The long-running ‘FII GLO’ case shows up the dangers of legislators failing to recognise the impact of European law, and the dangers of being unfair when trying to patchup the damage.
In brief, the UK’s rules on advance corporation tax (ACT – abolished in 1999) were blatantly discriminatory – a UK parent company receiving a dividend from a UK subsidiary did not suffer tax on the dividend, whereas a dividend from a foreign subsidiary was taxable.
This breached two of the fundamental freedoms guaranteed by the EU Treaty, so the law was invalid. Taxpayers should not suffer from invalid laws, and if they do, they are supposed to have an effective remedy. Once the ACT position was confirmed by the European Court of Justice, UK law was changed, but companies that had suffered tax under the invalid rules (all of them UK companies) claimed refunds.
The problem was that it took so long for the argument to wend its way through the legal process that many companies had their claims refused by HMRC on the grounds that they were submitted too late. HMRC originally argued that the tax should only be repaid if a valid claim was made within six years of the original tax payment, but some of those who had suffered from the bad law did not know within that timescale that they could claim.
They argued that, in a fair system, they should have six years from the point at which it was clear that they had paid tax by mistake. The taxpayer eventually won that argument in the House of Lords as long ago as 2006, but UK law had, by then, already been changed in September 2003 to block subsequent claims made on that basis.
No allowance was made in that change for any transitional period, which would have been fair and reasonable, but would have cost the Exchequer a significant amount, and the new law was challenged by a group litigation order in October 2003, which has taken until now to be settled.
Serious negative consequences for Exchequer
The FII GLO case challenged the fairness of the new law, and argued that it was also equally incompatible with European law, which guarantees everyone effective legal protection of their treaty rights, so claims should not have been barred with retrospective effect.
The Court of Justice ruled last week that the UK law change in 2003 was forbidden by EU law, so the Inland Revenue had charged tax without lawful parliamentary authority and should repay it. You can’t charge tax unless the law says it’s due, and having done so, you can’t refuse to refund it simply because the taxpayer has taken too long to reclaim it.
The courts were told in 2008 that some £5bn could be at stake. That will now be nearer £6bn, as interest will have been accruing over the five intervening years. If lawmakers and their officials had taken more careful notice of our European obligations, the ACT rules would have been fixed sooner and there would have been no need to try to block refunds to avoid the serious negative consequences for the Exchequer.
David Heaton is employment taxes partner at Baker Tilly
