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The CJEU Delivered its Third Ruling in the FII Group Litigation: The Principle of Effectiveness & Restriction of Remedies

On 12 December 2013, the Court of Justice delivered its third ruling in Test Claimants in the Franked Investment Income Group Litigation. Two previous references concerned the compatibility of the tax treatment of dividends paid by foreign subsidiaries to parent companies established in the UK, whereas the third reference (Case C‑362/12) evaluated the legislative restriction of legal remedies available to taxpayers for the recovery of taxes levied in breach of EU law.

 

Background

Under English law there were two ‘common law’ remedies available for claimants seeking restitution of taxes declared incompatible with EU law:

  • The Woolwich cause of action. This remedy was recognised by the House of Lords in Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70 and it provided for the recovery of tax unlawfully levied with a limitation period of 6 years from when the cause of action arose (s 5 of the Limitation Act 1980).
  • The Kleinwort Benson cause of action. This remedy was recognised in the House of Lords in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, allowing the recovery of sums paid under a mistake of law. Under s 32(1)(c) of the Limitation Act 1980, this type of action was available to the claimant for 6 years from the date on which the claimant discovered the mistake of law or could with reasonable diligence have discovered it.

It was the judgment of the High Court from 18 July 2003 in Deutsche Morgan Grenfell Plc v Inland Revenue Commissioners [2003] 4 All ER 645 that first recognised that the Kleinwort Benson cause of action could be relied upon to seek recovery of tax paid under a mistake of law. This decision was subsequently reversed by the Court of Appeal (4 February 2005), but reinstated the House of Lords (25 October 2006).

Without the legislative intervention, the state of law would have been as follows: for the purpose of making a claim for recovery of tax paid but not due, a taxpayer could rely upon either the Woolwich cause of action (subject to a limitation period of 6 years from the date of payment of the tax), or the Kleinwort Benson cause of action (subject to a limitation period of 6 years from the date on which the claimant discovered the mistake or could with reasonable diligence have discovered it).

However, following the 2003 judgment of the High Court, the UK Government announced the changes in legislation on the recovery of taxes (8 September 2003). Under the amendment enacted on 24 June 2004, s 32(1)(c) of the Limitation Act 1980 should ‘not apply in relation to a mistake of law relating to a taxation matter under the care and management of the Commissioners’ with the effect ‘in relation to actions brought on or after 8 September 2003’ (s 320 of the Finance Act 2004).

 

The Reference to the Court of Justice

The UK Supreme Court did not reach a consensus decision on s 320 of the Finance Act 2004. Lord Walker concluded that this case follows Marks & Spencer in that ‘[w]hilst national legislation reducing the period within which repayment of sums collected in breach of [EU] law may be sought is not incompatible with the principle of effectiveness, it is subject to the condition not only that the new limitation period is reasonable but also that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation. Such transitional arrangements are necessary where the immediate application to those claims of a limitation period shorter than that which was previously in force would have the effect of retroactively depriving some individuals of their right to repayment, or of allowing them too short a period for asserting that right’ (Case C-62/00 Marks & Spencer [2002] ECR I‑6325, para 38).[1] Lord Sumption, however, distinguished the present case from Marks & Spencer, since that case concerned the limitation period introduced for the single remedy available in national law for recovering the tax.[2] On the contrary, the Test Claimant and other companies in their position had an effective means of recovery through the Woolwich cause of action, which ‘entirely satisfies the obligation of the United Kingdom under the EU Treaty’.[3] Furthermore, according to Lord Sumption, there was no right to recover the tax on the basis of mistake: ‘the very earliest’ until the judgment of the High Court in Deutsche Morgan Grenfell Plc (2003) or, ‘more realistically’ until the issue of remedy was finally clarified by the House of Lords (2006).[4]

The majority of 5:2 supported the view that s 320 of the Finance Act 2004 should be considered to be in breach of EU law, but the Supreme Court decided to refer the case to the Court of Justice for interpretation and asked two questions:

  • Question 1: whether, in a situation where a taxpayer have a choice between two alternative causes of action in order to claim restitution of taxes levied in breach of EU law, one of which benefits from a longer limitation period, the principles of effectiveness, legal certainty and the protection of legitimate expectations preclude national legislation curtailing that limitation period without notice and retroactively.
  • Question 2: whether it makes any material difference that at the moment when the taxpayer issued its claim using the cause of action which benefited from the longer limitation period, the availability of the cause of action under national law had only been recognised (i) recently by a lower court and (ii) was not definitively confirmed by the highest judicial authority until later.

 

CJEU Ruling

To start with, the Court recalled its settled case law on the principle of procedural autonomy and the application of the principle of effectiveness in the context of time limits.[5] The right to a refund of taxes levied in breach of EU law is the consequence and complement of the rights conferred on taxpayers by provisions of EU law (see, inter alia, Case C‑591/10 Littlewoods Retail and Others [2012] ECR I‑0000).[6] In the absence of harmonisation measures, EU Member States may rely upon the principle of procedural autonomy and lay down detailed procedural regulation, which, however, have to ensure the effective protection of right (see, inter alia, Case C‑93/12 Agrokonsulting-04 [2013] ECR I‑00000),[7] reflected in the principles of equivalence and effectiveness (see, inter alia, Joined Cases C-317/08 to C-320/08 Alassini and Others [2010] ECR I-2213).[8] Under the principle of effectiveness, the time-limits set by national law should not render it impossible in practice or excessively difficult the exercise of rights conferred by EU law. Furthermore, the principle of legal certainty requires the limitation periods to be fixed in advance. Although the principle of effectiveness does not prevent a national legislator from setting more restrictive limits, the new limitation period should be reasonable and include a relevant transitional arrangement, providing an adequate period to a taxpayer to lodge a claim available under the previous regulation (to that effect see, in particular, Case C‑62/00 Marks & Spencer [2002] ECR I‑6325).[9]

Applying this case law to the present circumstances, the Court considered two aspects, namely: (i) whether the new limitation period is reasonable and (ii) whether a relevant transitional arrangement has been provided. It first stated that a limitation period of 6 years which starts to run on the date of payment, such as the Woolwich cause of action, is reasonable (see Case C‑228/96 Aprile [1998] ECR I-7141 and Case C-255/00 Grundig Italiana [2002] ECR I-8003).[10] The Court then reiterated paras 37 and 47 of Marks & Spencer (national legislation curtailing, retroactively and without any transitional arrangements, the period within which repayment could be sought of sums collected in breach of EU law is incompatible with the principle of effectiveness) and stated that the availability of two alternative remedies cannot lead to a different conclusion.[11] From the documents provided to the Court, it concluded that the enactment of s 320 of the Finance Act 2004 deprived a taxpayer from the possibility (retrospectively and without transitional arrangement) for recovery of sums for any period other than 1997 to 1999.[12] Following the settled case-law, a national provision that curtails the limitation period with immediate application to all claims made after the date of its enactment as well as to claims made between that date and the date the proposal had been announced, such as the legislation in question, must be considered to be incompatible with the principle of effectiveness.[13] This conclusion was also supported on the basis of the principles of legal certainty and the protection of legitimate expectations.[14] The fact that the availability of the cause of action allowing a longer limitation period had only been recognised recently by a lower court and was not definitively confirmed by the highest judicial authority until later was considered to be irrelevant.[15]

 

Comment

The Court of Justice has thus concluded that whilst the new limitation period of 6 years which starts to run from the date of payment is in itself reasonable, the UK has breached EU law by introducing the limitation retrospectively and without any transitional arrangement. The Court provided no further elaboration on what ‘an adequate transitional arrangement’ in this case would be, other than stating that it should allow taxpayers to lodge their claims under the previous law. This issue will be decided by the UK authorities.

The judgement of the Court of Justice can hardly be regarded as surprising. It logically follows the line of reasoning laid by the taxpayer, then reflected in the position of the majority at the Supreme Court and, subsequently, favoured by AG Wathelet.[16] The Court relied upon its settled case law, disregarding the special circumstances that forced the Supreme Court to refer the case as such that neither may ‘lead to a different conclusion’,[17] nor ‘relevant’.[18] The Court evaluated two alternative remedies separately against the requirements of EU law without considering a complete system of legal remedies available to taxpayers. It also decided that even a short-lived remedy creates a right that requires protection under the principle of effectiveness, legal certainty and legitimate expectations.

 

 Anzhela Yevgenyeva

Research Fellow, Oxford University Centre for Business Taxation

 


[1] Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue and another [2012] UKSC 19, para 96-99

[2] Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue and another [2012] UKSC 19, para 197.

[3] Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue and another [2012] UKSC 19, para 142.

[4] Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue and another [2012] UKSC 19, para 201.

[5] Case C-362/12 Test Claimants in the FII Group Litigation, paras 30-38.

[6] Case C-362/12 Test Claimants in the FII Group Litigation, para 30.

[7] Case C-362/12 Test Claimants in the FII Group Litigation, para 31.

[8] Case C-362/12 Test Claimants in the FII Group Litigation, para 32.

[9] Case C-362/12 Test Claimants in the FII Group Litigation, paras 33 and 37.

[10] Case C-362/12 Test Claimants in the FII Group Litigation, para 34.

[11] Case C-362/12 Test Claimants in the FII Group Litigation, paras 38-39.

[12] Case C-362/12 Test Claimants in the FII Group Litigation, para 41.

[13] Case C-362/12 Test Claimants in the FII Group Litigation, para 43.

[14] Case C-362/12 Test Claimants in the FII Group Litigation, paras 44-48.

[15] Case C-362/12 Test Claimants in the FII Group Litigation, para 51.

[16] AG Opinion in Case C-362/12 Test Claimants in the FII Group Litigation from 5 September 2013.

[17] Case C-362/12 Test Claimants in the FII Group Litigation, para 39.

[18] Case C-362/12 Test Claimants in the FII Group Litigation, paras 50-52.

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