The House of Lords has today ruled 4-1 in favour of the taxpayer in its decision in the Deutsche Morgan Grenfell case. The case is part of the Advance Corporation Tax (ACT) Group Litigation Order (GLO) and considers the issue of time limitation. The decision overturns the Court of Appeal and will have potentially significant financial implications for other groups, as well as for Deutsche Morgan Grenfell.

The decision means that Deutsche Morgan Grenfell is entitled to interest payments from HM Revenue & Customs (HMRC) in relation to ACT payments. As well as the ACT GLO, the decision is also likely to affect most or all of the other GLOs that claim discrimination under the EC Treaty. HMRC stated in arguments to the House of Lords that the cost to the Treasury could run into billions of pounds.

Bill Dodwell, tax partner at Deloitte, comments:

 “The long awaited decision of the House of Lords is a success for Deutsche Morgan Grenfell and other members of the ACT Group Litigation Order. It is likely that most of the ACT would have already been offset, but HMRC is likely to have to pay restitution, in effect interest, on the payments of ACT to these companies.

“The decision clears up some of the confusion on time limits but it remains to be seen what evidence will be needed for companies to prove that there has been ‘a mistake’ and also when that mistake could ‘with reasonable diligence have been discovered’. There will be knock-on effects on the other Group Litigation Orders.

“The Government legislated with effect from 8 September 2003 to try to limit the effect of this case. Some groups have commenced litigation arguing that this legislation is ineffective, in particular the lack of a transitional period. This litigation, which has been delayed pending this decision, will now presumably proceed.

“The focus will now switch to the Sempra Metals case, due to be heard by the House of Lords next week. The question in Sempra is whether interest is compounded or calculated on a ‘simple’ basis.”

HMRC argued that the usual time limitation period of six years should run from the date the ACT was paid, which would have ruled out compensation for some of the ACT paid by Deutsche Morgan Grenfell. Deutsche Morgan Grenfell claimed that the time limitation period should run from the date that the ECJ handed down their decision in the Hoechst case in 2001 as this was when they discovered that they had made a mistake in paying the ACT.

The Law Lords focused their arguments on whether the company had paid the ACT ’by mistake’ and when that mistake could ’with reasonable diligence have been discovered’. The majority ruled that on the particular facts of the case the Tax Director had no doubt that he was obliged to pay the ACT at the time it was paid, and therefore it had been paid by mistake.

This decision is particularly relevant for companies in the ACT GLO who joined before 8 September 2003 and have a similar fact pattern to Deutsche Morgan Grenfell. It will also have a knock on effect for claims made before 8 September 2003 in some of the other GLOs, such as the FIDs GLO.

Notes to the Editor

About the case:

Between 1973 and 1999, the UK’s tax legislation required a UK company to pay advance corporation tax (ACT) when it made a ‘qualifying distribution’ (typically a dividend payment).

The legislation also provided that, where dividends were paid from a UK subsidiary to a UK parent, the parent and subsidiary had the right to apply for a ‘group income election’ such that it was not necessary to account for ACT on dividend payments.

The Deutsche Morgan Grenfell case is part of the ACT group litigation order (GLO). The ACT GLO was made following the decision of the European Court of Justice (ECJ) on 8 March 2001 in respect of the Hoechst case.

The claimants in the Hoechst case were groups of companies where the parent was resident in Germany and the subsidiary was resident in the UK. They argued that the fact that they could not apply for a group income election (as the parent was resident in Germany) was contrary to freedom of establishment under the EC Treaty. The ECJ agreed with the claimants. Such companies therefore had a right of compensation or restitution in respect of ACT paid, which they could pursue through the UK national courts.

Accordingly, in October 2000, Deutsche Morgan Grenfell Group plc (DMG), a UK resident company with a German parent, made a claim to HMRC in respect of ACT payments on dividends to its parent made in 1993, 1995 and 1996.

The case concerns the issue of limitation. DMG argues that the limitation period in respect of claims relating to these ACT payments should run for six years from the Hoechst decision, being 8 March 2001. On this basis, it would still be possible for a company to make a claim now in respect of ACT payments made on dividends to an EU parent dating back to 1973. HMRC argues that the limitation period should rather run from the date that the ACT was paid, meaning that DMG could receive restitution in respect of the 1995 and 1996 ACT payments, but not the 1993 payment.

Prior to being heard in the House of Lords, decisions on this case were handed down from the High Court (ruling in favour of DMG) and the Court of Appeal (ruling in favour of HMRC).

The case centres particularly on a certain section of the Limitation Act 1980 (s32(1)(c)). This section extends the six year limitation period when an action is for relief from the consequences of a mistake. Relevant to this case is the section which says that, where there is a mistake, the period of limitation does not begin to run until the claimant has discovered the mistake, or could with reasonable diligence have discovered it.

At the House of Lords, both sides provided arguments in respect of a number of points, in particular:

• Cause of action. The matter considered here was whether English law recognises a claim for restitution of taxes paid under a mistake of law. If so, then potentially companies could go back to the early 1970s to claim restitution in respect of ACT payments.
• Mistake. The question was whether or not DMG had paid ACT under a mistake of law.
• Settled law defence. Assuming that DMG won the ‘cause of action’ and ‘mistake’ arguments, the issue raised was whether English law recognised a defence of “settled law” to a claim for restitution of taxes paid under a mistake of law.
• Discovery of mistake. Again, assuming that HMRC was unsuccessful in respect of the three arguments above, the question concerned the time when DMG discovered its mistake for the purposes of s32(1)(c) of the Limitation Act 1980. In the case of the later ACT payments there is a question as to whether DMG knew the law (that they could have made a group income election) at the relevant time, i.e. whether they made a mistake at all.
• The scope of s32(1)(c). The question is whether it is necessary for a payment to have been made under a mistake in order to rely on the extended time limit in s32(1)(c) of the Limitation Act 1980 or whether it would suffice that the payment was made pursuant to an unlawful demand by HMRC, albeit that DMG did not know the demand was unlawful.
• The amendment issue. DMG has amended its original claims in respect of the 1993, 1995 and 1996 ACT payments. The question was whether the amendment to the particulars of the claim took effect from the date the claim form was issued or the dates of the later amendments.

The outcome of this case will affect a number of other tax cases, in particular some Group Litigation Orders (the UK equivalent of US class actions). However the effect may be less significant than at first sight as the government has already legislated to amend the key section in the DMG case (Limitation Act 1980 s32(1)(c)). The amendment disapplies s32(1)(c) for actions in respect of a mistake of law relating to a taxation matter under the care and management of the HMRC brought on or after 8 September 2003. Note that this amendment is itself subject to challenge as it does not allow for a transitional period to allow time to make claims under the old rules. Certain UK and ECJ decisions suggest a transitional period of at least six months is needed to comply with EU law.

Group Litigation Orders have been formed to make claims that certain aspects of UK tax law are contrary to the EC Treaty and companies have sought damages or restitution before the High Court. Some of these Group Litigation Orders include classes dealing with non-discrimination under Double Tax Treaties, as well as discrimination under the EU Treaty. The six GLOs to date concern:

• Cross border loss relief;
• Thin capitalisation;
• Controlled foreign companies and foreign sourced dividends;
• Franked investment income;
• ACT, group income elections and treaty tax credits; 
• Foreign income dividends.

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Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.

The information contained in this press release is correct at the time of going to press.