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

The general background and outcome of the FII litigation was most recently summarised by Court of Appeal in 2025 Post-Prudential CA. In her introduction Falk LJ explained at [3]:

“It is now well established that, before the 2009 changes, the tax treatment of non-UK source dividends breached EU law. In contrast to the exemption that generally applied to UK-source dividends, non-UK source dividends were taxable, usually under Schedule D Case V. In the case of dividends from portfolio holdings this was subject to double tax relief ("DTR") only for any withholding tax suffered. No additional relief was generally available to reflect tax on the profits out of which the dividends were paid (underlying tax relief), whether in respect of any tax actually paid or, crucially (as it turned out), for tax at the nominal rate at which tax was chargeable in the foreign jurisdiction (the foreign nominal rate, or "FNR"). In contrast, for shareholdings of 10% or more DTR was available for both withholding tax and actual underlying tax, but not for tax at the FNR.”

There is no dispute that the Dividends in this case are “non-portfolio” (being dividends from shareholdings held by the Claimant representing 10% or greater of the paying companies’ share capital). (A more detailed background to the relevant domestic legislation and the EU provisions breached was set out in Post-Prudential Closure Notice applications Group Litigation v HMRC [2024] UKUT 00023 (“2024 Post-Prudential UT”) (at [8] to [14] and which 2025 Post-Prudential CA referred to as a “helpful outline of the statutory framework” at [20]).

The key litigation landmarks the parties focussed on were: Test Claimants in the FII Group Litigation v IRC (Case C-446/04) 2006 (“2006 FII CJEU I”), Test Claimants in the FII Group Litigation v HMRC (Case C-35/11) (“2012 FII CJEU 2”), 2013 Prudential Ch and 2018 Prudential SC. We were also taken to other decisions such as The Claimants Listed in Class 8 of the Group Register of the CFC and Dividend GLO [2019] EWHC 338 (Ch) and in 2024 Post-Prudential UT for their commentary on what became clear and when.

As explained by Ms Ruxandu’s submissions, HMRC argue the position regarding such dividends being taxable was clear at the earliest from 2006 (2006 FII CJEU 1) , and that the choice between on the one hand the effective rate of tax (which would take account e.g. of available reliefs) and the nominal rate of foreign tax had been decided in 2012 (2012 FII CJEU 2) but that in any event that solution was clear from Prudential SC at the very latest by 2018.

In their written submissions following Post-Prudential CA HMRC say that it was at the very least clear following FII CJEU 2 [2012] that a credit for the FNR was available. (That is consistent, we note, with the Court of Appeal’s summary in Post-Prudential CA at [137] which stated that “FII CJEU2 had decided that a credit at the FNR was available for non-portfolio holdings”).

The Supreme Court’s decision in Prudential SC in 2018 confirmed in terms the following (upholding what Henderson J, as he then was, had said in 2013 Prudential Ch) that:

We did not understand it to be in dispute that both non-exemption and the credit at FNR solution were confirmed, as far as the litigation was concerned, by 2018. (The Claimant’s case shifts focus at that point to concerns regarding how and when HMRC then implemented the solution to the EU breach. We consider those in the subsequent points concerning the 2020 HMRC business brief and HMRC invitation to make a claim).

Thus, although the parties disagree as to the issues regarding 1) the precise point in time the litigation clarified that foreign dividends were not exempt, 2) when HMRC accepted that to be the case, and also 3) when the solution to the breach of a credit at FNR was settled by the litigation prior to 2018 Prudential SC, we do not consider it necessary to address those points in order to deal with the question before us here. That is whether it was irrational of HMRC to refuse to exercise its discretion to extend time. Given non-exemption and the credit at FNR were clear by the hand down date of 2018 following Prudential SC, a decision that a claim that was not made until 2021 was late could not on any view, in our judgment (subject to the other points which we come to deal with) be considered one that was irrational. It would not matter for the purposes of this judicial review whether the position became clearer at an earlier date as that would only make the decision to refuse the late claim to the extent it was based on a view that a claim could have been made earlier in the light of what was known more defensible.