UT/2024/000060 - [2025] UKUT 00143 (TCC)

The JR Claim is brought with the permission of the Administrative Court, and was transferred to the Upper Tribunal on 14 May 2024.

The background facts were not in dispute and are drawn from the Claimant’s Amended Statement of Facts supplemented, as appropriate, by the correspondence between the parties put before us. In this section we focus on the facts necessary to put the Decision which is the subject of current challenge and the Claimant’s grounds in context.

The Claimant is part of a group of companies that carries on a global business manufacturing and selling indoor climate control solutions. During the accounting period ended 31 December 2002, the Claimant received dividends of £1,234,395 from an Irish-resident subsidiary. In that period it also had NTLRD of £2,671,788. (The two year statutory time limit for making NTLRD claims accordingly expired on 31 December 2004).

The Claimant’s Return of 31 March 2004 for that accounting period was completed on the basis that dividend income was taxable (showing taxable profits of £1,128,00) (“the Original Return”). The Claimant also made a claim to offset £1,127,000 of its NTLRDs against its profits. The unused balance was surrendered as group relief to a group company Purmo (UK) Limited (“Purmo”).

That return was later amended in-time by the Claimant on 22 December 2004 to treat the Dividends as exempt (“the Amended Return”). The offset claim was withdrawn. The Claimant took the view, based on advice it received, that the UK’s approach to taxing dividends received from overseas companies was incompatible with EU law (given the more favourable treatment of domestic dividends).

On the basis that the Dividends were exempt, and within the relevant time limit for doing so, the Claimant surrendered the whole of the NTLRD (£2,671,788) to Purmo.

On 22 December 2005 HMRC opened a statutory enquiry into the Amended Return.

On 31 March 2010 the Claimant’s then advisers wrote to HMRC to make a claim in the alternative for tax credit relief in respect of the underlying tax arising on the overseas dividend income. The letter explained that the Claimant had not claimed tax credit relief on the underlying tax that arose on the dividend income because the returns treated the income as non-taxable. It sought to protect the Claimant’s position in the event, in view of the uncertainty of the outcome of the ongoing FII Litigation, that the dividend income was ultimately found to be taxable.

As regards the Claimant’s treatment of Dividends as exempt in the Amended Return, it was later confirmed as a result of court decisions, that the UK was not required to exempt overseas dividends from UK tax but instead had to provide a credit for foreign tax at the foreign nominal rate (“FNR”). Applied to the Claimant’s case, the Claimant was liable for UK tax. The FNR of 10% was below the UK corporation tax rate (of 30%). So, although there was a credit for foreign tax (which based on the 10% FNR came to £123,439) that did not extinguish the UK tax the Claimant was liable for on the Dividends. The Claimant therefore asked HMRC, in a letter of 11 March 2021, to reduce (by £822,928) the NTLRD sum which the Claimant had previously surrendered to Purmo, and instead to use that sum to set off against the amount which the Claimant was now taxable for (the £1,234,395 on the Dividends less available deductions).

The NTLRD reduction figure of £822,928 was thus arrived at by the Claimant by factoring in various elements, as helpfully summarised by the submissions of Mr Firth KC. The starting point was that the change in treatment of those Dividends from exempt under the Claimant’s amended return to taxable would mean the Claimant had a higher profit. In the light of that the Claimant wanted to hold back sufficient NTLRD to use for itself to be able to reduce its tax charge to nil (rather than giving it all to Purmo as it had done before). It did not need to hold back all of the NTLRD to do that because it could get a credit for foreign tax (the £123,439 calculated at the FNR of 10%). The new amount of NTLRD now available for the Claimant (together with other available deductions) would, when applied to the Irish dividend income, result in tax of £123k (which the foreign tax credit of equivalent amount could then eliminate). The reduction in the NTLRD set-off by £822,928 would of course mean in turn that the recipient, Purmo, benefitted from less relief. That was not a problem however, because Purmo could mitigate that by carrying back its own loss from a later accounting period.

On 11 March 2021 the Claimant, on the basis outlined above, made the following claims, having set out its view that the correct FNR was 10%, namely that:

On 2 April 2021, HMRC agreed with the Claimant that the FNR was 10%. As regards the claims referred to at 1) and 2) above, it also on that date agreed to the claim for reduction of group relief surrendered to Purmo (subject to HMRC receiving the necessary consents from the relevant group companies) and the claim for Purmo to carry back its loss.

The group companies’ consents were provided on 5 May 2021. HMRC wrote on 28 May 2021 stating the case worker was “waiting on internal approval for the late claim to the [NTLRD]” (i.e. the claim referred to at 3) above) and would “close enquiries” for both parties once that was received.

On 8 March 2023 HMRC wrote to say the claim to use the NTLRD was refused because it was late but that decision was later withdrawn on 7 July 2023. Following further exchanges of correspondence HMRC stated in its letter of 13 October 2023 its “provisional view” that the NTLRD claim would not be admitted. The Claimant made further representations in its letter of 13 November 2023. HMRC then issued the decision which is the subject of this judicial review claim, that is to say the Decision, on 5 January 2024.

In the Decision HMRC refused the claim to set-off the NTLRD (claim 3) above). The claim had not been made within two years of the relevant period (i.e. by 31 December 2004) and HMRC refused to exercise its discretion to extend that time limit. Its reasons included that the Claimant’s case did not fall within the SP. In order to put the detail of the Decision in context it is convenient at this point to set out the law stating the two year time limit and then to say something more about the SP.