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

As to the practical difficulties in establishing the FNR that was applicable in the Claimant’s circumstances, Ms Ruxandu’s answer, which was not countered by the Claimant, is that the FNR was simply the relevant tax rate in the foreign country and thus straightforward to establish.

Mr Firth took us to the authority Test Claimants in the FII Group litigation v HMRC [2016] EWCA Civ 1180 by way of explanation for how the FNR was arrived at. The analysis there at [88] to [115] canvassed a number of different calculation options. The length and detail of the ensuing analysis are consistent with determination of the FNR being viewed as a complex exercise. However as Ms Ruxandu pointed out that was about working out the FNR in respect of so-called mixer companies; i.e. a company in one foreign jurisdiction into which foreign dividends from a number of different country sources subject to different tax rates of tax were paid in order that the eventual credit was optimised. That more factually complex situation naturally gave rise to more options and greater complexity.

In this case the only fact specific analysis that was required, given Irish corporation tax set different rates for companies which were manufacturing companies, was to determine whether the company fell into the manufacturing category of income or not. In the Irish subsidiary’s case it was clear the 10% rate applied as that was the specified rate of tax in Ireland for that kind of company. There is no suggestion (remembering that the dividend paying company was a subsidiary) that the Claimant would not readily know its Irish subsidiary’s manufacturing status or (in contrast to some of the difficulties highlighted in the situation of investment companies receiving portfolio dividends) was unable to ascertain the underlying tax actually paid (which might be different in an individual case because of the particular deductions and reliefs available) to confirm that this was lower than the FNR.

A Deficit Claim (based on an FNR claim at 10%) could therefore have been made at the latest in 2018 following Prudential SC. It was not therefore irrational for HMRC to refuse to exercise its discretion on the basis that a quantified deficit claim could have been made earlier.

The Claimant also points to the fact theFNR was only agreed with HMRC in April 2021.The reference to the FNR only being agreed in April 2021 however somewhat undermines the point being made. In the letter of 11^th March 2021, by which the Deficit Claim was made, the Claimant’s advisers specified that the FNR was 10%, which applied to manufacturing income for the Irish-resident subsidiary company. The Claimant did not wait however for FNR to be agreed with HMRC before making the Deficit Claim. As it happens, HMRC did agree this rate, but only by their letter of 2^nd April 2021 which, to state the obvious, postdated the letter of 11^th March 2021. Agreement on the FNR was not therefore something which in fact held up the making of the Deficit Claim. Nor does it appear the case that agreement on the FNR was a pre-condition to making the Deficit Claim at an earlier date. As such, this point falls away.

We should also note that in oral submissions Mr Firth in fact accepted that it was possible in theory to quantify the Deficit Claim. Putting aside the legal impossibility of making a claim (which we have rejected) the Claimant could of course have put in a claim which stated a figure. But Mr Firth’s essential point was that simply putting in any figure would not properly optimise the use of the available deficits. That must be correct. Nevertheless it is difficult to see how having to incur a risk that the figures selected would not be optimal would constitute a reason which would then render it irrational for HMRC to refuse a late claim made on that basis. It remained open to the taxpayer to take a view (just as anyone else) on what the correct legal analysis was and put an in-time claim (as an alternative) on that basis.

Mr Firth’s submissions on this point also contrasted what he termed “discretionary” claims which involved a taxpayer stipulating an amount (subject to ceiling) (such as the NTLRD claim), in respect of which, if the claim was accepted the taxpayer would be held to that figure (even if turned out they could have claimed more) and those claims where HMRC would correct the claim to the right amount (such as the FNR credit). For similar reasons that in our view is a distinction without relevance when it comes to the reasonableness of expecting a taxpayer to make an in-time claim. The fact that one type of claim carries less risk of underclaim from a tax optimisation point of view is besides the point. In either case, before the time of the expiry of the relevant time limit, the taxpayer might reasonably be expected to take a view of the amount sought to be claimed. It should be emphasised that we are not saying that it is unreasonable to expect that taxpayers will seek to optimise their available reliefs. Rather it is that such optimisation cannot be assumed to constitute an inevitably good reason conferring an entitlement on the part of the taxpayer to the exercise of discretion to extend time in respect of a late claim (given the possibility to make an in-time claim on one’s best view of the correct law).