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

The Judge began his consideration of the issue he had to determine by setting out the test he had to apply, as set out in FII SC2. It is worth setting out [21] of the judgment in full:

“[21] I draw the following conclusions from both FII SC2 and subsequent authorities:

i)

The task is to identify when the Claimants could, with reasonable diligence, have discovered “the mistake”. That is the mistake that the Claimants have pleaded, and succeeded in establishing, namely that, contrary to what they thought at the time, UK tax law was incompatible with the Treaty (see [199] of FII SC2).

ii)

The burden is on the Claimants. Therefore, if the Claimants put forward a time (T) as the earliest date of a constructive discovery, the burden is on them to show that they could not have discovered their mistake earlier than time T without exceptional measures that they could not reasonably have been expected to take ([203] of FII SC2).

iii)

The “reasonable diligence” standard is objective. The Claimants are to be judged “by reference to how a person carrying on a business of the relevant kind would act on the assumption that he desired to know whether or not he made a mistake, if he had adequate but not unlimited staff and resources and was motivated by a reasonable but not excessive sense of urgency”. ([213(16)] of FII SC2). At [255] of FII SC2 this hypothetical reasonable person was referred to, as a shorthand, as a “well-advised multi-national group in the UK”.

iv)

Paragraph (iii) above is dealing with a standard of behaviour. The question posed by s.32(1) is what the Claimants (themselves) could have discovered if they had exercised reasonable diligence coming up to that standard ([48] of Males LJ’s judgment in OT Computers Ltd (in liquidation) and others v Infineon Technologies AG and others [2021] EWCA Civ 501). That invites a consideration of two questions, both of which may shed light on each other:

a)

When, having exercised reasonable diligence, would the Claimants have had sufficient confidence to justify embarking on the preliminaries to the issue of proceedings such as submitting a claim to HMRC, taking advice and collecting evidence ([191] and [193] of FII SC2)?

b)

When, having exercised reasonable diligence, would the Claimants have discovered that they had a “worthwhile claim”?

(v)

The questions posed in paragraph iv) above are not directed at when the Claimants could have expected that their pleaded claims would succeed (as the discussion in FII SC2 of the “logical paradox” reveals). Nor are they directed at a complex evaluation of chances of success (see [47] of Gemalto Holding BV and others v Infineon Technologies AG and others [2022] EWCA Civ 782) although, of course, if at time T, all that the Claimants could, with reasonable diligence, have discovered was a claim that would be struck out as disclosing no cause of action, they would not have discovered a “worthwhile” claim.

vi)

The question is whether the mistake “could” with reasonable diligence have been discovered rather than whether it “should” have been.”

The Judge made it clear at [25] that he would not give either of the questions he summarised at [21] iv) any greater significance than the other, given the guidance from the Supreme Court that both formulations were appropriate and each can shed light on the other.

The Judge next set out his approach to making relevant findings of fact. At [29] he identified four issues that he needed to address:

At [31] the Judge explained the steps he had taken to avoid being unduly influenced by hindsight, identifying certain areas of the parties’ cases where that risk arose.

At [32] the Judge found that a well-advised multi-national exercising reasonable diligence to ascertain whether it had a worthwhile claim would have had nothing like the wealth of material available to it that was analysed in minute detail by the experts called by the parties. He found that neither an Appropriate Adviser nor a well-advised multi-national would perform anything like that kind of detailed analysis when considering whether there was a worthwhile claim. Instead they would be guided by a high-level appreciation of relevant legal principles, in the expectation that a more detailed analysis would follow the identification of a worthwhile claim.

The parties had been given permission to call expert evidence on the subject of “how legal thinking on whether the UK tax treatment of dividends received by UK-resident companies from non-resident subsidiaries in the form of ACT on subsequent distributions and tax on dividend income was compatible with EU law developed in the period to 18 December 2003”. The Judge preferred the expert evidence of Mr Gammie, the Claimants’ expert, to that of the Revenue’s expert, Professor Barnard, among other reasons because Professor Barnard had no expertise in tax matters, whereas Mr Gammie was able to offer expert opinion evidence from the standpoint of a tax practitioner (with expertise in both tax and EU law) on the thinking of tax advisers at all relevant times.

The Judge found that the well-advised multi-national exercising reasonable diligence would have taken professional advice as to whether a DV Challenge or an ACT Challenge would be worthwhile (in the sense explained in FII SC2). That professional advice would be given by an adviser or team of advisers having expertise in both the UK tax system applicable to domestic and overseas dividends and in EU law matters. The Judge then considered what such an Appropriate Adviser would have known or believed at different points in time. At [63] he found that the Appropriate Adviser would have been aware at all material times that direct tax was not an enclave to which Treaty freedoms were inapplicable. However, in the period prior to July 1996 there was nothing in the academic or professional literature to suggest that Relevant UK Law was incompatible with Treaty freedoms.

The Judge went on to find at [70] that an Appropriate Adviser would not have advised that there was a “worthwhile claim” if asked that question in the period prior to July 1996. At [71] he accepted Mr Gammie’s evidence as to the state of legal thinking at that time (namely, that there were fundamental impediments to such a challenge) the key points being that in 1996:

The Judge accepted that the decision of the CJEU in Finanzamt Koln-Altstadt v Roland Schumacker (C-279/93) [1996] QB 28 (“Schumacker”) would have been of real interest to the Appropriate Adviser. That case concerned a Belgian national, resident in Belgium, whose entire income was derived from his employment in Germany, who successfully claimed that he should be treated for income tax purposes by the German tax authorities in the same way as a German resident taxpayer. The Judge noted Mr Gammie’s acceptance that this case was “an invitation to probe the extent to which member states were exercising their competence in direct tax matters in a manner that was compatible with EU law.” The bringing of the Hoechst claims in the UK would also have caught that Adviser’s attention. However, for the reasons set out in detail at [93] to [101], the professional consensus described by Mr Gammie was not undermined by those developments.

As the Judge pointed out at [95], contemporaneous writing on Schumacker emphasised that it set out an exception to the general rule that residents and non-residents were not comparable for direct tax purposes. At [96] and [97] he accepted Mr Gammie’s evidence that the Hoechst case would have been perceived at the time as a challenge of a very different nature to the ACT and DV Challenges which raised no questions touching on double taxation or the coherence of the UK tax system. At [98] he referred to a 1994 commentary by Professor Tiley which supported the view at that time that the relevant difference in tax treatment could be justified on grounds of “cohesiveness” of the domestic tax system (the principle applied in Bachmann). The Judge concluded that section of his judgment by reiterating at [106] that if a well-advised multi-national had consulted an Appropriate Adviser in July 1996, the advice would have been that there was no worthwhile claim.

The Judge addressed the judgment of the CJEU in Verkooijen at [110] to [116]. That case concerned a national tax system in which dividends distributed by companies established in the Netherlands were subject to a deduction of tax at source. If this deduction was made, the Netherlands taxpayer who was liable to income tax on the dividends obtained a limited, relatively modest, exemption from tax. This was apparently designed as an incentive to invest in Netherlands companies. Mr Verkooijen held shares in the parent company of his employer, which was established in Belgium. He received a dividend on those shares from which a deduction of tax had been made at source in Belgium. He complained that he had not been allowed the exemption that he would have received had the dividend been paid on shares in a Netherlands company, and that this was unjustified discrimination.

The CJEU held that this difference in treatment was an unlawful restriction on the free movement of capital. Unlike Bachmann, in which there was a direct link between the granting of a tax advantage and the offsetting of that advantage by a fiscal levy, both of which related to the same tax and the same taxpayer, there was no link between the grant to shareholders resident in the Netherlands of income tax exemption in respect of dividends received, and the taxation of the profits of companies with their seat in a different Member State, Belgium. They were two separate taxes levied on different taxpayers. The fact that the Netherlands would lose tax revenue by granting such an exemption in respect of foreign dividends was not an overriding reason in the public interest which could be relied upon as justification for a measure which was in principle contrary to a fundamental freedom.

The Judge decided that the CJEU judgment in Verkooijen was significant because the reasoning adopted by the court struck at the heart of the professional consensus and thereby “dismantled” it, for reasons he set out at [115] and [116], but which are perhaps best expressed in a later passage at [133]:

“133.

The judgment in Verkooijen would significantly have undermined the professional consensus that Mr Gammie described. In particular:

i)

Despite the aspect of the consensus described in paragraph 71.i), the CJEU felt able to declare the way in which the Netherlands had decided to address issues of double taxation on cross-border dividend flows to be incompatible with Treaty freedoms even in the absence of harmonised action throughout the EU.

ii)

Despite an express invitation by the governments of the UK and the Netherlands, the CJEU declined to conclude that the situation where Mr Verkooijen received a dividend from a Netherlands company was not comparable with the situation where he received a dividend from a company resident in Belgium. That clearly called into question the aspect of the consensus described in paragraph 71.ii).

iii)

The CJEU expressly rejected arguments based on the “cohesion of the tax system”. In their closing submissions, the Claimants characterised the CJEU’s reasoning as “short and a little wooden” but, whatever the quality of its reasoning, the judgment clearly dented the aspect of the consensus described in paragraph 71.iii).”

Considering the period between 1996 and the decision in Verkooijen, the Judge regarded it as significant that there was no written material (authored by either academics or practitioners) that was starting to question the consensus after 11 July 1996. Even in the immediate aftermath of the CJEU’s decision in Verkooijen on 6 June 2000, commentators were not suggesting that this decision had confirmed something that people had already started to suspect, namely that DV Challenges or ACT Challenges were worthwhile. At [121] the Judge referred to an article written in 1998 by a Swedish academic, Professor Lodin, which raised a number of the issues that the CJEU came to consider in Verkooijen, but concluded that discriminatory tax rules, such as those dealing with cross-border dividends, should be amended in the interests of ongoing European economic integration. Professor Lodin did not suggest that those rules were already incompatible with Treaty freedoms.

The Judge rejected the Revenue’s argument that because Mr Verkooijen (and those advising him) had sufficient knowledge to bring his claim in the Netherlands, a well-advised multi-national in the UK using reasonable diligence could also have realised that the CJEU might decide that the situations of the EU resident subsidiary and the UK resident subsidiary were “comparable” in this context, and/or reject the application of the concept of “cohesiveness” as a justification for the difference in treatment between them. That argument, in simple terms, was that if a Dutch lawyer could discover a worthwhile basis for challenging the legality of measures of this type on the basis of incompatibility with Treaty freedoms, then so too could a UK lawyer.

The Judge accepted Mr Gammie’s evidence that thinking in mainland Europe on the potential for CJEU decisions on Treaty freedoms to influence domestic direct tax systems was at that time well ahead of thinking in the UK. He held that even if practitioners in the Netherlands would have thought that Mr Verkooijen had a worthwhile claim before the CJEU gave its judgment, an Appropriate Adviser in the UK would not have thought the same.

As to whether an Appropriate Adviser would have realised that there was a worthwhile challenge to the Relevant UK Law as a result of seeing the way in which the case was put in Verkooijen, the Judge found that an Appropriate Adviser would not have been aware of the Verkooijen proceedings until at least the publication of the Opinion of the Advocate General. There were in fact two such Opinions, delivered on 24 June 1999 and 14 December 1999 respectively. In the earlier Opinion, the Advocate General considered that in principle the measure complained of was an obstacle to free movement of capital and freedom of establishment, but that it could be justified as being necessary to ensure the cohesion of the tax system (as in Bachmann). However, that view (which was in line with the third limb of the consensus described by Mr Gammie) was based on a misunderstanding of how the system operated in the Netherlands. In the second Opinion, after the misunderstanding had been corrected, the Advocate General distinguished Bachmann on the basis ultimately accepted by the CJEU, namely, that there was not a direct link between the tax, the exemption, and the tax deduction, which was an essential ingredient of justification on grounds of cohesiveness.

Finally the Judge rejected the argument that the date on which a claimant could have discovered they had a worthwhile claim on an ACT Challenge was different from, and later than, the date on which they could have discovered that they had a worthwhile claim on a DV Challenge. He held that because the judgment in Verkooijen was inconsistent with a substantial proportion of the professional consensus that Mr Gammie had described, that in itself would have given a well-advised multi-national sufficient confidence to embark on the preliminaries referred to in paragraph [21] iv) a) of the judgment in respect of both types of challenge. He said at [134] that he would have needed some clear basis, grounded in contemporaneous evidence as to the state of legal thinking, for concluding that, despite the clear dent to the professional consensus that must have arisen following the Verkooijen judgment, a well-advised multi-national would have concluded that there was no worthwhile ACT Challenge on 6 June 2000. The claimants’ evidence was insufficient for him to reach that conclusion.