CJEU: UK in breach of EU law when it blocked 'mistake' based tax claims

Giving its judgment in the long-running franked investment income group litigation (the FII GLO), the Court of Justice of the European Union (CJEU) said that the UK was entitled to remove the more favourable time limit for bringing so-called 'DMG mistake' claims. However, by not including sufficiently adequate transitional arrangements in making the change, it "retroactively deprived some individuals of their right to repayment", the court said.

"Whilst 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 previous legislation," the court said in its judgment.

"The fact that ... the taxpayer has two such remedies cannot, in circumstances such as those in issue before the referring court, lead to a different conclusion," it said.

For similar reasons, the UK Government's actions also infringed EU principles of legal certainty and the protection of legitimate expectations, it concluded. It did not matter that at the material time the availability of the more favourable route had been recognised only recently by a lower court and was not definitively confirmed by the highest judicial authority until later.

"The judgment is good news for companies who previously made EU law based High Court claims for repayment of corporation tax with a view to relying on the longer time limit applicable to mistake based claims," said tax expert Jake Landman of Pinsent Masons, the law firm behind Out-Law.com. "The ruling is no great surprise since a majority in the Supreme Court and the Advocate General of the European Court previously came to the same conclusion."

The FII GLO relates to a long-running dispute between the UK tax authorities and a number of UK-based multinational companies.. In two earlier rulings, the CJEU found that the UK's previous approach to the taxation of the dividends which UK-based multinational companies received from overseas subsidiaries was discriminatory.

EU law requires there to be an 'effective' remedy for monies paid in respect of tax that has been unlawfully charged. Aside from claims under statute UK law offers two common law remedies: 'DMG mistake of law claims', under which companies can claim back tax wrongfully paid in mistake of law; and 'Woolwich claims', under which companies can reclaim tax unlawfully paid.

Previously, the six year limitation period for bringing DMG claims ran from the date that the mistake was discovered, or could reasonably have been discovered; while Woolwich claims had to be made within six years of the date that the tax was paid. DMG claims were therefore usually more favourable to the taxpayer from the point of view of time limits. However, the ability of a company to rely on this more favourable time limit was removed by section 320 of the 2004 Finance Act, which blocked DMG claims made on or after 8 September 2003. The change was introduced without a transitional period and the CJEU has therefore deemed section 320 and the removal of DMG claims unlawful.