![Case Nos: CA-2024-000713 - [2025] EWCA Civ 1271](https://backend.juristeca.com/files/emisores/logo_Sjvxvlx.png){kind=logo}
BACKGROUND
BACKGROUND
As the Judge observed at [7], the previous 20 years of litigation in the FII GLO subjected the relevant tax treatment to microscopic scrutiny, and it would not be possible to capture the nature of that scrutiny in any short summary. He helpfully set out in his judgment at [8] the aspects of the regime which were of particular significance to his judgment and to this appeal. For present purposes a broad overview of how the regime operated will suffice.
The Income and Corporation Taxes Act 1988 (“ICTA”) provided for the system of ACT under section 14 and Part VI (“the ACT provisions”) and for the taxation of dividend income from non-resident sources under section 18 (Schedule D, Case V) (“the DV provisions”).
Between 1973 and 2009, corporation tax was levied on UK resident companies under the DV provisions on dividends they received from non-UK companies, which was subject to credit relief for foreign taxes paid (double tax relief or “DTR”). However, no tax was payable on dividends received by a UK resident company from another UK resident company.
The DV provisions were repealed for dividend income received on or after 1 April 2009.
Between 1973 and 1999 a UK resident company was required to account for ACT on any dividends that it paid to its shareholders, but there was an exception for payments to another UK company which was a member of the same group. In that situation a “group income election” could be made which prevented ACT from becoming due.
If a group income election was not made, and ACT was paid, in principle it would generate a tax credit which could be set off against the paying company’s obligation to account for “mainstream” corporation tax on its profits (“MCT”). If the MCT due was less than the ACT paid in a given tax year, the surplus ACT could be carried forward or back by the paying company. It could also be surrendered to a UK resident subsidiary which could use it to offset its own corporation tax liabilities.
The aggregate of the dividend plus the tax credit constituted “franked investment income” (“FII”) of the UK resident recipient. Being “franked” by the ACT that was payable when the dividend was declared, FII reduced the obligation of the recipient company to account for ACT on dividends that it paid. A dividend paid by an overseas company could not be treated as FII.
ACT was abolished for distributions made on or after 5 April 1999.
It is unnecessary to set out the nature of the underlying legal challenges in any detail, since they succeeded and it is now common ground that there was an overpayment of tax. Suffice it to say that the test claimants, all of whom are multi-national groups with UK resident parents and EU resident subsidiaries, claimed that the differences between their tax treatment and that of wholly UK-resident groups of companies breached the provisions of article 43 (freedom of establishment) and article 56 (free movement of capital) of the EC Treaty (“the Treaty”) and their predecessor articles (now articles 49 and 63 of the Treaty on the Functioning of the European Union (“TFEU”)). The “DV Challenge” challenged the difference between the corporation tax treatment of non-UK dividends and the corporation tax treatment of UK dividends; the “ACT Challenge” challenged the proposition that overseas dividends were incapable of constituting FII.
As the Judge recognised (at [83] and [97]), both types of challenge raised questions touching on the coherence of the UK’s tax system and on double taxation matters. The DV Challenge sought to establish that the UK should refrain altogether from taxing dividends received from EU resident subsidiaries, even though the UK had collected no tax on the profits out of which those dividends were paid. The ACT Challenge sought to establish that the UK should treat EU dividends as FII, with a consequent reduction in the amount of ACT collected, even though no UK tax was payable on the profits out of which the EU dividends were paid and no ACT had been paid when those dividends were paid. Both challenges therefore struck at the heart of the way in which the UK chose to deal (or not deal) with matters such as economic double taxation, and so with the way in which the UK’s tax regime interacted with the tax regimes applicable in other member states.
If section 5 of the 1980 Act applied, Evonik’s claims would be limited to the period from 12 July 1996, BAT’s claims to the period from 18 June 1997, FCE’s claims to the period from 2 March 2001 (with the practical effect that all its claims are time-barred), and EMI’s claims to the period from 18 December 2003. The limitation issue also affects other GLOs in which claims were made in respect of the overpayment of other types of tax.