The Court of Appeal has published its decision in that part of the CFC and Dividend Group litigation that relates to portfolio dividends (i.e. holdings of less than 10 percent) where the test claimant is the Prudential Assurance Company. The key point that this case has covered is the taxation of portfolio dividends under the old Schedule D Case V rules in ICTA 1988 whereby double tax relief was given for foreign withholding taxes paid on the dividends, but not for any underlying tax. This appeal deals with issues arising from the main High Court judgment in October 2013 and the second judgment in January 2015. The Court of Appeal upheld the decisions of Mr Justice Henderson on all the issues which it considered apart from some subsidiary questions regarding the identification of unlawful Advance Corporation Tax (ACT).
Some of the points of particular note from the Court of Appeal judgment are set out below:
Credit for foreign tax on dividends
After analysing the various Court of Justice of the European Union (CJEU) decisions the Court upheld Henderson J’s decision that a conforming interpretation should be applied to UK legislation to allow a credit against UK tax on foreign dividends at the higher of the actual and nominal rate of foreign tax. HMRC were not permitted to raise a new argument regarding the effective rate of UK tax on insurance companies.
Compound or simple interest
The Court held that it was bound by its decision in Littlewoods Retail Ltd v HMRC to uphold Henderson J’s decision in favour of compound interest. An appeal against the Littlewoods decision is pending before the Supreme Court.
Identification of unlawful ACT
The Court approved Henderson J’s decision that HMRC were too late to raise this issue at trial. It nevertheless held, on the merits, that the point had in fact been decided in favour of Prudential’s submission when the Court of Appeal handed down its judgment in Test Claimants in the FII Group Litigation v HMRC on 23 February 2010.
Henderson J accepted submissions from Prudential that unlawful ACT should be regarded as utilised first against unlawful corporation tax and that, in two kinds of case where ACT is repaid, this should be identified with lawful rather than unlawful ACT previously paid. Having regard to the restitutionary nature of these proceedings, the Court held that he was wrong to do so and that in each case the amounts should be identified pro rata with lawful and unlawful ACT previously paid.
Change of position defence
The Court dismissed HMRC’s pleaded change of position defence as being neither viable nor supported by evidence. It declined to allow HMRC to raise a new defence of change of position or absence of enrichment.
The Court refused to allow HMRC to plead, as a new point, that Prudential could with reasonable diligence have discovered its mistake earlier than it did. Another limitation point, on whether Prudential’s amended ACT claims arose out of the same or substantially the same facts as the claims already pleaded, was excluded from the appeal on the basis that it could have no effect on the outcome.