The House of Lords, restoring the order of Park J [2003] BTC 497, held that there was no reason in principle why the right to restitution of payments made by mistake of law should not apply to payments of tax, that the taxpayer had made payments of advance corporation tax by mistake and that its claim for compensation in respect of those payments was not out of time because the mistake could not have been discovered until a judgment of the European Court of Justice in 2001.

Facts

The taxpayer was the UK subsidiary of a German parent company. At the relevant time, UK tax law provided that, where subsidiary companies paid dividends to their parents, group income elections could be made which enabled the dividends to be paid without the paying subsidiary having to pay advance corporation tax (‘ACT’) to the UK Revenue. Until the decision of the ECJ in the case of Metallgesellschaft Ltd v IR Commrs; Hoechst AG v IR Commrs (Case C-397/98) [2001] BTC 99; [2001] ECR I-1727', such elections could be made only between UK resident companies (ICTA 1988, s. 247(1)). However, in that case the ECJ held that it was contrary to art. 52 of the EC Treaty (art. 43 EC) for UK law to deny the right to make group income elections where the parent company was resident in a member state other than the UK. The ECJ also held that Community law conferred a right of compensation or restitution in respect of the tax which had been paid prematurely as ACT, which claimant companies were entitled to pursue in the UK courts. After the Advocate General's opinion was given but before the ECJ gave judgment the taxpayer brought proceedings in relation to payments of ACT made in 1993, 1995 and 1996. Park J held that English law recognised a claim in restitution to recover money paid under a mistake of law (Kleinwort Benson v Lincoln City Council [1999] 2 AC 349) and that that principle applied to claims to recover overpaid tax. In the circumstances the tax had been paid under a mistake of law and s. 32(1)(c) of the Limitation Act 1980 operated to postpone the start of the six year limitation period until the time when the mistake of law was discovered or discoverable with reasonable diligence. That was when the ECJ decision was given and accordingly the proceedings were in time.

The Court of Appeal ([2005] BTC 126) allowed in part an appeal by the Revenue, holding that a claim could not be made for restitution of a payment made under a mistake of law to the Revenue on account of a supposed liability to tax on the basis of Kleinwort Benson but only on the principle in Woolwich Equitable Building Society v IR Commrs [1992] BTC 470, which required an unlawful demand.

Issues

Whether a claim for restitution of a payment made under a mistake of law applied in the case of a payment of tax; whether the taxpayer made payments of ACT under a mistake of law; and when the limitation period began to run under s. 32(1)(c) of the Limitation Act 1980.

Decision

The House of Lords (by a majority) allowed the taxpayer's appeal and restored the order of Park J. Lord Hoffmann said that there was no reason in principle why the right to restitution of payments made by mistake, which had been extended in Kleinwort Benson to include mistakes of law, should not apply to payments of tax. Lord Goff s speech in Kleinwort Benson did not deny the right to recover tax on the ground that it was paid by mistake. On the contrary, his discussion of a possible settled law defence necessarily entailed that he thought that there was such a cause of action.

A common law claim on the grounds of mistake was not excluded by s. 33 of the Taxes Management Act 1970. There was no reason to infer that Parliament intended to exclude a common law remedy in all cases of mistake (whether of fact or law) in which the Revenue was unjustly enriched but did not fall within s. 33. Woolwich and Marcic v Thames Water Utilities Ltd [2003] UKHL 66; [2004] 2 AC 42 considered. The money had been paid by mistake. The question was whether the action could be described as being ‘for relief from the consequences of a mistake’ within the meaning of section 32(1)(c) of the 1980 Act. Kleinwort Benson was authority for the proposition that an action for restitution of money paid under a void contract could fall within that description. The majority in Kleinwort Benson decided that a person whose understanding of the law (however reasonable and widely shared at the time) was falsified by a subsequent decision of the courts should, for the purposes of the law of unjust enrichment, be treated as having made a mistake. The judge had been entitled to accept the taxpayer's evidence as showing that, whether or not a state of doubt was consistent with making a mistake, the taxpayer was not in a state of doubt.

The taxpayer's mistake was not reasonably discoverable until after the judgment of the ECJ had been delivered. It was important to bear in mind the special nature of the mistake, namely that it was deemed to have been made because of the retrospective operation of a later decision of the ECJ. The ‘reasonable diligence’ proviso depended upon the true state of affairs being there to be discovered. The true state of affairs was not discoverable until the ECJ pronounced its judgment. Predictions could be made, especially after the opinion of the Advocate General, which gave the taxpayer sufficient confidence to issue proceedings. But the taxpayer could not have discovered the truth because the truth did not yet exist. It followed that s. 32(1)(c) postponed the commencement of the limitation period in respect of all three ACT payments until the judgment of the ECJ on 8 March 2001. That meant that the proceedings were in time.

Lord Walker of Gestingthorpe delivered a concurring judgment and Lord Hope of Craighead agreed. Lord Scott of Foscote would have dismissed the appeal on the basis that the taxpayer had not made mistake of law. The unlawfulness of the tax regime identified by the ECJ lay not with the imposition of ACT but in the discriminatory nature of the group income election provisions. Accordingly the remedy provided by domestic law could not be based on the premise that the payments of ACT were payments that were not due. The taxpayer paid the ACT that was due under s. 14(1) of ICTA 1988. The taxpayer and its German parent company did make a mistake of law in that they did not realise that they could successfully challenge the failure of the ACT tax regime to allow them to make a group income election. However the ACT was not paid under a mistake of law in the sense necessary for a restitutionary remedy. The ACT was paid because there was a legal obligation under a valid statutory provision for the money to be paid. The taxpayer's remedy was not a restitutionary one for the re-payment of money paid that was not due, or for the repayment of money paid under a mistake, but was a claim for compensation to recover the loss caused by the breach of Community law. An allegation of a mistake but for which the ACT would not have been paid was not an essential ingredient in the taxpayer's cause of action. On that basis its claim was statute barred.

Lord Brown of Eaton-under-Heywood agreed in the result but disagreed on the issue of when the mistake should have been discovered. As soon as a paying party recognised that a worthwhile claim arose that he should not after all have made the payment and accordingly was entitled to recover it (or to compensation for the loss of its use), he had ‘discovered’ the mistake within the meaning of s. 32.

House of Lords.

Judgment delivered 25 October 2006.