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The test claimant companies belonged to groups that had UK-resident parents and foreign subsidiary companies, in the EU and elsewhere.
The case related to the tax treatment of dividends received by UK-resident companies from non-resident subsidiaries, as compared with those paid and received within wholly UK-resident groups of companies.
The claimants said the differences between their tax treatment and that of wholly UK-resident groups of companies breached articles 43 (freedom of establishment) and 56 (free movement of capital) of the EC Treaty, and such breaches had caused them loss.
In light of an earlier ruling from the European Court of Justice (ECJ), the High Court held that UK rules on corporation tax on overseas dividends did breach EU law.
Two remedies were available in domestic law: a claim for restitution of tax unlawfully demanded under Woolwich Equitable Building Society v CIR [1992] STC 657, and a claim for tax wrongly paid under a mistake as recognised in Deutsche Morgan Grenfell Group plc v CIR [2007] STC 1.
The Court of Appeal subsequently ruled that the six-year limitation applied to claims; the claimants appealed.
In essence, the Supreme Court said the claimants had the right to recover wrongly paid tax going back to 1973, but could not reach agreement on other issues, which were referred to the EECJ.
Chris Morgan, head of EU tax at KPMG, said the decision was ‘good news for taxpayers, and brings the prospect of £5bn of tax refunds from HM Treasury closer’.
But he added that the final decision lay with the ECJ, and explained that ‘the old advance corporation tax rules meant the claimants had effectively made an interest free loan to the government with no repayment date. This decision means the “loans” may eventually be repaid.’
PricewaterhouseCoopers tax partner Peter Cussons said, ‘This long-running litigation emphasises the need for UK tax legislation to be compliant with EU law’, adding there was ‘still much work to be done’.
