One of the amendments made to the Finance Bill in October 2015 introduced a corporation tax charge at 45 percent on compound interest arising under claims relating to the payment of tax based on a mistake of law or the unlawful collection of tax (by way of a new Part 8C to the Corporation Tax Act 2010), granting HMRC powers to withhold this tax from the payments of restitution interest when awarded. The measures appear to be targeting the potentially very large sums of compound interest arising on repayments of both direct tax and VAT that taxpayers may be entitled to under EU law, including (but not limited to) those with High Court claims which may be part of existing Group Litigation Orders (GLOs) depending on the eventual outcome of the relevant litigation. We are aware that several taxpayers involved in these GLOs have now mounted legal challenges against the imposition of tax on restitution interest.
In a recent hearing which took place on 18 January 2016, the taxpayer sought permission to amend their existing High Court restitutionary claim in order to include arguments challenging the lawfulness, under EU law and the European Convention on Human Rights (ECHR), of the UK’s new restitution interest legislation. The taxpayer was refused permission to amend the claim on the basis that such a challenge was premature (given certain issues in the cross border dividend litigation remain ongoing) and the likely proper route of remedy when the tax position crystallises will be an appeal to the First-tier Tribunal (FTT) under the terms of the relevant legislation.
In a separate hearing before the Administrative Court on 3 February 2016 other taxpayers argued they were entitled to bring a judicial review claim because they currently have no alternative remedy, as they may not be assessed for the 45 percent tax for several years and were unable to appeal to the FTT until then. Whipple, J has reserved judgment and we await details of when the decision on whether the claim can proceed will be released.
The first issue being grappled with by the UK courts is the correct forum for challenges to the new rules – should it be the Chancery Division of the High Court where the original claims were issued, the Administrative Court by way of judicial review, or appeals to the First-tier Tribunal?
It also remains to be seen when a valid challenge may be properly brought, with HMRC arguing strongly that many claims currently being brought by taxpayers are premature; the litigation out of which their claims arise have still not had all issues finally determined.
These developments will be of interest to taxpayers with cross-border dividend claims, awaiting the final outcome of the FII GLO and CFC & Dividend GLO. It will also be relevant for all taxpayers with any pending High Court restitutionary claims seeking repayments of overpaid tax, whether direct tax or VAT.
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