would now be inequitable to require the Revenue to make restitution for the tax which was paid by mistake, because the money in question has long ago been spent in the public interest, and everybody assumed in good faith that it had been validly levied? I confess that, once the question is stated in these terms, the answer to it seems to me to be obvious. It would in my judgment be inequitable to require repayment in such circumstances, always bearing in mind that the claimants have a perfectly good separate San Giorgio claim for repayment of the unlawfully levied tax itself, free from any change of position defence."
It is important to emphasise, however, that the view which I there expressed was only a provisional one, and all I actually decided was that the Revenue could raise the defence at a subsequent stage: see FII (CA) at paragraph . I must also acknowledge, with the benefit of hindsight, and academic commentary on the views which I then expressed, that I now think I was probably unwise to go as far as I did without more detailed evidence, and some points which seemed obvious to me in 2008 appear far less clear in 2013. Furthermore, whether my views were right or wrong, I did at least have the benefit of some relevant evidence from Mr David Ramsden, who was then the Treasury's chief economic adviser: see paragraphs  to .
(3) On what basis is interest payable?
Introduction and background
(a) for unlawfully levied ACT which was subsequently set off against MCT, from the date of payment by the claimants to the date of utilisation;
(b) for all other unlawfully levied tax (including unlawfully levied ACT which was never utilised, and unlawful ACT utilised against unlawful MCT), from payment by the claimants to the date of repayment by the Revenue; and
(c) for the principal sum of the time value of utilised ACT (resulting from (a) above), from the date of set-off against MCT to the date of repayment by the Revenue.
The claimants say they would be content to accept the usual rates of compound interest awarded in the Commercial Court (namely Bank of England base rate plus 1%, compounded monthly). In oral argument, however, they proceeded on the more realistic basis that, if compound interest were to be awarded, it should be at conventional rates calculated by reference to the rates of interest and other terms applicable to borrowing by the Government in the market during the relevant period, that being the solution adopted by a majority of the House of Lords in Sempra Metals Limited v IRC  UKHL 34,  1 AC 561 ("Sempra").
"It follows from that case law that, where a Member State has levied charges in breach of the rules of Community law, individuals are entitled to reimbursement not only of the tax unduly levied but also of the amounts paid to that State or retained by it which relate directly to that tax. As the court held in paras 87 and 88 of [Hoechst], that also includes losses constituted by the unavailability of sums of money as a result of a tax being levied prematurely."
In paragraph  I said that the ECJ had made it clear, to my mind:
" that the San Giorgio principle must now be regarded as entitling a claimant who has paid tax levied in breach of Community law not only to repayment of the tax itself, but also to reimbursement of all directly related benefits retained by the member state as a consequence of the unlawful charge. It is only in this way that the claimant can obtain an effective remedy for its loss, and effect can be given to the underlying principle that the member state should not profit from the imposition of the unlawful charge."
"108. Certain important consequences seem to me to follow from this analysis. In the first place, if an effective remedy requires that the member state should not profit from the unlawful charge, the claimant should in principle be entitled not only to repayment of the tax itself but also to interest. Otherwise the claimant would effectively be compelled to make an interest-free loan to the member state for the period between the wrongful exaction of the tax and its repayment. Secondly, no sensible distinction can be drawn in relation to interest between cases where tax is levied prematurely (as in Hoechst) and cases where the tax itself has to be repaid. In each case, the claimant should recover by way of "interest" a sum which represents the loss of use of the money, or (perhaps more accurately) the benefit of the use of the money to the member state, over the relevant period. If anything, common sense suggests that this right should be stronger in cases where the tax itself has to be repaid than in cases where the tax was merely levied prematurely. Thirdly, the measure of such loss of use or benefit, in the context of a restitutionary claim brought in an English court, should normally be compound, not simple, interest, as the majority of the House of Lords upholding Park J and the Court of Appeal recognised and held in Sempra: it is only by an award of compound interest that the commercial value of the use of the money over the time when it was retained can be properly reflected. Fourthly, such an award of interest can no longer be regarded as merely ancillary to the repayment of the tax, within the principle of Sociιtι Roquette Frθres and Express Dairy Foods (restated in Hoechst para 86 of the judgment of the ECJ) because it must now be seen as an integral part of the San Giorgio claim for the repayment of the tax and reimbursement of all directly related benefits retained by the member state."
"40. This issue is one of great importance carrying enormous financial consequences, not only for the United Kingdom but all member states. It is relevant to other cases pending or anticipated in the High Court and the Court of Appeal. I do not consider that the answer to the issue is clear. There is considerable cogency in the argument of the Commissioners and the analysis of the judge that, at least until FII, the settled jurisprudence of the ECJ in relation to San Giorgio claims was that, save in the [Hoechst] case of premature levying of tax, interest was an ancillary matter to be dealt with in accordance with national law, including whether there was a right to any interest at all and, if so, the rate and the time for which it was to be paid. It is also striking, as the Commissioners have forcefully submitted, that there is no clear statement by the ECJ, whether in FII or any subsequent case, that the former settled jurisprudence has been changed by the formulation of the San Giorgio principle in FII (see para 205 of the ECJ's judgment), and that, in cases of overpayment as much as cases of premature payment, the San Giorgio principle requires the recipient to pay compensation for the time value of the wrongful retention of tax when it was not lawfully due. On the other hand, it is clear, as the judge found and as the claimants contend, that the formulation of the San Giorgio principle in para 205 of FII is, on one interpretation, broad enough to encompass the claimants' claims to payment for the time value of the overpayments of VAT while retained by the Commissioners. It is also difficult to see any logical basis for distinguishing in this respect between the premature levying and payment of tax and the overpayment of tax. In both cases, only compound interest will normally give a full and effective remedy. As Mr Conlon observed, it is possible to conceive examples in which VAT is exacted prematurely in breach of Community law, and it is difficult to see any principled reason for treating such cases differently from overpayments of VAT.
41. In view of those doubts and difficulties and the importance and financial implications of the issue, it seems plainly desirable that there should be a reference to the ECJ for a preliminary ruling on the issue. The judge himself (see  STC 2027 at ) considered whether to refer the question to the ECJ for a further preliminary ruling. One of the reasons why he declined to do so was that it was open to the Commissioners to appeal his decision, in which case the question of a further reference could be more appropriately considered by this court. In the light of the decision of Henderson J that the restitutionary claims of the claimants for compound interest are time-barred and my conclusion (below) that he was right in that decision, it is not possible for the reference to be made in these proceedings since a reference is not necessary to enable judgment to be given: see art 267 TFEU and paras 11 and 14 of the ECJ's Information Note on references from national courts for a preliminary ruling (OJ 2009/C 297/01). Other than to state that there should be a reference to the ECJ for a preliminary ruling when a proper opportunity arises, it is not necessary, and I do not consider it appropriate, to express any further view about the merits of this part of the appeal."
"66. Etherton LJ in Chalke CA said (see  STC 1640 at ) that he found it difficult to see any logical basis for distinguishing between the premature levying and payment of tax and the overpayment of tax. But it seems to me that such a basis may exist in EU law if the governing principles are: first, that taxes shall be levied only in accordance with EU law; secondly, that, when they are levied in breach of EU law, they must be reimbursed; thirdly, that all questions affecting the payment of interest are indeed matters for national law; and fourthly, that the principle of effectiveness requires that national law shall not render practically impossible or excessively difficult the exercise of EU law rights.
67. On my analysis, it is the extent of the second and third of those four principles that are truly in doubt. Must the reimbursement include the use value of the money or not? And if so, what then is left for the national courts to determine? It is this latter point that has led me to incline towards the view that the ECJ may not have intended in FII to make the "significant advance" in jurisprudence that Henderson J referred to in Chalke Chancery (see  STC 1640 at ). If EU law were to lay down that, in all cases, reimbursement of improperly levied taxes must include the use value of the money (including compound interest) it would be creating something that crosses previously established boundaries:
(i) It would call into question the line of ECJ cases in which it has been made clear that all ancillary questions, beyond repayment itself, is for the national law to settle
(ii) It would be surprising if EU law was concerned with the detail of interest claims that should be available for tax repayment claims, but not other kinds of claims against member states.
(iii) The ancillary matters that would be left to national courts would thereby be significantly attenuated. As the ECJ said in [Hoechst] (see para 81):
"81. It must be stressed that it is not for the [ECJ] to assign a legal classification to the actions brought by the plaintiffs before the national court "
But if the value of the use of the money had to be awarded in every case (even if that value might be differently assessed on a case-by-case basis), EU law would be delineating the precise way in which the EU right was to be vindicated in national law. On one analysis, this could be said to be over-stepping the mark between EU rights on the one hand, and the domestic causes of action by which they can be vindicated on the other.
(iv) The ECJ has already acknowledged exceptions to the need to repay VAT (and, therefore, presumably interest also), for example, in Weber's Wine World (see para 94), where the taxpayer would itself be unjustly enriched by such an outcome, as where the trader has passed the burden of VAT on to third parties.
(v) It would be creating an EU right that would require much more detailed exposition in EU law than might perhaps be appropriate. EU law would need to explain how the loss of use value of the money was to be calculated at what rates and with what rests: otherwise, the principle of effectiveness could not properly be implemented, because national courts would not know the precise extent and limits of the EU right.
68. This discussion leaves outstanding, of course, the question of whether there is, indeed, a logical distinction between claims in relation to prematurely paid, as opposed to overpaid, tax. To return to the four principles I set out at  above, if the second principle requires only reimbursement, with the third principle leaving interest to national law, then the repayment of the use value of an unlawfully levied ACT pre-payment could be regarded as the reimbursement itself. This seems to be the way it was viewed in [Hoechst] ( para 87) as the "very objective sought by the claimants' actions."
69. The parties have not been able to agree the questions that should be referred to the ECJ. In these circumstances, I have considered carefully the drafts provided by the parties and have determined that three questions along the following lines would most closely reflect the problem that I have described under this issue 2:
(i) Question 1: Where a taxable person has overpaid VAT contrary to the requirements of EU VAT legislation, does the remedy provided by a member state accord with EU law if that remedy allows for (a) reimbursement of the principal sums overpaid, and (b) simple interest on those sums, in accordance with national legislation, such as ss 80 and 78 of VATA 1994?
(ii) Question 2: If not, does EU law require that the remedy provided by a member state should allow for (a) reimbursement of the principal sums overpaid, and (b) the use value of the overpayment in the hands of the member state and/or the loss of the use value of the money in the hands of the taxpayer?
(iii) Question 3: If the answer to both questions 1 and 2 is in the negative, what must the remedy that EU law requires the member state to provide include, in addition to reimbursement of the principal sums overpaid, in respect of the use value of the overpayment and/or interest?"
The decision in Littlewoods (ECJ)
"25. The Court has also held that, where a Member State has levied charges in breach of the rules of Community law, individuals are entitled to reimbursement not only of the tax unduly levied but also of the amounts paid to that state or retained by it which relate directly to that tax. That also includes losses constituted by the unavailability of sums of money as a result of a tax being levied prematurely (Metallgesellschaft, paragraphs 87 to 89, and Test Claimants in the FII Group Litigation, paragraph 205).
26. It follows from that case law that the principle of the obligation of Member States to repay with interest amounts of tax levied in breach of EU law follows from that law.
27. In the absence of EU legislation, it is for the internal legal order of each Member State to lay down the conditions in which such interest must be paid, particularly the rate of that interest and its method of calculation (simple or "compound" interest). Those conditions must comply with the principles of equivalence and effectiveness; that is to say that they must not be less favourable than those concerning similar claims based on provisions of national law (or arranged in such a way as to make the exercise of rights conferred by the EU legal order practically impossible (see, to that effect, San Giorgio, paragraph 12; Weber's Wine World, paragraph 103; and Case C-291/03 MyTravel  ECR I-8477, paragraph 17).
28. Thus, according to consistent case law, the principle of effectiveness prohibits a Member State from rendering the exercise of rights conferred by the EU legal order impossible in practice or excessively difficult
29. In this case, that principle requires that the national rules referring in particular to the calculation of interest which may be due should not lead to depriving the taxpayer of an adequate indemnity for the loss occasioned through the undue payment of VAT.
30. It is for the referring court to determine whether that is so in the case at issue in the main proceedings, having regard to all the circumstances of the case. In that regard it should be noted that it is apparent from the order for reference that, under the provisions of section 78 of the VATA 1994, the Commissioners paid Littlewoods interest on the VAT levied in breach of EU law. Pursuant to those provisions, Littlewoods received payment of simple interest, in accordance with the said provisions, in an amount of £268,159,135, corresponding to interest due over about 30 years, which amount exceeds by more than 23% that of the principal sum, which amounts to £204,774,763.
31. As for verifying whether the principle of equivalence has been complied with in the case at issue in the main proceedings, it should be noted that compliance with that principle requires that the national rule in question apply without distinction to actions based on infringement of EU law and those based on infringement of national law having a similar purpose and cause of action. However, the principle of equivalence cannot be interpreted as requiring a Member State to extend its most favourable rules to all actions brought in a certain area of law. In order to ensure compliance with that principle, it is for the national court, which alone has direct knowledge of the procedural rules governing restitution actions against the State, to determine whether the procedural rules intended to ensure that the rights derived by individuals from EU law are safeguarded under domestic law comply with that principle and to consider both the purpose and the essential characteristics of allegedly similar domestic actions. For that purpose, the national court must consider whether the actions concerned are similar as regards their purpose, cause of action and essential characteristics (see, to that effect, Case C-63/08 Pontin  ECR I-10467, paragraph 45 and case-law cited).
34. In the light of the foregoing, the answer to the questions referred is that EU law must be interpreted as requiring that a taxable person who has overpaid VAT which was collected by the Member State contrary to the requirements of EU VAT legislation has a right to reimbursement of the tax collected in breach of EU law and to the payment of interest on the amount of the latter. It is for national law to determine, in compliance with the principles of effectiveness and equivalence, whether the principal sum must bear "simple interest", "compound interest" or another type of interest."
Paragraph 34 was then repeated in the formal ruling of the Court at the end of the judgment.
"(1) Subject to rules of court, in proceedings (whenever instituted) before the High Court for the recovery of a debt or damages there may be included in any sum for which judgment is given simple interest, at such rate as the court thinks fit or as rules of court may provide, on all or any part of the debt or damages in respect of which judgment is given, or payment is made before judgment, for all or any part of the period between the date when the cause of action arose and
(a) in the case of any sum paid before judgment, the date of the payment; and
(b) in the case of the sum for which judgment is given, the date of the judgment.
(4) Interest in respect of a debt shall not be awarded under this section for a period during which, for whatever reason, interest on the debt already runs.
As the wording of subsection (1) makes clear, the power to award interest is a discretionary one, and it is confined to simple interest. Subject to those limitations, interest may be awarded for the whole or any part of the period between the time when the cause of action arose and the date of judgment or earlier payment. Subsection (4) shows that the power to award interest is a default one, which cannot be used to duplicate, or take priority over, interest which already runs on the debt for whatever reason.
The decision of the House of Lords in Sempra
(1) By a majority (consisting of Lords Hope, Nicholls and Scott), the House held that the court had jurisdiction at common law to award compound interest where a claimant sought restitution of money paid under mistake; according to the minority on this issue (Lords Walker and Mance) the court could make such an award by an extension of the court's discretionary equitable jurisdiction.
(2) A different majority (Lords Hope, Nicholls and Walker) held that, in the case of personal restitution, the money award reversing unjust enrichment had to take into account the value of use of the money over the time during which it had been retained by the defendant.
(3) As to the value of the use of that money over the period, Lords Hope and Nicholls said that it was prima facie the reasonable cost to the claimant of borrowing the same sum over the period, unless the defendant could show that he had in fact gained no benefit himself, while according to Lords Scott and Mance interest was only recoverable if it were proved that the money had actually earned interest in the hands of the defendant.
(4) Finally, the same majority as in (2) above held:
a) that the assumption that the Government had derived some benefit from the premature payment of the tax had not been displaced; but
b) the Government was in a different position to ordinary commercial borrowers, in that it could borrow at more favourable rates; and accordingly
c) the claims should be quantified on the conventional basis mentioned above.
(a) The judgment of Lord Hope
"is the claimant who seeks a remedy on the ground of unjust enrichment entitled to an award for restitution of the value of money that is measured by compound interest?"
It is worth noting, at this early stage, that the question was framed by Lord Hope in general terms, although he had expressly recognised in paragraph  that in the instant case "interest is the measure of the principal sum itself".
"7. The claim that is made in this case, however, is for restitution. It is presented as a claim for the time value of money by which the defendant was enriched unjustly. The claimant submits that the common law requires that it be paid a sum which represents the value of the money over the period of that enrichment, and that this sum falls to be calculated by compounding interest over that period. It has been held that in an action for money had and received the net sum only can be recovered But interest has been awarded at common law where restitution follows the reversal on appeal of a previously satisfied judgment Various other exceptions have been recognised Furthermore the claim in this case is not for more than what was had and received by the defendant. What was had and received was the enrichment. It is the enrichment itself that is to be valued, not anything more than that.
8. In NEC Semi Conductors Ltd v Inland Revenue Comrs  STC 606, para 173, Mummery LJ said that the question how restitutionary relief of the kind that is sought in this case should be assessed was not settled by the La Pintada case  AC 104, as the claim is not for an entitlement to interest, as creditors, on a debt or on damages by way of compensation for loss of the use of the money that was unjustly demanded and retained by the defendant. I respectfully agree with him, and I would approach the issue in this case from the same starting point. I would hold that it is open to your Lordships to examine this issue on the basis that the answer to it is to be found in the law of unjust enrichment. It is not foreclosed by the decisions of this House in the Westdeutsche case  AC 669 and the La Pintada case  AC 104, neither of which addressed the issues that arise in this case."
Here again I would comment that Lord Hope's approach to the problem is through a general examination of the law of unjust enrichment, and on the footing that it is "the enrichment itself that is to be valued".
"18. I wish to concentrate on the approach that should be taken to the restitutionary cause of action on which Sempra prefers and is entitled to rely, which is its claim that the money was paid under a mistake. The conclusion that the court has jurisdiction to award compound interest as damages at common law is, however, a valuable one. It provides us with a building block which was missing when the House rejected the use of compound interest as a possible solution in equity in Westdeutsche Ancillary interest was sought on a sum for which the court was to give judgment in satisfaction of the local authority's restitutionary claim against the bank. It was common ground that there was no jurisdiction to award compound interest in such a case at common law or by statute: per Lord Goff of Chieveley at p690H."
"21. There is no doubt that a compensatory remedy for breach of Community law would look to what the taxpaying company had lost by reason of having to pay the tax early. But that, from Sempra's point of view, is not the preferred remedy. If it is to escape from the six-year limitation period it must instead pursue the alternative argument that the payments were made under a mistake. This is a restitutionary remedy. So it is necessary to look more closely at the nature of this remedy, and at the basis on which a claim under it falls to be calculated. It is only when this question has been addressed and answered that it will be possible to answer with confidence the question how, if Sempra is to be provided with the restitutionary remedy to which it is entitled for its mistake as to its rights under Community law, the amount of the principal sum due must be calculated."
Lord Hope then referred to the development of a coherent law of restitution in the earlier decisions of the House in Lipkin Gorman v Karpnale Ltd  2 AC 548 and the Kleinwort Benson case, before concluding at the end of paragraph :
"I think that it can now be taken as settled that, under the Kleinwort Benson principle, a cause of action at common law is available for money paid under a mistake of law: Deutsche Morgan Grenfell Group Plc v Inland Revenue Comrs  1 AC 558, para 62. I also think that the time has come to recognise that the court has jurisdiction at common law to award compound interest where the claimant seeks a restitutionary remedy for the time value of money paid under a mistake."
"25. There is no need to pursue these arguments any further in this case. The question whether there is an unjust factor has already been settled. As the [ECJ] has explained, there was no legal ground for the retention of the enrichment. The unjust enrichment principle supports the free-standing cause of action to recover interest, which is the measure of the enrichment. It has not been suggested that a restitutionary award by way of interest would give rise to injustice, so long as it was appropriately calculated.
26. Recognition that the court has jurisdiction to award compound interest at common law is a short, but logical, step in the further development of the restitutionary remedy. It follows from the fact that the right to recover money paid under a mistake is available at common law. To treat the choice of remedy in unjust enrichment as discretionary would, in my opinion, be inconsistent with the common law right that gives rise to it."
The final sentence of this quotation introduces the important theme that there is nothing discretionary about an award of interest as a restitutionary remedy. It is part of the measure of the enrichment itself, and therefore part of the remedy to which the claimant is in principle entitled.
"31. I would apply the reasoning in these passages to the claim for interest in this case. A remedy in unjust enrichment is not a claim of damages. Nor is it a contractual remedy, so there is no need to search for an express or an implied term as the basis for recovery. The old rules which inhibited awards of interest to ancillary interest on sums due on contractual debts or on claims for money had and received do not apply. The essence of the claim is that the revenue was unjustly enriched because Sempra paid the tax when it did in the mistaken belief that it was obliged to do so when in fact it was being levied prematurely. So the revenue must give back to Sempra the whole of the benefit of the enrichment which it obtained. The process is one of subtraction, not compensation."
"32. But, as in cases of property other than money where the claim includes restitution for the value of the use of the asset that was transferred, subtraction of the enrichment from the defendant includes more than the return of the money that was transferred and its nominal or face value. That value, in this case, has already been accounted for. The subject matter of Sempra's claim is the time value of the enrichment. This is the amount that has to be assessed.
33. In this case the enrichment consists, not of the payment of a sum of money as such, but of its payment prematurely. As Professor Birks pointed out, the availability of money to use is not unequivocally enriching in the same degree as the receipt of money: Unjust Enrichment, p53. But money has a value, and in my opinion the measure of the right to subtraction of the enrichment that resulted from its receipt does not depend on proof by Sempra of what the revenue actually did with it. It was the opportunity to turn the money to account during the period of the enrichment that passed from Sempra to the revenue. This is the benefit which the defendant is presumed to have derived from money in its hands, as Lord Walker puts it in para 180. The revenue accepts that the money it received prematurely had a value, but it says that the restitutionary award should take the form of simple interest. I do not think that such an award would be consistent with principle. Simple interest is an artificial construct which has no relation to the way money is obtained or turned to account in the real world. It is an imperfect way of measuring the time value of what was received prematurely. Restitution requires that the entirety of the time value of the money that was paid prematurely be transferred back to Sempra by the revenue.
34. All this points to the conclusion, subject to what I say later about onus (see paras 47, 48) that, for restitution to be given for the time value of the money which was paid prematurely, the principal sum to be awarded in this case should be calculated on the basis of compound interest.
35. I recognise, of course, that in Westdeutsche this House held that in a claim at common law for money had and received the claimant was entitled only to simple interest under section 35A of the Supreme Court Act 1981 and, by a majority, that it would not be appropriate for equity to award compound interest on the principal sum in aid of the bank's common law claim. As my noble and learned friend, Lord Mance, points out in his analysis of that case, the argument throughout was that there was no power at common law to award compound interest. But I agree with Lord Nicholls and with my noble and learned friend, Lord Scott of Foscote, that Sempra's restitutionary claim is available to it at common law. Once it is accepted that losses caused by late payment are recoverable under the restitutionary remedy at common law irrespective of the position in equity, the problem that was addressed in the Westdeutsche case disappears.
36. Furthermore, the interest in question in the present case is, as the Court of Justice stressed  Ch 620, para 88 the principal sum itself. In my opinion the decision in the Westdeutsche case does not address this point. We were not asked to overrule that decision, because it is distinguishable on this ground. Furthermore, the basis of Sempra's claim, as the common law has now recognised, is unjust enrichment. I do not think that it is open to the common law, when it is providing a remedy in unjust enrichment, to decline to apply the principle on which that remedy is founded when the principal sum to be awarded is being calculated. As Lord Nicholls points out (see para 99), there is now ample authority to the effect that interest losses which are recoverable as damages should be calculated on a compound basis where the evidence shows that this is appropriate. The same rule should be applied to the restitutionary remedy at common law."
(a) an award of simple interest would not be an appropriate measure of the time value of the enrichment, because it is "an artificial construct" which has no relation to business reality;
(b) Sempra's restitutionary claim was available to it at common law;
(c) because that claim was based on the principle of unjust enrichment, it is not open to the common law, when providing a remedy, to decline to calculate the principal sum recoverable on a compound interest basis, where the evidence shows this to be appropriate; and
(d) nothing in Westdeutsche prevents the court from adopting such an approach.
"Computation of the time value of the enrichment on the basis of simple interest will inevitably fall short of its true value. Such a result would conflict with the principle that applies in unjust enrichment cases, that the enrichee must give up to the claimant the enrichment with, as Professor Birks put it in Unjust Enrichment, p167, no hint of a restriction to giving back. In my opinion the compounding of interest is the basis on which the restitutionary award in this case should be calculated."
(b) The judgment of Lord Nicholls
"72. As already foreshadowed, the crux of the dispute on effectiveness concerns the availability of compound interest in respect of the wrongful levying of ACT. The Inland Revenue recognises that interest is payable in respect of the tax paid prematurely in the form of ACT. But it contends that under English law the courts do not have power to award compound interest save in cases of fraud and misapplication by a fiduciary. The revenue contends, further, that an award of simple interest would be an effective legal remedy for Sempra in the present case."
"102. The benefits transferred by Sempra to the Inland Revenue comprised, in short, (1) the amounts of tax paid to the Inland Revenue and, consequentially, (2) the opportunity for the Inland Revenue, or the Government of which the Inland Revenue is a department, to use this money for the period of prematurity. The Inland Revenue was enriched by the latter head in addition to the former. The payment of ACT was the equivalent of a massive interest free loan. Restitution, if it is to be complete, must encompass both heads. Restitution by the revenue requires (1) repayment of the amounts of tax paid prematurely (this claim became spent once set off occurred) and (2) payment for having the use of the money for the period of prematurity.
103. In the ordinary course the value of having the use of money, sometimes called the "use value" or "time value" of money, is best measured in this restitutionary context by the reasonable cost the defendant would have incurred in borrowing the amount in question for the relevant period. That is the market value of the benefit the defendant acquired by having the use of the money. This means the relevant measure in the present case is the cost the United Kingdom Government would have incurred in borrowing the ACT for the period of prematurity. Like all borrowings in the money market, interest charges calculated in this way would inevitably be calculated on a compound basis."
"112. If the House takes this opportunity I venture to repeat there can only be one answer on this important question of law. Nobody has suggested a good reason why, in a case like the present, an award of compound interest should be denied to a claimant. An award of compound interest is necessary to achieve full restitution and, hence, a just result. I would hold that, in the exercise of its common law restitutionary jurisdiction, the court has power to make such an award To that extent I would depart from the decision of the Westdeutsche appeal  AC 669.
113. If this approach is adopted the unfortunate decision in the London, Chatham and Dover Railway case  AC 429 will be effectually buried in relation to the payment of interest for non-payment of a debt and in relation to the payment of interest for having the use of money in personal restitution cases. The law will achieve a principled measure of consistency between contractual obligations and restitutionary obligations. The common law in Australia has developed in this way. The common law in England should do likewise.
114. I add that, as with awards of compound interest as damages for non-payment of a debt, so also with awards of compound interest as restitutionary relief in respect of a defendant's unjust enrichment: such awards do not conflict with section 35A of the Supreme Court Act 1981. As already noted, section 35A is concerned with interest on "a debt or damages". An amount of money recoverable as restitutionary relief falls within this phrase. Section 35A bites on that amount. But section 35A says nothing about the principles to be applied by the courts at the anterior stage when assessing the amount of money required to achieve full restitution."
"117. The time value of money, measured objectively in this way, is to be distinguished from the value of the benefits a defendant actually derived from the use of the money. The latter value is not in point in the present case. Sempra retained no proprietary interest in the money it paid to the Inland Revenue, and it has no interest in the "fruits" of that money. Sempra's claim is a personal claim against the Inland Revenue in respect of the benefits it transferred to the revenue. The value of those benefits should be measured as described above.
118. In the present case there can be nothing unjust in requiring the Inland Revenue to pay compound interest, by way of restitution, on the huge interest free loan constituted by Sempra's payment of ACT."
Lord Nicholls added that this would not always be so, and instanced a recipient of a payment made by mistake who made no actual use of the money, and then repaid it when the mistake came to light. I need not explore cases of that type, because the Revenue have advanced no argument, and adduced no evidence, to displace the prima facie assumption that the Exchequer has benefited from the tax overpaid, or prematurely paid, by the claimants.
"121. The point is not without force. But this is now water under the bridge. In [Woolwich] a similar submission was made regarding the availability of interest under section 35A, as opposed to the statutory repayment supplements. The point was upheld by Lord Keith of Kinkel and Lord Jauncey of Tullichettle. The majority of the House, however, took a different view. A restitutionary cause of action arose, with the usual consequences regarding interest, when the building society made the tax payments required by the ultra vires regulations. This was so, even though in the result the building society received more favourable interest treatment than other overpaying taxpayers.
122. The Woolwich case concerned a claim to simple interest under section 35A. But on this point no sensible distinction can be drawn between an overpaying taxpayer's right to seek interest under section 35A and, as in the present case, an overpaying taxpayer's entitlement to an award of interest, simple or compound, as damages or as an element of substantive restitutionary relief.
123. The Inland Revenue also submitted that Sempra's restitutionary claim based on mistake stands apart from Sempra's other two causes of action. Sempra's claims for damages for breach of statutory duty and restitution in respect of tax paid pursuant to an unlawful demand are directly founded on the United Kingdom's breach of the Treaty. This is not so with the claim based on mistake. The claim based on mistake is founded on Sempra's own mistake. The fact that Sempra's mistake arose because of this country's breach of the Treaty is not part of Sempra's cause of action. This distinction, it was submitted, provides a principled justification for treating Sempra's mistake-based claim differently from its other claims so far as compound interest is concerned.
124. Here again this point has already been decided adversely to the Inland Revenue. The effect of the decisions of this House in [Kleinwort Benson and DMG] is that money paid by mistake can be recovered, whether the mistake is of fact or law. Money paid by way of tax does not stand on a different footing. In principle the restitutionary consequences are the same for tax payments made by mistake as they are for other payments made by mistake."
"130. I can now state my conclusion on whether English law provides an effective remedy for the United Kingdom's breach of article 43 of the Treaty. In my view it plainly does. For the reasons given above, compound interest is available under English law when quantifying the extent of Sempra's losses and when quantifying the extent of the Inland Revenue's unjust enrichment."
He added in paragraph  that there would be no point in referring a further question to the ECJ, since English law provided for the award of compound interest when quantifying the remedies available to Sempra under all three causes of action which it asserted.
(c) The judgment of Lord Walker
"The crucial insight in the speeches of Lord Nicholls and Lord Hope is, if I may respectfully say so, the recognition that what Lord Nicholls calls income benefits are more accurately characterised as an integral part of the overall benefit obtained by a defendant who is unjustly enriched. Full restitution requires the whole benefit to be recouped by the enriched party: otherwise "the unravelling would be partial only" "
" a vocabulary, generally understood and accepted, to distinguish between (1) proprietary claims which may involve tracing in equity (as in Attorney General for Hong Kong v Reid  1 AC 324); (2) personal claims for an account of profits (that is, for a sum equal to the profits actually made by the defendant); and (3) personal claims for interest which represents (in a more or less conventional way) the benefit which the defendant is presumed to have derived from money in his hands."
The claims which the House was considering in Sempra, and the claims which I am considering in the present case, are all of the third type.
"183. The judgment of the Court of Justice is in my opinion a powerful encouragement for this House to reconsider the basis on which a monetary award reversing unjust enrichment can and should take account of the time value of money. In modern economic conditions simple interest does not provide full compensation in a case where unjust enrichment has lasted for a significant period (a fact which is now reflected, as Lord Hope points out, in the practice of the European Commission)
184. Lord Nicholls and Lord Hope propose to cut through the thicket of problems by recognising a restitutionary remedy available as of right at common law, subject to the court's power to resort to "subjective devaluation" in order to avoid injustice in hard cases. This would be following a course which, in the Westdeutsche case  AC 669, was not so much rejected as assumed not to be open. I must confess that my own inclination would be to take the course which this House came very close to taking, but ultimately drew back from taking, in the Westdeutsche case: that is to extend the court's equitable jurisdiction to award compound interest. Before your Lordships the law has been much more fully investigated, and in my opinion there are compelling reasons for departing from the Westdeutsche case and recognising the force of Lord Goff's and Lord Woolf's powerful dissenting speeches in that case.
185. Both Lord Goff  AC 669, 695-697 and Lord Woolf, at pp 721-723, saw their preferred solution as an extension of equity's auxiliary jurisdiction in order to make good the inadequacy of a common law remedy. That would in my opinion be a principled development in the still-evolving relationship between equity and the common law
186. In the Westdeutsche case  AC 669 Lord Goff and Lord Woolf both considered, at pp 691 and 723 respectively, that on the facts of that case compound interest was required in order to achieve complete restitution and reverse unjust enrichment. Lord Woolf recognised, at p 722, that the exercise of the auxiliary jurisdiction would (as with all equitable remedies) be discretionary, and, at p 724, that compound interest should not be awarded if the facts were such that the defendant would not have earned compound interest. Awards of simple interest under section 35A of the Supreme Court Act 1981 are also discretionary, but the court's exercise of its discretion causes few difficulties in practice. In my opinion this is clearly a case in which compound interest should be awarded, since (i) it is a case where Community law requires full restitution; (ii) the defendant is economically powerful and sophisticated and must be supposed (as the agreed "conventional basis" seems to recognise) to have taken full advantage of its premature receipts of ACT; and (iii) it is not suggested that the claimant has been at fault or has been dilatory in making or pursuing its claim.
187. I feel some apprehension about the suggested conclusion that compound interest should be available as of right, subject only to an exception for "subjective devaluation", a concept normally applicable to benefits in kind It is true that the time value of money (as opposed to money itself) may be regarded as a "non-money benefit", as Birks does in Unjust Enrichment, 2nd ed (2005), p 53. But it is a benefit which can readily be quantified in money terms; that has been, for many centuries, the function of interest. The discretionary nature of an equitable award of interest provides the necessary flexibility, though I would expect the principles for the exercise of the discretion to develop along familiar and predictable lines.
188. In this case either the common law route or the equitable route lead to the same conclusion. The appropriate exercise of discretion is to order the revenue to pay compound interest at a conventional rate calculated by reference to the average cost of Government borrowing during the relevant period. I would therefore dismiss the appeal and make the order proposed by Lord Hope."
(d) The judgments of Lord Scott and Lord Mance
XI Limitation issues
(1) To what extent is the claim statute barred by a six year limitation period?
(2) To what extent is the claim for recovery under a mistake of law barred by section 320 of the Finance Act 2004?
(a) The original claim form was issued on 8 April 2003. The only claimant at that stage was Prudential. Corporation tax claims were made in respect of dividends received from portfolio holdings in other EU/EEA states for accounting periods from 1995 to 2002.
(b) By amendment dated 2 September 2003, claims in respect of portfolio dividends received from third countries were added in respect of the same accounting periods.
(c) By amendment dated 14 July 2004, two further claimants were added: Prudential Holborn Life Limited and Scottish Amicable Life Plc. Their claims were of a similar nature to those already made by Prudential.
(d) By amendment dated 24 November 2004, additional claims were made for accounting periods from 1990 to 1994 inclusive and 2004.
(e) By amendment dated 30 June 2005, a claim for damages for breach of statutory duty was added to the particulars of claim.
(f) By amendment dated 22 January 2008, the third claimant (Scottish Amicable Life Plc) was removed from the claim. Additional claims were also made for accounting periods from 2004 to 2006.
(g) By amendment dated 1 September 2008, additional claims were made for the 2007 accounting period.
(h) By amendment dated 17 July 2009, a claim for damages for breach of statutory duty was added to the claim form; and
(i) By amendment dated 19 October 2009, claims in respect of ACT were added ("the ACT claims").
"Exclusion of extended limitation period in England, Wales and Northern Ireland
(1) Section 32(1)(c) of the Limitation Act 1980 (extended period for bringing an action in case of mistake) does not apply in relation to a mistake of law relating to a taxation matter under the care and management of the Commissioners of Inland Revenue. This subsection has effect in relation to actions brought on or after 8 September 2003.
(2) For the purposes of (a) section 35(5)(a) of the Limitation Act 1980 (circumstances in which time-barred claim may be brought in course of existing action), and (b) rules of court having effect for the purposes of those provisions, as they apply to claims in respect of mistakes of the kind mentioned in subsection (1), a new claim shall not be regarded as arising out of the same facts, or substantially the same facts, if it is brought in respect of a different payment, transaction, period or other matter. This subsection has effect in relation to claims made on or after 20 November 2003.
(6) The provisions of this section apply to any action or claim for relief from the consequences of a mistake of law, whether expressed to be brought on the ground of mistake or on some other ground (such as unlawful demand or ultra vires act).
(7) This section shall be construed as one with the Limitation Act 1980 "
XII Claims under the Tax Acts and the Autologic principle