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UK's retrospective blocking of franked investment income 'mistake' claims was illegal, says Advocate General


The UK breached EU law when it introduced legislation to retrospectively block claims tax repayment claims for mistakes of law, an EU legal adviser has said.

Giving his opinion as part of a long-running legal dispute concerning the tax treatment of dividends and EU discrimination law, Melchior Wathelet said that blocking the ability of taxpayers to bring so-called 'DMG mistake' claims left them without an effective remedy.

The Finance Act 2004 removed the more favourable time limit for DMG mistake claims made on or after 8 September 2003, but did not receive Royal Assent until 22 July 2004.

Wathelet is an Advocate General of the Court of Justice of the European Union (CJEU). Advocates General's opinions are not binding on the Court but are followed in the majority of cases.

Last year, the UK Supreme Court ruled that a 2007 Finance Act provision that prevented companies from claiming refunds as a result of mistakes of law made before this date was unlawful.

The opinion relates to a long-running dispute between the UK tax authorities and a number of UK-based multinational companies, known as the Franked Investment Income group litigation (FFI GLO). Between 1973 and 1999 the UK offered UK parent companies an exemption from corporation tax on dividends paid up by UK subsidiaries. Dividends paid up by foreign subsidiaries were taxable, although in most cases offset by relief for the foreign tax borne by the subsidiary. The CJEU has already found that this approach was unlawful discrimination under EU law.

EU law requires there to be an "effective" remedy for monies paid in respect of tax that has been unlawfully charged. Under UK law, companies can claim back tax wrongly paid as a result of a mistake of law (the 'DMG' principle), or tax "unlawfully demanded" (the 'Woolwich' principle).

DMG claims are named after the House of Lords decision in 2006 that Deutsche Morgan Grenfell could reclaim advance corporation tax which it had paid under mistake of law and that the six year time limit for bringing claims ran from the date the mistake was discovered, or could reasonably have been discovered, and not the date the tax was paid. In contrast, Woolwich claims have to be made within six years of the date the tax was paid.

DMG claims were therefore usually more favourable from the point of view of statutory time limits. Where claims depend upon a ruling of the CJEU that a provision of UK law is unlawful, it can be a number of years after the tax was paid before the CJEU rules and therefore before the taxpayer can become aware that it has overpaid tax due to a mistake of law.

However, the ability of a company to rely on the more favourable time limit to bring a DMG claim against the tax authorities on or after 8 September 2003 was removed by section 320 of the 2004 Finance Act. From that date claims can only be made within six years of the date the tax was paid and not the date the mistake was discovered.  No transitional provisions were available for pending claims, such as that in the current case.

At the time the events in dispute took place, the Inland Revenue was the relevant tax authority. Its role has now been superseded by that of HM Revenue and Customs (HMRC). HMRC argued that, although the companies were prevented from bringing a DMG claim under section 320, the Woolwich principle still operated leaving them with an effective remedy providing that they acted within the statutory time limit.

In his opinion, the Advocate General said that member states were not required to establish more than one legal remedy to enable individuals to safeguard their legal rights. However, if more than one legal remedy was available, the Treaty of the European Union (TEU) required each of those remedies to offer "effective" legal protection, meaning that "the conditions in accordance with which it may be used and achieve a positive outcome are known in advance".

"Accordingly, as soon as taxpayers choose one of the national legal remedies available under national law ... or have recourse to the only national legal remedy available, they must come under the protection offered by the general principles of EU law," he said. "It follows that the amendment made by the Finance Act 2004, with retroactive effect but without transitional arrangements, to the rules governing the time-barring of claims based on a cause of action which had been open to the litigants makes it impossible to exercise rights conferred upon them by EU law," he said.

"The fact that the litigants could have chosen another cause of action, fully consistent with the principles of equivalence and effectiveness, is irrelevant in this regard," he said.

The Advocate General was not persuaded by the UK government's argument that the reimbursement of tax sought was so significant that the protection of public interest was concerned in preventing the disruption of public finances. The repayment claimed was about £2 billion and several billions of pounds were at stake in other similar cases. 

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