- At the times
relevant for this case United Kingdom tax law provided that, where subsidiary
companies paid dividends to their parents, ‘group income’ elections could
be made which enabled the dividends to be paid without the paying subsidiary
having to pay ACT to the UK Revenue. Until the decision of the CJEC in Metallgesellschaft/Hoechst
such elections could be made only between United Kingdom resident companies:
section 247(1) of ICTA included the words: ‘both being bodies corporate
resident in the United Kingdom’. However, in Metallgesellschaft/Hoechst
the CJEC held that it was contrary to article 52 (now article 43) of the
EC Treaty for United Kingdom law to deny the right to make group income elections
where the parent company was resident in a Member State other than the United
Kingdom. The CJEC also held that, as respects payments of ACT which had already
been made in the past, Community law conferred a right of compensation or
restitution which the aggrieved companies were entitled to pursue in the United
Kingdom courts.
- Many United
Kingdom subsidiaries of Member State parents, including DMG, a subsidiary
of a German parent, commenced actions seeking compensation or restitution
accordingly. The actions are now all organised within a Group Litigation Order
(as to which see the Civil Procedure Rules, rules 19.11 to 19.15), and a series
of test cases is being heard to determine various questions of principle to
which they, or some of them, give rise. The first such case was the Pirelli
case, which concerned an issue which arose where the parent company was resident
in a Member State which had a particular kind of Double Taxation Agreement
with the United Kingdom. The second such case is this one, in which the test
claimant is DMG.
- The special
feature of this case, and of others within the Group Litigation Order for
which this is the test case, is that questions of limitation of actions arise:
some of the payments of ACT which DMG made to the United Kingdom Revenue were
made more than six years before DMG commenced its action claiming compensation
or restitution. The Revenue say that DMG’s claims in respect of those ACT
payments are barred by the normal six years time limit laid down by section
2 of the Limitation Act 1980. DMG argues that it can circumvent this effect
of the 1980 Act by a combination of two principles of law: first, that English
law recognises an action for restitution of money paid under a mistake of
law (see the decision of the House of Lords in the Kleinwort Benson case
identified in the Table of Abbreviations, etc, at the beginning of this judgment);
second, that under section 32(1)(c) of the 1980 Act, the limitation period
where an action is brought for relief from the consequences of a mistake begins
to run only when the claimant discovered the mistake or could with reasonable
diligence have discovered it. DMG has pleaded its case in ways which include
a claim for restitution on the ground that it made the payments of ACT under
a mistake of law. It says that it did not discover the mistake until the decision
of the CJEC in Metallgesellschaft/Hoechst. That decision was given
on 8 March 2001, by which date DMG had already commenced its action. Alternatively,
DMG says that the earliest time at which it could be said to have discovered
its mistake was when the Advocate General delivered his opinion in Metallgesellschaft/Hoechst.
That was on 12 September 2000, well within six years before DMG commenced
its action. DMG argues that therefore it is not time-barred from recovering
the relief which it claims, notwithstanding that the ACT payments (or some
of them) were made more than six years before the action was commenced.
- It seems to
me that three principal questions arise:
- Does a claim
for restitution of a payment made under a mistake of law apply in the case
of a payment of tax to a Revenue authority? In my view the answer is: yes.
- Did DMG make
the relevant payments of ACT under a mistake of law so as to be entitled
to claim restitution in accordance with the principles laid down by the
House of Lords in Kleinwort Benson? In my view the answer is again:
yes.
- Under section
32(1)(c) of the Limitation Act 1980, when did the limitation period begin
to run? Did it begin to run only at the time of the CJEC’s decision in Metallgesellschaft/Hoechst
(or possibly at the time of the Advocate General’s opinon)? Or did it
begin to run at the earlier time in mid-1995 when DMG first learned that
the Hoechst group of companies was arguing that the rule that only United
Kingdom resident companies could make group income elections was contrary
to Community law? In my opinion the period began to run only at the time
of the CJEC’s decision.
It
follows that DMG’s claims succeed.
The relevant
United Kingdom tax law
- At the times
with which this case is concerned the general rule of United Kingdom tax law
was that, if a company resident in the United Kingdom paid a dividend, it
had to pay ACT to the Revenue: ICTA s.14. The rate of ACT varied over the
years. At the times with which the present case is concerned it was normally
25% of the dividend. In the usual case the amount so paid could be set off
against the company’s normal liability to pay corporation tax on its profits,
sometimes referred to as mainstream corporation tax or (as in this judgment)
MCT. Where the ACT was so set off the payment of it did not cause the company
to suffer an absolute loss of the money, because the set-off reduced on a
pound for pound basis a later payment of MCT which the company would otherwise
have had to make anyway. However, it did have the effect that the company
had to pay some of its corporation tax bill early, so the ACT meant that the
company suffered a timing disadvantage and the United Kingdom Revenue received
a corresponding timing advantage. (There could be cases where a subsidiary
had paid ACT and could not set it off against MCT. In such cases the ACT payment
did represent an absolute loss of the money and not just a timing disadvantage.
However, in the case of DMG all the relevant ACT payments were eventually
set off against MCT, so that the disadvantage for which DMG seeks relief is
a timing disadvantage only.)
- There was an
exception to the rule that a company which paid a dividend had to pay ACT.
If it was a subsidiary of a United Kingdom holding company the two companies
could jointly make a group income election under section 247 of ICTA. The
effect was that the subsidiary did not have to pay the ACT after all. It did
still have to pay its full MCT when the due date came round, but the group
income election removed the timing disadvantage. However, if the dividend-paying
company was a subsidiary of a non-United Kingdom holding company the two companies
could not make a group income election, so the subsidiary had to pay ACT and
suffer the timing disadvantage, in circumstances where a subsidiary of a United
Kingdom holding company, if it and its parent had made a group income election,
did not. That was the feature of United Kingdom law which, in Metallgesellschaft/Hoechst,
the CJEC held to have been contrary to EC law and also to entitle the companies
which had suffered from it to claim compensation or restitution. Where, as
in this case and as in the cases of the Metallgesellschaft and the Hoechst
groups, the ACT had been set off against MCT, the compensation or restitution
would be an amount calculated by reference to interest over the period from
the payment of the ACT until it was set off against MCT.
The Limitation
Act 1980
- Sections 2 and
5 of this Act provide that an action founded on tort (section 2) or on simple
contract (section 5) may not be brought after the expiration of six years
from the date when the cause of action accrued. The parties agree that a claim
for compensation or restitution of the nature which the CJEC said in Metallgesellschaft/Hoechst
should be available would almost certainly be a claim in tort or contract
and subject to a six years time limit. An important issues is : when does
the six years period start to run. The parties also agree that, if section
2 or section 5 applies and the period runs only from the date when the cause
of action accrued, some of DMG’s causes of action accrued more than six years
before it brought its action and would therefore be time-barred. However section
32 opens the possibility that, if one of the detailed circumstances described
in the section exists, the limitation period, though it is still six years,
may commence to run at a date later than the date when the cause of action
accrued. So far as relevant the section provides as follows:
32
Postponement of limitation period in case of fraud, concealment or mistake
(1)
… where in the case of any action for which a period of limitation is prescribed
by this Act either –
(a)
…; or
(b)
…, or
(c)
the action is for relief from the consequences of a mistake,
the
period of limitation shall not begin to run until the plaintiff has discovered
the … mistake … or could with reasonable diligence have discovered it.
The facts
- At the times
when the ACT payments relevant to this case were made the group structure
was a little more complicated than a parent company with a 100% direct subsidiary,
but nothing turns on the extra complications. The German holding company was
DBAG. It was not the simple 100% owner of DMG. Instead it owned 14% of the
shares in DMG directly. It owned all of the shares in DBI, an interposed United
Kingdom holding company, and DBI owned the other 86% of the shares in DMG.
I mention for completeness that in November 1997 the structure was simplified
and DBI, the 100% direct subsidiary of DBAG, became the 100% (as opposed to
merely the 86%) direct owner of DMG. However, the dividends and the associated
ACT payments which are relevant to this case were paid before November 1997,
so it is the earlier structure which is in point.
- According to
the terms of ICTA s.247, group income elections could not have been made between
DMG and DBAG or between DBI and DBAG, because DBAG was not a company resident
in the United Kingdom. A group income election could have been made between
DMG and DBI (because both companies were resident in the United Kingdom),
but no such election was made. The reason was that, although an election would
have enabled dividends to flow from DMG to DBI without ACT, onward dividends
from DBI to DBAG would have had to be paid subject to a liability on the part
of DBI to pay ACT: or at least that was how the matter appeared on the terms
of the domestic United Kingdom legislation. In the circumstances DMG paid
ACT by reference to all its dividends – the 86% of them paid to DBI as well
as the 14% of them paid to DBAG – and DBI did not pay ACT when it paid onward
dividends to DBAG. DBI did not have to pay ACT on those onward dividends because
of the rules about franked investment income in ICTA ss.238 and 241.
- DMG has pleaded
in this case, and the Revenue admit, that, if section 247 had permitted group
income elections to be made between a United Kingdom subsidiary and a parent
company in another Member State, elections would have been made between DMG
and DBI, between DMG and DBAG, and between DBI and DBAG. The corollary is
that, because section 247 appeared clearly not to permit group income elections
to which a parent company in another Member State was a party, the companies
did not attempt to make group income elections. There is no doubt that, if
they had attempted to make them, the Revenue would have rejected the elections
and pointed to the clear terms of the United Kingdom statute in justification
of the rejection.
- Over the years
several dividends flowed through from DMG to DBAG, either directly as to 14%
of them or through DBI as to 86% of them. In the case of all of them DMG paid
ACT. As respects some of the ACT payments no issue arises in the present case
(because no limitation arguments arise), but as respects three dividends and
associated ACT payments there are limitation issues in dispute which I must
decide. Before I give the dates of the dividends and ACT payments it is useful
to record that DMG issued its claim form, commencing the present action, on
13 October 2000, served its particulars of claim on 9 February 2001, and amended
the particulars so as to give specific details of the ACT payments which this
case is about on other dates. One amendment, giving particulars of an ACT
payment made in 1993, was made on 16 August 2001. Another amendment, giving
particulars of two ACT payments made in 1995 and 1996 was made on a date which
must be taken to have been 19 August 2002. The periods which ran for six years
up to those dates began on 14 October 1994, 10 February 1995, 17 August 1995,
and 20 August 1996.
- The three ACT
payments which are relevant for this judgment were made on 14 October 1993,
15 February 1995, and 14 January 1996. At a later point I shall go into more
detail on these matters, but it will be apparent from the dates which I have
just given that a limitation issue certainly arises as respects the ACT paid
on 14 October 1993, and at least might arise also as respects the ACT paid
on 15 January 1995 and on 14 January 1996. If the section 2 limitation period
(as opposed to the section 32 limitation period) started to run on the date
of payment of the ACT, six years from the payment of the ACT on 14 October
1993 had expired before DMG had even issued its claim form. The position is
more complicated as regards the two subsequent payments of ACT (on 15 January
1995 and 14 January 1996), because it gets involved with questions of whether
what mattered was the service of the particulars of claim or rather the making
of the amendments to the particulars of claim. I will explain about that in
a later section of this judgment.
Does English
law recognise a claim in restitution to recover taxes paid under a mistake
of law?
- This question
subdivides into two questions. The first is whether English law recognises
a claim in restitution to recover money paid under a mistake of law. If the
answer to the first question is yes, the second question arises: does it make
any difference if the money paid was paid to a Revenue authority in discharge
of what was, or at least was thought to be, a liability for taxes?
- The answer to
the first question is now clear, as a result of the decision of the House
of Lords in Kleinwort Benson. English law does recognise a claim in
restitution to recover money paid under a mistake of law. The Kleinwort
Benson case is so celebrated that it would be excessive for me to describe
it in any detail. It is sufficient to say that a bank (Kleinwort Benson) had
made payments to a local authority (Lincoln in the particular case dealt with
by Their Lordships) under swap agreements which the bank thought, in common
with virtually everybody who had a view on the point at the time, were legally
enforceable. An intervening decision of the House of Lords (Hazell v Hammersmith
and Fulham LBC [1992] 2 AC 1) showed that the bank and virtually everybody
else were mistaken about the law: the swap agreements were not legally enforceable
after all. Kleinwort Benson sued to recover the payments which it had made.
It had limitation problems, but it sought to overcome them by relying on a
right to recover payments made under a mistake of law and also by relying
on section 32 of the Limitation Act 1980.
- The majority
in the House of Lords (Lords Goff, Hoffman and Hope) held that Kleinwort Benson
was entitled to succeed. Under English law money paid under a mistake of law
was recoverable; earlier cases to the contrary were overruled. And section
32(1)(c) did operate to postpone the start of the six years limitation period
until the time when the mistake of law was discovered or discoverable with
reasonable diligence. The majority also took the view that Kleinwort Benson
had indeed made the payments to Lincoln under a mistake. That was one respect
in which the minority differed. Lords Browne-Wilkinson and Lloyd considered
that, because the bank had made the payments in accordance with what it and
everyone else had believed to be the law at the time, it had not made them
under a mistake. The contrary view of the majority on that issue is summarised
in the following passage from the speech of Lord Goff (at p.379):
To
me, it is plain that the money was indeed paid over under a mistake, the mistake
being a mistake of law. The payer believed, when he paid the money, that he
was bound in law to pay it. He is now told that, on the law as held to be
applicable at the date of the payment, he was not bound to pay it. Plainly,
therefore, he paid the money under a mistake of law, and, accordingly, subject
to any applicable defences, he is entitled to recover it.
That
passage does conclude with a suggestion that there might be applicable defences,
but Lord Goff went on to consider whether there indeed were any, and concluded
that there were not, at least so far as the instant case was concerned. He
did think it possible that there ought to be some defences, but he did not
consider that the House of Lords could introduce them as a matter of case
law.
- I will consider
later how the foregoing aspects of the House of Lords’ decision in Kleinwort
Benson apply to the facts of the present case. For the moment I wish to
address the second question which I identified in paragraph 14 above: does
it make any difference if the money was paid to a Revenue authority in discharge
of what was, or at least was thought to be, a liability for taxes? In principle
it is hard to see why that should make any difference, but the question must
be considered with some care because of three paragraphs in Lord Goff’s speech
(at pages 381 and 382 in a speech which extends from page 365 to page 389).
I believe that I ought to quote them in full:
At
this point it is, in my opinion, appropriate to draw a distinction between,
on the one hand, payments of taxes and other similar charges and, on the other
hand, payments made under ordinary private transactions. The former category
of cases was considered by your Lordships' House in Woolwich Equitable
Building Society v. Inland Revenue Commissioners [1993] A.C. 70, in which
it was held that at common law taxes exacted ultra vires were recoverable
as of right, without the need to invoke a mistake of law by the payer. Moreover
reference was made, in the course of the hearing, to the various statutory
provisions (usefully summarised in the Law Commission's Consultation Paper
(Law Com. No. 120) at pp. 74-84) which regulate the repayment of overpaid
tax. For present purposes it is of interest that, in the case of some taxes
(including income and corporation tax), no relief is given "in respect of
an error or mistake as to the basis on which the liability . . . ought to
have been computed where the return was in fact made on the basis of or in
accordance with the practice generally prevailing at the time when the return
was made:" see the proviso to section 33(2) of the Taxes Management Act 1970.
Two
observations may be made about the present situation. (I of course have it
in mind that this is the subject of proposals for legislative reform contained
in the Law Commission's Report (Law Com. No. 227), but your Lordships are
concerned with the law as it stands at present.) The first observation is
that, in our law of restitution, we now find two separate and distinct regimes
in respect of the repayment of money paid under a mistake of law. These are
(1) cases concerned with repayment of taxes and other similar charges which,
when exacted ultra vires, are recoverable as of right at common law on the
principle in Woolwich, and otherwise are the subject of statutory regimes
regulating recovery; and (2) other cases, which may broadly be described as
concerned with repayment of money paid under private transactions, and which
are governed by the common law. The second observation is that, in cases concerned
with overpaid taxes, a case can be made in favour of a principle that payments
made in accordance with a prevailing practice, or indeed under a settled understanding
of the law, should be irrecoverable. If such a situation should arise with
regard to overpayment of tax, it is possible that a large number of taxpayers
may be affected; there is an element of public interest which may militate
against repayment of tax paid in such circumstances; and, since ex hypothesi
all citizens will have been treated alike, exclusion of recovery on public
policy grounds may be more readily justifiable.
In
the present case, however, we are concerned with payments made under private
law transactions. It so happens that a significant number of payments were
in fact made under interest rate swap agreements with local authorities before
it was appreciated that they were void; but the number is by no means as great
as might conceivably occur in the case of taxes overpaid in accordance with
a prevailing practice, or under a settled understanding of the law. Moreover
the element of public interest is lacking. In cases such as these I find it
difficult to understand why the payer should not be entitled to recover the
money paid by him under a mistake of law, even if everybody concerned thought
at the time that interest rate swap agreements with local authorities were
valid.
- Is Lord Goff
saying in those paragraphs that the cause of action for restitution of money
paid under a mistake of law, the existence of which he, Lord Hoffman and Lord
Hope are affirming, does not apply to money mistakenly paid in taxes? In my
judgment the answer is that he is not. In support of my view I make the following
points.
- There is certainly
no principle that, for public policy reasons or for other reasons, there
can never be restitutionary claims for recovery of taxes wrongly paid. See
Woolwich Equitable Building Society v IRC [1993] AC 70, recognising
the existence of a restitutionary claim in respect of tax paid under protest
in response to what turned out to have been an unlawful statutory demand.
- If Lord Goff
intended to say that, although money paid under a mistake of law was generally
recoverable, money paid in taxes under a mistake of tax law was not, he
would not have said it at the point in his speech where the three paragraphs
which I have quoted appear. The general structure of the speech was to begin
with an analysis of whether a cause of action for restitution of payments
made under a mistake of law existed at all, and then, having concluded that
it did, to go on to consider whether there were any defences to such a cause
of action which might apply in particular cases. If His Lordship wished
to say that a cause of action for payments of taxes made under a mistake
of law did not exist he would surely have dealt with the point in the first
part of his speech. However, the paragraphs which I have quoted appear in
the second part of the speech, and in particular in a section where Lord
Goff is considering whether the House of Lords should introduce a ‘settled
law defence’ along the lines of a proposal which had been made by the Law
Commission. The Commission had considered that legislation would be necessary
to create a settled law defence, and in a draft Bill had included a provision
expressed as follows: ‘An act done in accordance with a settled view
of the law shall not be regarded as founding a mistake claim by reason only
that a subsequent decision of a court or tribunal departs from that view.’
- In the context
I do not believe that Lord Goff was saying that there could never be a restitutionary
claim for tax paid by mistake. Rather he was observing that, although there
could be such a claim, the courts might at some future time have to consider
whether there was also a settled law defence. In the Kleinwort Benson
case itself he went on to decide that (at common law, and leaving out
of account possible future legislative changes) there was no such defence
where the mistaken payments had been made under private law. He did not
wish to be understood as deciding the same thing where the payments were
tax payments. However, he was not deciding that there was a settled law
defence in the case of tax payments. He was leaving the matter open.
- In the present
case the submission put to me by Mr Glick QC on behalf of the Revenue was
that a cause of action for the restitution of tax payments made under a
mistake of law did not exist at all. He expressly said that, if I considered
that the cause of action did exist, he did not invite me to decide at High
Court level that a settled law defence might be available. He reserved the
right to advance such an argument in a higher court, and I gave permission
for an amendment to the Revenue’s defence which would lay the basis for
such an argument if the Revenue wish to advance it hereafter.
- In the earlier
part of Lord Goff’s speech, where he discussed whether there should be a
cause of action in restitution for money paid under a mistake of law, he
reviewed a number of authorities in other jurisdictions which had held that
such a cause of action did exist. Among them was the South African case
of Willis Faber Enthoven (Pty.) Ltd v Receiver of Revenue, 1992 (4)
SA 202. That was a tax case in which a restitutionary claim for the recovery
of tax paid under a mistake of law succeeded. The impression which I glean
from the speech is that Lord Goff approved of the Willis Faber decision
and saw no objection to a similar result forming part of United Kingdom
law.
- In none of
the other speeches in the House of Lords, either of the majority or of the
minority, is there any suggestion that there could be a difference between
payments of tax made under a mistake of law and payments of different kinds
made under a mistake of law.
- There is one
last point to make on this aspect of the case. I ought to mention the judgment
of Brooke LJ in Eagerpath Ltd v Edwards (2001) 73 T.C. 427. The case
was about a technical issue of tax appeal machinery involving an ‘error or
mistake claim’ under section 33 of the Taxes Management Act 1970. However,
there are some observations of Brooke LJ which assume that a result of the
Kleinwort Benson decision in the House of Lords is that a taxpayer
who has paid too much tax because of a mistake of law has a cause of action
at common law entitling him to recover the overpayment. However, the observations
were clearly obiter. I am informed that the issue of whether the Kleinwort
Benson decision extended to tax payments had not been raised in argument.
I think it is unlikely that Brooke LJ considered the three paragraphs from
Lord Goff’s speech which I have quoted. In the circumstances I do not attach
much weight to his observations, but they are at least a tentative opinion
of a Court of Appeal judge that tax payments made by mistake can be recovered.
Did DMG make
its payments of ACT under a mistake of law?
- In my opinion
the answer is: yes. However, the question is not entirely straightforward.
In my view it is more complicated than the equivalent question which arose
in the Kleinwort Benson case, and it requires careful analysis. In
that case Lord Goff said, in a passage which I have already quoted: ‘The
payer believed, when he paid the money, that he was bound to pay it. He is
now told that, on the law as held to be applicable at the date of the payment,
he was not bound to pay it.’ In this case it cannot be put as simply as
that. There are two different reasons why that is so.
- The first reason
is this. The relevant United Kingdom tax provisions did not did not take the
simple form of providing that, if a subsidiary paid a dividend to another
company which was in the same group, it did not have to pay ACT. They provided:
(1) that if the companies were in a group relationship, they could make a
group income election; (2) that if there was a group income election in force
at the time of payment of a dividend, ACT was not payable (unless the companies
specifically gave notice to the contrary as regards a particular dividend);
(3) that a group income election did not take effect for three months or,
if earlier, until the inspector notified the companies that he accepted it;
and (4) that an election would be of no effect if, in those three months,
the inspector notified the companies concerned that he was not satisfied that
it was validly made. See generally ICTA s.247(2) and (3), s.248(2). On the
last point, if the inspector gave notice that he was not satisfied that an
election was validly made the companies could appeal, but unless and until
the appeal was determined in the companies’ favour, there was no group income
election in force. It followed that as a matter of law ACT was properly payable
in respect of dividends paid in the meantime, and even a successful appeal
against the refusal of a group income election would not change that position.
The dividends paid while the appeal was pending continued to give rise to
ACT liabilities, and the success of the appeal would only be relevant to future
dividends paid after the appeal decision. See as to this observations of the
CJEC in paragraph 104 of its judgment in Metallgesellschaft/Hoechst.
- The point which
emerges from the foregoing is that, on a close analysis, the mistake of law
which DMG made was not that it paid ACT which was not payable: the ACT was
as a matter of law payable when DMG paid it, and the decision of the CJEC
in Metallgesellschaft/Hoechst does not mean that it was not payable.
Rather the mistake of law which DMG made was that it did not realise that
it and DBI could have made group income elections with DBAG, which would have
had the effect of preventing the ACT from being payable.
- The second reason
why this case is not exactly the same as one covered by the passage from Lord
Goff’s speech in Kleinwort Benson is this. His Lordship he describes
a situation where : ‘The payer believed, when he paid the money, that he
was bound in law to pay it.’ In the present case it is not as clear cut
as that, at least as regards the last of the three ACT payments to which the
case relates. The special feature which affects this case is that Hoechst
commenced its action against the Revenue in April 1995, and DMG, through its
Head of Taxation Mr Thomason, knew about it at the latest by early July 1995.
I will consider the implications of this in subsequent paragraphs, but I record
now that Mr Glick on behalf of the Revenue seeks to make much of it. In the
simplest form his argument is that, if DMG paid ACT at a time when it knew
that the United Kingdom statute law was being challenged as contrary to Community
law, it cannot say that it paid the ACT under a mistake. The argument is more
complicated as regards the first and second ACT payments, both of which were
paid before Hoechst commenced its challenge. However, it will be recalled
that under section 32(1) of Limitation Act 1980 the limitation period begins
to run when the claimant discovers his mistake (or could with reasonable diligence
have discovered it). Mr Glick argues that, even if DMG was suffering from
a mistake when it made the first two ACT payments, it discovered its mistake
by July 1995 when its Head of Taxation learned of the argument which Hoechst
was putting forward.
- In my view,
however, DMG did pay the ACT, including the third amount of ACT paid on 14
January 1996, under a mistake of law. I do not accept Mr Glick’s submissions
about the effect of DMG’s knowing of Hoechst’s argument from mid-1995 onwards.
In this respect I do not think that my reasoning precisely follows the arguments
of counsel. To some extent the arguments explored the question of what degree
of doubt there had to be about a proposition before the person concerned can
be said to be suffering from a mistake or not. As my reasons, explained in
the ensuing paragraphs, will show, I do not see the issue in quite that way.
- At the times
of the first and second dividends and of the two ACT payments to which they
gave rise DMG knew nothing about the argument that, by virtue of EC law, it
and DBI were entitled to make group income elections with DBAG despite the
express provision in section 247 that they were not. Because of the CJEC decision
in Metallgesellschaft/Hoechst DMG knows now that the true state of
the law then was that the companies were entitled to make group income elections;
the Revenue knows that now as well; indeed we all do. But we did not know
that then. If the true state of the law had been known at the time the companies
would have made elections and DMG’s dividends would have been paid under them
as group income, not attracting a liability on DMG’s part to pay ACT. At this
stage in the analysis it must be assumed that, if the true state of the law
had been understood, both DMG and the Revenue would have understood it. In
other words we know now that DMG, DBI and DBAG were mistaken in thinking that
DMG and DBI could not make group income elections with DBAG; if they had not
been mistaken in that respect they would have made elections; if they had
made elections all of the DMG dividends which in fact attracted ACT would
not have attracted ACT. Therefore the ACT which DMG in fact paid was paid
under a mistake of law: if the mistake had not existed the ACT would not have
been paid. It is, however, important to appreciate that the mistake was not
directly a mistake about whether there was a liability to pay ACT. It was
directly a mistake about whether group income elections could be made. The
liabilities to pay ACT arose as secondary consequences of that primary mistake.
- I move on now
to consider whether it makes any difference that by July 1995 DMG knew that
Hoechst was challenging the provision in section 247 that, for a group income
election to be possible, both companies had to be resident in the United Kingdom,
and that the basis of the challenge was that the provision was unlawful because
it contravened articles of the EC Treaty. I will deal first with the third
ACT payment of just under £3.5m, which was paid by DMG on 14 January 1996.
The payment related to two dividends, both paid on 17 July 1995: one paid
direct to DBAG on its 14% shareholding, and the other paid to DBI on its 86%
shareholding. The evidence shows that the DBAG group, including DMG, knew
about the Hoechst argument before 17 July 1995, but made no attempt to get
group income elections in place. So in the context of the third ACT payment
the question is whether, given that DMG knew about the argument, DMG can still
say that it paid the ACT under a mistake. In relation to the first and second
payments the detailed facts are different: the ACT payments were made in October
1993 and February 1995 in respect of dividends paid in July 1993 and July
1994: at none of those times did DMG know about the Hoechst argument. For
those ACT payments the question is: if DMG made the payments under a mistake
of law (which in my opinion it did), did it discover the mistake in 1995 when
it discovered about Hoechst’s argument?
- Before I move
on I wish to record the evidence which Mr Thomason (the Head of Taxation at
DMG) gave about his state of mind when he learned of the Hoechst argument.
In his witness statement he said this:
[A]t
all times prior to the determination of the European Court in the Hoechst
case, I believed that the UK statute denying the ability to make a group income
election was the law and I was bound to act in accordance with this law. …
It did not occur to me that I could ignore the law as it stood for the simple
reason that the law is the law. Just because another taxpayer challenged the
law that did not mean that I could or should ignore it.
Mr
Thomason was cross-examined, but I do not believe that the foregoing passage
was challenged or affected by his answers on other points. He added the general
point (obvious but plainly relevant) that it was not clear in 1995 what would
be the outcome of the Hoechst case (or, as it turned out, of the Metallgesellschaft/Hoechst
conjoined cases). He also said that there were more arguments being
advanced by Hoechst in 1995 than the one which eventually succeeded in the
CJEC. For example, relief was being claimed by Hoechst AG, the German parent
company, as well as by the United Kingdom subsidiary which had paid the dividends
and the associated ACT. In addition arguments were being advanced in reliance,
not on the EC Treaty, but on the non-discrimination article in the Double
Taxation Agreement between the United Kingdom and Germany.
- I now proceed
with my own analysis of the position. It is obvious that, when DMG learned
of the argument which Hoechst was advancing, it had come to know something
– to discover something – which it had not known before. That is true, but
DMG did not come to know, or to discover, that it and DBI could make group
income elections with DBAG after all. All that it discovered was that another
company was arguing that it could make a group income election with its German
parent company in comparable circumstances, and that the Revenue were disputing
the argument. I examine the position as matters actually stood before DMG
paid the dividend which it was planning to pay and did pay in July 1995. If
at that time DMG and DBI had submitted group income elections with DBAG, it
is in my opinion certain that the inspector would have rejected the elections
within the three month period which was available to him under section 248(2).
Short of DMG abandoning the intention to pay dividends altogether (which I
assume would have been unacceptable to the group as a whole) DMG would have
had to pay the ACT. Further, such ACT would have been correctly paid even
if DMG had appealed against the rejection of the elections and a later decision
(like the actual decision in Metallgesellschaft/Hoechst) showed that
the inspector ought to have accepted them. (See as to this paragraphs 21 and
22 above.)
- Concentrating
for the moment on the first and second ACT payments (the payments associated
with the dividends which DMG paid in July 1993 and July 1994), I repeat that
the mistake which DMG made at those times was that it did not realise that
it and DBI could have made valid group income elections with DBAG. In 1995,
when DMG learned of the case which Hoechst had begun against the United Kingdom
Revenue, it did not discover that it (DMG) and DBI could have made group income
elections with DBAG after all. All that it discovered was that there was a
possible argument that they could have done that. So it did discover something,
but not something which made any difference to the matters which are critical
in this case. Suppose that back in 1993, when DMG was planning to pay the
first of the dividends, it had already known what it actually discovered in
1995: that there was an argument that group income elections could be made
with parent companies in Member States other than the United Kingdom, but
that the Revenue did not agree with the argument. Would DMG, DBI and DBAG
have submitted group income elections then? I do not think that they would.
Still less do I think that, if they had submitted elections then, DMG would
not have been liable to pay ACT when it paid the dividends. I have no doubt
that the Revenue would have rejected the elections, and that DMG would have
been liable to pay the ACT and would have paid it.
- Accordingly,
my conclusions in relation to the first two ACT payments are (1) that DMG
did pay them under a mistake of law; (2) that, unless a limitation defence
applies, DMG is entitled to claim restitution on the basis of a mistake of
law; (3) that DMG did not discover its mistake in 1995 when it learned about
the argument which Hoechst was advancing; (4) that therefore the limitation
period applicable to DMG’s mistake of law claim did not begin to run in or
about July 1995; and (5) that no limitation defence applies. In my opinion
DMG did not discover its mistake until the decision of the CJEC in Metallgesellschaft/Hoechst
was released on 8 March 2001. DMG had already commenced its action claiming
relief before then: it did so shortly after the Advocate General’s opinion
was delivered. That opinion was in favour of the claimants, and thus it foreshadowed
the later decision of the CJEC itself. It might be arguable that DMG discovered
its mistake at the time of the Advocate General’s decision. I would not take
that view myself: it was not inevitable that the CJEC would take the same
view as the Advocate General. But the point does not matter, because, even
if the limitation period started run at the time of the Advocate General’s
opinion, DMG commenced its action only a month and a day later (12 September
2000 and 13 October 2000).
- As regards the
third ACT payment – the one made on 14 January 1996 – DMG knew about the Hoechst
argument when it paid the ACT, and it had also known about the argument when
it and DBI made no attempt to make group income elections before it paid the
dividends on 17 July 1995. Notwithstanding that, I accept that DMG paid the
ACT under a mistake of law, and is in principle entitled to restitution for
the timing disadvantage which it thereby suffered. The limitation period would
only start to run against DMG on the release of the CJEC decision, by which
time it had already commenced its claim for relief.
- The result is
that in my judgment DMG’s claims succeed and that none of them is statute
barred. I will, however, briefly indicate what I believe the position would
have been if I am wrong and if, once DMG knew of the Hoechst argument in 1995,
it was no longer suffering from a relevant mistake.
What if (contrary
to my view) DMG was no longer mistaken once it learned of the argument being
advanced by the Hoechst group?
- I will deal
first with the first two ACT payments, which were made before DMG knew about
the Hoechst argument. On the hypothesis which I am now assuming DMG was under
a mistake when it made the payments but discovered its mistake on a date between
April 1995 (when the Hoechst action was commenced) and mid-July 1995 (by which
time there is no doubt that DMG knew about the Hoechst case). So the limitation
period started to run on a date in that period. I do not know exactly which
date, but for illustration purposes in the discussion which follows I will
assume that it was 1 July 1995. For DMG’s claim for restitution to escape
being statute barred it would have had to have been commenced before 1 July
2001. DMG’s claim form was issued on 13 October 2000, and the particulars
of claim were served on 9 February 2001. On the face of it both were within
time, whether the relevant date is taken to be that of the claim form or that
of the particulars of claim.
- However, there
is a complication which arises from the detailed contents of DMG’s pleadings.
The question is whether the claim form and the particulars of claim as they
were originally expressed always claimed relief in respect of the ACT payments
made in October 1993 and February 1995, or whether claims in respect of those
particular ACT payments were new claims added by amendments made on 16 August
2001 (as respects the October 1993 ACT payment) and on 19 August 2002 (as
respects the February 1995 ACT payment). If they were new claims added to
the particulars of claim by the amendments, and if (contrary to my view) the
limitation period had started running on or about 1 July 1995, the claims
would be time barred by the Limitation Act. In my opinion, however, the original
particulars of claim, on their proper interpretation, already claimed relief
in respect of the ACT payments made in October 1993 and in February 1995.
- This is a fine
point on the small print wording of the particulars of claim, and I will not
go into it at length. The critical point is that the particulars claimed relief
in respect of all payments of ACT made by reference to ‘the Dividends’. ‘The
Dividends’ was a defined term: it meant the dividends which DMG had paid from
time to time to DBI and DBAG, thus (as it seems to me) covering all dividends,
including those which had led to the payments of ACT in October 1993 and February
1995 (the first and second payments which are in issue in this case). The
original particulars of claim did say that the payments of ACT ‘include but
are not limited to’ certain payments set out in a schedule. The payments so
set out did not include the payments made in October 1993 and February 1995:
those payments were only added to the schedule by the amendments made more
than six years after 1 July 1995. However, in my view the original particulars
of claim claimed relief in respect of all payments of ACT which had been made
by DMG in respect of all dividends paid by it to DBI and DBAG. The claim was
not limited to the payments specified in the schedule.
- In this respect
the original particulars of claim were different from those which I considered
in the recent case of Hoechst United Kingdom Ltd v IRC [2003] EWHC
1002 (CH). The particulars of claim in that case (as I interpreted them) only
claimed relief in respect of the specific ACT payments which were identified
in a schedule, so that when the schedule was amended to add further payments
the amendment had the effect of adding new claims in respect of additional
causes of action. In the present case, in contrast, I consider that the amendments
did not add new claims, but rather gave further details of claims which had
already been made within the causes of action which had already been pleaded.
Therefore, even if, contrary to my view, the six years limitation period started
to run in July 1995 as respects the first two payments of ACT which are in
issue, I still consider that DMG’s claims for relief in respect of those two
payments were brought within the period and are not statute barred.
- I turn to the
third ACT payment, the one of about £3.5m which was made on 14 January 1996.
The result is the same as respects that payment, but the precise route by
which the result is reached is different. When the payment was made, and also
at the earlier time when the dividend which gave rise to it was paid (on 17
July 1995), DMG already knew about the argument which Hoechst was advancing.
In my view, for the reasons which I have explained earlier, that did not change
the position that DMG paid the ACT under a mistake of law. However, Mr Glick
has submitted that it did, and that DMG did not pay the January 1996 ACT under
a mistake. Let me suppose that he is right. Three specific consequences would
follow: (1) DMG’s claim for restitution, in so far as it rests on the Kleinwort
Benson principle that money paid under a mistake of law is recoverable,
would fail. (2) However, DMG would have a good claim for compensation or restitution
based on the different ground that it had paid the money pursuant to an unlawful
taxation measure (as in Woolwich Equitable Building Society v IRC [1993]
AC 70). (3). The limitation period for that cause of action began to run immediately
on payment of the ACT, on 14 January 1996. Therefore DMG would need to commence
its action before 14 January 2002.
- As I have already
recorded the claim form was issued on 13 October 2000 and the particulars
of claim were served on 9 February 2001, both comfortably within the six years
period. Therefore DMG’s claim in respect of the last of the three ACT payments
would have been in time anyway, as long as the claim as pleaded in the original
particulars did claim relief in respect of that ACT payment. In my judgment
it did, for the same reasons as those which I explained in paragraph 35 above.
The particulars claimed relief in respect of all ACT payments made by DMG,
not only in respect of those associated with the dividends which were scheduled
to the pleading. When the schedule was amended, effectively on 19 August 2002
and thus too late to be within the six years limitation period which ended
on 13 January 2002, the amendment did not plead a new cause of action, but
rather gave further factual details of a cause or causes of action which had
already been pleaded in the original particulars served on 9 February 2001.
Therefore, even if DMG, by reason of knowing about Hoechst’s argument, did
not make its January 1996 ACT payment under a mistake, it still brought its
claim for relief in respect of that payment within the time permitted by the
Limitation Act.
- There is one
other detailed matter to be mentioned in connection with limitation. In my
judgment in Hoechst United Kingdom Ltd v IRC, [2003] EWHC 1002
(CH) I suggested the possibility that, in claims like those of Hoechst and
of DMG in this case, the limitation period may not have expired all at once
on the sixth anniversary of the date when a payment of ACT was made, but progressively
over the period from that sixth anniversary date until the later sixth anniversary
of the date when the ACT was set off against MCT. The theory behind the suggestion
is that the relief is calculated on the basis of notional interest over that
period, and thus may be regarded as accruing from day to day. It seems to
me to be at least arguable that the limitation period would also run from
day to day and would expire from day to day six years later.
- In the oral
argument in this case I drew attention to the possible argument. Counsel had
not considered it in preparation for the hearing, so it was agreed that they
would not address it in their oral arguments, but might supply me with written
submissions on it after the hearing. They did that. Mr Rabinowitz QC and Mr
Fitzpatrick on behalf of DMG supported the argument. Mr Glick QC and Mr Carr
on behalf of the Revenue said that it was wrong. In the event the question
does not arise on the view which I take of this case, so, while I am grateful
to counsel for their careful written submissions upon it, I hope that they
will forgive me if I do not express a view on it. It is better to leave the
point to be decided in a future case where it does matter.
Conclusion
- In the result
I conclude that DMG’s claims, in so far as they are formulated as claims for
restitution in respect of money paid under a mistake of law, succeed in principle,
and that they are not time-barred by the Limitation Act 1980. I wish only
to add that this is not a result which I reach with much enthusiasm. When
Parliament first enacted the predecessor of section 32(1)(c) of the Limitation
Act 1980 (postponing the running of the limitation period in claims based
on mistake until the mistake is discovered), it did not have in mind claims
for recovery of money based on a mistake of law, particularly a mistake which
was shared by almost everyone else at the time. This was one consideration
which influenced the dissenting minority in Kleinwort Benson. Lord
Browne-Wilkinson said:
On
every occasion on which a higher court changed the law by judicial decision,
all those who had made payments on the basis that the old law was correct
(however long ago such payments were made) would have six years to bring a
claim to recover money paid under a mistake of law.
The
three Law Lords in the majority clearly felt that the limitation consequences
of their decision would be unacceptable in the long term and would have to
be changed. Thus Lord Goff said (at p.389):
I
recognise that the effect of section 32(1)(c) is that the cause of action
in a case such as the present may be extended for an indefinite period of
time. … [T]he recognition of the right at common law to recover money on the
ground that it was paid under a mistake of law may call for legislative reform
to provide for some time limit to the right of recovery in such cases. The
Law Commission may think it desirable, as a result of the decision in the
present case, to give consideration to this question; indeed they may think
it wise to do so as a matter of some urgency.
The
Law Commission considered the matter in its major report on Limitation of
Actions, dated 9 July 2001 (see paragraphs 2.49, 2.90 and 4.76 to 4.79). However,
no legislation consequent upon that report has yet been enacted.
- In the circumstances
I believe that I am bound by the decision of the majority in the House of
Lords in Kleinwort Benson to hold that a cause of action for recovery
of money paid under a mistake of law does exist, and that where such an action
is commenced section 32(1)(c) of the Limitation Act 1980 applies with the
effect that the limitation period does not begin to run until the mistake
is discovered. For the detailed reasons which I have given in this judgment,
I consider that DMG did make the three payments of ACT under a mistake of
law; that DMG is therefore entitled to restitution; that it makes no difference
that the payments were tax payments; and that DMG’s claims for restitution
are not time-barred by the 1980 Act. For those reasons I will give judgment
in favour of DMG.