Franked investment income case could "open the floodgates" for EU-law based tax claims says expert

Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that the Supreme Court had clarified "a number of important points" in its judgment (104-page / 487KB PDF) that a provision in the Finance Act 2007 preventing companies from claiming refunds as a result of mistakes of law made by the Inland Revenue before 8 September 2003 was unlawful. The case will now return to the European Court of Justice (ECJ), which will be asked to decide whether a retrospective provision in the Finance Act 2004 which also excluded claims brought after 8 September 2003 resulted in there illegally being "no effective remedy" available for those claims.

"Claims based on mistake of law made before 8 September 2003 remain valid, but the panel of seven judges was split on whether [the 2004 Act] was effective to deny later claims, and this is the point referred back to the ECJ," she said. "The weight of the majority opinion makes it likely, in my view, that the ECJ will hold that [the 2004 Act] contravenes the principle of effectiveness and/or legitimate expectation, leaving the door open to 'mistake' claims made after 8 September 2003."

If the ECJ decided along those lines, this "opens the floodgates for other EU law based direct tax claims", she said, which would "likely prove very expensive for the Treasury".

So-called 'DMG' mistake-related claims, after a 2006 House of Lords decision in which investment bank Deutsche Morgan Greenfell was entitled to restitution for a Revenue mistake, were "more favourable from a time limit perspective" she said, "as the time limit starts to run from the date the mistake is discovered and not the date any amount is paid in error. Further all amounts prior to discovery of the mistake are generally recoverable".

EU law requires there to be an "effective" remedy for monies paid in respect of tax that has been unlawfully charged. In addition to a DMG claim, for tax wrongly paid under a mistake, in the UK a company can also claim for repayment of tax "unlawfully demanded" - known as the 'Woolwich' principle, after the relevant case.

"The Supreme Court confirmed unlawful demand is not an essential element of Woolwich and therefore such a claim would have been available if brought in time," explained tax law expert Jake Landman of Pinsent Masons.  "The Supreme Court was unanimous in finding that the remedy extends to all amounts paid to HMRC as a result of or connected with a statutory requirement to pay tax not lawfully due."

"Questions have been referred to the ECJ because two of the Supreme Court panel thought that the fact that Woolwich was potentially available meant the curtailment of DMG claims by Finance Act 2004 was acceptable" he said.