Corporation tax - loss relief - tax credits - foreign income dividends - issue as to compatibility of UK provisions with Community law - High Court held that reference to ECJ not appropriate at this stage - questions of jurisdiction and limitation purely domestic issues for national courts

The High Court held that it was not appropriate to refer any questions to the European Court of Justice before issues of jurisdiction and limitation had been determined since those were purely matters of UK law to be decide by the English courts.

Facts

A group litigation order was made by the High Court to regulate litigation by a substantial number of pension funds against the Inland Revenue in respect of the payment of foreign income dividends (FIDs).

Legislation about FIDs was enacted by the Finance Act 1994 and incorporated in ICTA 1988 by s. 246A to 246Y. Previously, UK companies which received income in the form of dividends from non-resident companies, typically subsidiaries, and paid onward dividends to their shareholders. Advance corporation tax (ACT) then had to be paid by reference to the onward dividends and, because of double tax credits for the tax suffered in the overseas jurisdictions from which the underlying dividends flowed, the UK companies could not set much of their ACT against a liability to so-called mainstream corporation tax in the UK. This resulted in the surplus ACT problem which the FID regime was designed to alleviate.

The UK dividend paying company could elect to have its onward dividends treated as FIDs. The main effects were: (1) the paying company did not have to pay ACT; and (2) the recipients of the dividends were not entitled to tax credits under ICTA 1988, s. 231. The FID regime was generally beneficial to dividend paying companies because they did not have to pay ACT but it was disadvantageous to the recipients, especially pension funds. Generally a pension fund which received a UK dividend was entitled to tax credits in respect of it and, until the changes made in 1997, it received a cash payment from the Inland Revenue equal to the tax credit. If, however, the dividend was an FID, there was no tax credit and no cash payment.

Therefore, the pension funds banded together to bring High Court proceedings against the Revenue designed to establish that in the case of pension funds, the domestic law position was contrary to, and overridden by, directly applicable provisions of Community law. In the course of a case management conference, an issue arose whether a reference should be made to the European Court of Justice for a preliminary ruling on whether the UK law was contrary to Community law.

The Revenue argued that it was not appropriate to make a reference at this stage since, as a result of the decision of the House of Lords in Autologistic Holdings plc v IR Commrs [2005] BTC 402, the High Court had no jurisdiction to hear some of the claims sought to be brought as High Court claims within the GLO. Instead the pension funds’ contentions should have been raised in tax appeals to the special commissioners under the normal procedure for resolving contested issues of tax law. Further, all the other claims sought to be brought as High Court claims were barred by the Limitation Act. Therefore, a reference to the ECJ of the substantive questions was unnecessary and inappropriate as, even if those questions were decided in favour of the pension funds, none of the funds would have any entitlement to redress.

Issue

Whether it was appropriate to refer any question to the ECJ at this stage of the proceedings.

Decision

Park J (ruling accordingly) said that a reference to the ECJ should not be made now, although that did not preclude the possibility of a reference being made later. In the Autologistics case the House of Lords had decided, by a majority, that, if a litigant sought to have a question of tax law determined in a High Court action at a time when it could have put into operation and utilised the normal procedures under the Taxes Acts, which would lead to a tax appeal before the general or special commissioners, the High Court should decline jurisdiction and stay the purported High Court claim. This question of jurisdiction was purely a matter of UK law and Community law had nothing to do with it.

There was no doubt that Community rights and remedies were subject to national rules of limitation of actions, as had been affirmed frequently by the ECJ. The rules in the Limitation Act 1980 plainly complied with the principles of equivalence and effectiveness. As regards equivalence, exactly the same rules applied whether the claimant was based in the UK or in another member state or anywhere else in the world. As regards effectiveness, a six year limitation period was long enough to rule out any argument that the exercise of rights arising by virtue of Community law was practically impossible or excessively difficult.

The critical point was that the limitation issue was a question purely of domestic law which ought to be decided by the English courts before a decision was reached on whether or not to refer any questions to the ECJ.

Chancery Division, Judgment delivered 18 November 2005