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Prudential Assurance Company Ltd v HMRC – Supreme Court Decision

Prudential Assurance Company Ltd v HMRC

The latest CFC and Dividend GLO decision was released on 25 July 2018, concerning tax on overseas portfolio dividends and compound interest.

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The Supreme Court (UKSC) has published its decision in Prudential, a test case in the CFC and Dividend GLO. It concerns Advance Corporation Tax (ACT) and corporation tax charged under Schedule D Case V ICTA 1988 (DV tax) on overseas portfolio dividends (i.e. holdings of less than 10 percent). At the relevant time double tax relief was given for foreign withholding taxes paid, but not for any underlying tax (ULT). The Court of Justice of the European Union (CJEU) determined previously that the UK’s treatment of overseas dividends was incompatible with EU law. To remedy the breach, the UKSC confirmed that credit for ULT on portfolio dividends should be calculated by reference to the foreign nominal tax rate (FNR) not the tax actually paid. However, the UKSC decided that compound interest was not due in respect of tax which was levied in breach of EU law.

Tax credit: FNR or tax actually paid?

HMRC argued credit for foreign tax on overseas dividends should be set by reference to the overseas tax actually paid, submitting there was a difference in principle between portfolio and non-portfolio investments. The UKSC found no such distinction existed and credit for foreign tax should be calculated by reference to the FNR of the ‘water’s edge’ company.

The UKSC rejected HMRC’s submission that a further CJEU reference was required, noting the likelihood the CJEU would revise its jurisprudence appeared “negligible to the point where it can be discarded”.

This confirms the tax credit position for taxpayers who submitted claims based on Prudential principles concerning overseas portfolio dividends. It will be of interest to taxpayers with claims based on the FII litigation which concerns dividends received from group subsidiaries. There are additional issues of quantification and restitution in the FII GLO, so this judgment is not necessarily determinative for those claims.

Compound or simple interest?

The taxpayer argued it was entitled to compound interest in respect of tax levied in breach of EU law, on the basis that HMRC were unjustly enriched by the opportunity to use the money in question. The UKSC disagreed and found in favour of HMRC. Crucially, the UKSC departed from a previous judgment it gave (while the House of Lords) in the case of Sempra Metals.

This decision follows the UKSC’s judgment in Littlewoods which held compound interest was unavailable in a VAT context and will be disappointing for taxpayers who made High Court restitutionary claims based on mistake aiming to secure compound interest on their direct tax repayments.

The UKSC noted the “degree of disruption to public finances” awarding compound interest could have. The value of claims in Littlewoods were estimated – by HMRC – to be £17 billion, and £4-5 billion in Prudential and similar pending cases. While the difference between an award of simple and compound interest was considered ‘modest’ for Prudential, for other claimants (including those in the FII GLO) the difference could be significant.

Quantification

There were a number of technical quantification issues concerning ACT and carry back of franked investment income (FII) considered. The UKSC agreed with HMRC that any unlawful mainstream corporation tax (MCT) charge was a nullity and so no ‘lawful’ ACT could be set-off against it. This did not give rise to a claim in restitution.

However, the UKSC upheld the taxpayer’s cross-appeals on two issues. First, it held that where ACT from a pool of both lawful and unlawful ACT is set-off against unlawful MCT, the unlawful ACT is utilised first. Second, the UKSC determined that where FII was carried back, the FII should be treated as relieving only lawful ACT.

The full decision can be found here
 

For further information please contact:

Richard Doran

Nicola Hine

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