Case Nos: CA-2024-000713 - [2025] EWCA Civ 1271

This is the latest episode in long-running group litigation known as the Franked Investment Income (“FII”) Group Litigation. The focus of this litigation is on UK-parented groups with foreign subsidiaries, and on the tax treatment of dividends coming into the UK from abroad. The case has been to the Supreme Court three times already. There have also been three references to the Court of Justice of the European Union (“CJEU”) (Footnote: ¹). In one of the appeals to the Supreme Court, Lord Reed and Lord Hodge described the amounts of money at stake as “colossal”.

The issue at the heart of this appeal, namely: “when did the time for bringing these claims start to run under section 32(1)(c) of the Limitation Act 1980?” also potentially affects the claims made under other group litigation orders in which claimants are seeking the restitution of tax paid under a mistake of law.

The FII Group Litigation Order (“the FII GLO”) was established on 8 October 2003. Under the FII GLO, as amended from time to time, various claims were selected as test claims for the purposes of determining identified common issues, and the rest were stayed.

The claimants seek to recover corporation tax which both they and the Revenue (which expression encompasses both the defendants) believed to be payable at the time when it was paid, but which the CJEU subsequently ruled was paid under a domestic tax regime that was incompatible with certain of the fundamental freedoms guaranteed by EU law. That decision of the CJEU (“FII CJEU 1”) was promulgated on 12 December 2006. The incompatibility having been established, the CJEU left it to the domestic courts to provide the claimants with a suitable remedy.

The FII GLO embraces challenges to the UK tax regime applicable to dividends received by a UK company from non-UK subsidiaries which was already operative in 1973, when the UK joined what became the European Union. The regime was modified in 1999 by the abolition of the system of advance corporation tax (“ACT”) but continued until April 2009. This appeal is concerned with two of the three challenges, which were referred to as “the DV Challenge” and “the ACT Challenge” in the court below.

The claimants contended that the domestic regime exposed them to a higher tax liability than would have been imposed if the relevant provisions were compatible with EU law, and that they had paid the additional tax in the mistaken belief that the domestic provisions were compatible with EU law. Therefore, they were entitled to restitution of the overpaid tax or damages in lieu. The Revenue contested the claims. In a judgment delivered in November 2008, following a trial in July that year [2008] EWHC 2893 (Ch); [2009] STC 254 (“FII HC 1”), Henderson J found for the claimants on that issue. He rejected the Revenue’s contention that the claims were barred by various provisions of the Finance Acts 2004 and 2007 and by section 33 of the Taxes Management Act 1970.

Once it had been established that payments of tax had been made under a mistake of law, the question arose as to whether a claim to recover the tax on the basis of unjust enrichment would be time-barred six years after the mistaken payment was made (as would ordinarily be the case under section 5 of the Limitation Act 1980) or whether on the facts the claimant company which made the tax payments could take advantage of section 32(1)(c) of that Act (“the 1980 Act”) to postpone the running of the limitation period.

Section 32 of the 1980 Act is entitled “Postponement of limitation period in case of fraud, concealment or mistake”. It provides, so far as relevant, as follows:

“(1)

Subject to subsections (3) and (4A) below, where in the case of any action for which a period of limitation is prescribed by this Act…

…

(c)

the action is for relief from the consequences of a mistake;

the period of limitation shall not begin to run until the plaintiff has discovered the… mistake… or could with reasonable diligence have discovered it.”

A few years before the decision in FII CJEU 1, it had been established by the House of Lords in Kleinwort Benson v Lincoln City Council [1999] 2 AC 349 that section 32(1)(c) of the 1980 Act applies to payments made under a mistake of law. In those circumstances, the issue which fell to be determined in the context of the FII GLO was: on what date did time begin to run for the purposes of that section? That turned on when the claimants discovered the mistake of law or could with reasonable diligence have discovered it.

In his second judgment [2014] EWHC 4302 (Ch) (“FII HC 2”) Henderson J held that the date on which the claimants could with reasonable diligence have discovered the mistake (“the date of discoverability”) was 8 March 2001, that being the date on which the CJEU had delivered its judgment in joined cases C-397/98 and C-410/98, Metallgesellschaft Ltd v IRC, Hoechst AG v IRC [2001] Ch 620 (“Hoechst”) .

The Court of Appeal disagreed [2016] EWCA Civ 1180; [2017] STC 696 (“FII CA 2”) holding that the date of discoverability was 12 December 2006, the date on which FII CJEU 1 was promulgated. Both those judgments applied the decision of the House of Lords in Deutsche Morgan Grenfell Group plc v IRC [2007] 1 AC 558 (“DMG”) in which it was held that in a context in which the relevant point of law is being actively disputed in current litigation, the date of discoverability was the date on which a final appellate court states the law as it was at the time of payment. That analysis assumed that a mistake of law could not be “discovered” unless and until it was established.

The Revenue appealed, not only challenging the decision in DMG but the decision in Kleinwort Benson that section 32(1)(c) was applicable to mistakes of law. The Supreme Court, by a majority, allowed the appeal in part, overruling DMG. In a judgment handed down on 20 November 2020 [2020] UKSC 47; [2022] AC 1 (“FII SC 2”) Lord Reed PSC and Lord Hodge DPSC (with whom Lord Lloyd-Jones JSC and Lord Hamblen JSC agreed) concluded that:

Those two formulations were said to be no different in substance; each was “helpful and casts light on the other” [193]. The latter formulation was derived from the dissenting speech of Lord Brown in DMG (which is quoted and analysed at [180] to [183] of FII SC 2) in which he referred variously to a claimant recognising “that a worthwhile claim arises that he should not after all have made the payment” and learning “that there was a serious legal challenge to the legality of the ACT regime.”

In a case such as this, where an understanding of the law has been later altered by a judicial decision, the limitation period will run from:

“the date when it was discoverable by the exercise of reasonable diligence that the basis of the payment was legally questionable, so as to give rise to a worthwhile claim in restitution” (FII SC 2 at [210].)

The Supreme Court remitted to the High Court the question of when the mistake of law could have been discovered with reasonable diligence in the FII cases, applying what it had determined to be the correct legal test.

Four test claims were selected for the purposes of determining the limitation issues. They are broadly representative of various points in time at which members of the FII GLO brought their claims. The claim by the Evonik Group (“Evonik”) was the first in time; it was issued on 12 July 2002. The next of the test cases was the claim by the British American Tobacco Group, (“BAT”) which was issued on 18 June 2003, followed by the claim by FCE Bank Plc, (“FCE”) issued on 2 March 2007, and finally the claim by the EMI Group (“EMI”) issued on 18 December 2009.

In a judgment handed down on 5 February 2024 ([2024] EWHC 195 (Ch), Richards J (“the Judge”) held that the date on which the claimants could with reasonable diligence have discovered the mistake of law upon which their claims for restitution are based was 6 June 2000, that being the date on which the CJEU handed down its judgment in Staatssecretaris van Financiën v Verkooijen, Case C-35/98[2002] STC 654 (“Verkooijen”). The date which the Judge selected was one for which neither the claimants nor the Revenue contended, at least originally, although it appears from [30] of the judgment that the claimants modified their position in oral argument.

The Revenue appealed on the basis that the Judge erred in law and that certain of his fact-findings were irrational. They contend that he applied the test laid down by the Supreme Court in FII SC 2 in a manner that was significantly more favourable to claimants than the Supreme Court intended, and that on a proper application of the test, the claimants could have discovered their mistakes by 11 July 1996 at the latest (i.e. more than six years before the earliest of the test claims.)

FCE cross-appealed on the basis that the Judge picked too early a date for the date of discoverability of the mistake on which an ACT Challenge was founded. They complain that the Judge erred in his analysis of Verkooijen and that there was nothing in the CJEU’s decision or reasoning in that case to suggest that a worthwhile claim could be made that the UK’s denial of an FII credit in respect of overseas dividend income breached EU law. They contend that the date of discoverability of such a worthwhile claim was when the CJEU handed down its judgment in Hoechst (i.e. the date alighted on by Henderson J in FII HC 2).

For the reasons set out in this judgment, I would dismiss both the appeal and the cross-appeal. I consider that the Judge made none of the errors ascribed to him. He was entitled to find that on a proper application of the test laid down by the Supreme Court, on exercising reasonable diligence the claimants could not have discovered the mistake of law before 11 July 1996. That was an evaluative judgement made on the evidence adduced at trial. The only matter on which I would respectfully differ from the Judge is that I consider that if, for the reasons that he gave, a properly advised multi-national group would have recognised that there was a worthwhile claim/would have had sufficient confidence to embark on the preliminaries to litigation when the judgment of the CJEU in Verkooijen was published, they would also have done so once the second Opinion of the Advocate General in that case was published, in December 1999. However, that minor difference in the date makes no difference to the outcome of this appeal.