On an inquiry into the compensation payable to companies in the Pirelli group by Revenue and Customs, the High Court declared that, if a group income election had been made under ICTA 1988, s. 247(1), the non-UK resident parent companies would not have been entitled to a tax credit upon the subsequent payment by the UK subsidiary of its mainstream corporation tax (‘MCT).

Facts

At the relevant time where a company resident in the UK paid a dividend to its shareholders it became liable to pay ACT in respect of the dividend. ACT was set against the company's liability to MCT. A recipient of the dividend, if resident in the UK, became entitled to a tax credit. The amount of the tax credit corresponded to the current rate of ACT. Companies in the same group could make a group income election under ICTA 1988, s. 247. A group income election had a twofold effect, reflecting the linkage between payment of ACT and entitlement to a tax credit: dividends paid by a subsidiary to its parent while the election was in force (‘election dividends’) did not trigger liability to pay ACT nor did their receipt trigger entitlement to a tax credit. So election dividends did not constitute franked investment income of the parent. The legislation restricted the right to make a group income election to cases where both companies were resident in the UK but the European Court of Justice (ECJ) in Metallgesellschaft Ltd v IR Commrs; Hoechst AG v IR Commrs (Joined Cases C-397/98 and C-410/98) [2001] BTC 99 ruled that denying groups of companies the right to make a group income election where the parent was non- resident in the UK but resident in another member state was contrary to art. 43 EC providing for freedom of establishment. The court held that the claimant companies in these cases were entitled to compensation for loss of the use of the money paid as ACT between the date of payment and the date when the ACT was used by being set off against the subsidiary company's mainstream corporation tax liabilities.

The feature which differentiated the claims of the Pirelli companies from the claims in the Metallgesellschaft/Hoechst cases (where the parent company was German) was that the DTAs between the UK on the one hand and Italy and the Netherlands on the other contained provisions (art. 10) for the foreign parents to receive tax credits from the UK Revenue equal to 6.875 per cent of the dividends. The Revenue took the view that the DTA payments should be taken into account to reduce the compensation due to the Pirelli companies.

The Pirelli companies challenged that view on the wording on the UK legislation and the tax treaties and because the loss had been suffered by the subsidiaries and the DTA payments received by the parents. They further argued that ACT was contrary to EC law as a withholding tax within art. 5(1) of Directive 90/435 the parent/subsidiary directive).

The High Court ([2003] BTC 218) and Court of Appeal ([2004] BTC 50) held that compensation was to be assessed on the basis that the taxpayers were entitled to the DTA payments even if they had been able to and had made a group income election. The House of Lords allowed the Revenue's appeal and remitted the case to the High Court to decide the unresolved factual question whether, had group income election been available to the taxpayer group, the group would have elected to have the UK subsidiaries pay the dividends in question free of ACT or, instead, would have chosen to have the UK subsidiaries pay the dividends outside group income election, thus enabling the overseas parents to receive convention tax credits ([2006] BTC 181).

At the remitted hearing, the taxpayer companies put forward the new argument that the DTA tax credit which the non-UK resident companies received, and which had to be brought into account in calculating the compensation, should not be treated as a DTA credit to which those companies were not entitled at all. On the true analysis, if a group income election had been open to and exercised by the taxpayer group, the dividends paid to the non-UK resident companies would have been paid free of ACT.

Issue

Whether the raising of the new point was an abuse of process since it had not been raised in the Court of Appeal or the House of Lords and, if not, whether the point was well-founded.

Decision

Rimer J (making a declaration accordingly) said that the just disposal of the abuse of process issue required the benefit of any doubt to be given to the taxpayers.

The point was not a new one as far as the Revenue were concerned as they had known since the original hearing before Park J that it was waiting in the wings. Further, the point was a short one and was of importance not only to the taxpayers but also to more than 50 other litigants with similar interests. Finally, the Revenue had chosen to argue the merits of the point before arguing that the court should not entertain any argument at all, which seemed to be illogical: the whole point of the assertion that the new point amounted to an abuse of process was, in theory, to relieve them from the burden of having to argue it. Collectively, those considerations had satisfied the court that the raising of the new point did not amount to an abuse of process. Accordingly, the point should be decided on its merits.

It was clear that, as a matter of domestic law, in the case of a group income election between exclusively UK resident companies, the UK parent would not be entitled to a tax credit either when the dividend was paid or when its UK subsidiary later paid its MCT. Therefore, it would be odd if, in the case of a like election between a UK subsidiary and its foreign parent, the latter were to be entitled to a tax credit in circumstances in which a UK parent would not.

Community law required the UK to relieve economic double taxation suffered by a group in respect of a dividend paid by a UK subsidiary to a foreign parent in cases in which the UK itself imposed economic double taxation by exercising taxing rights over the dividend and where the UK relieved such economic double taxation in the case of a UK parent. However the UK was not responsible for relieving economic double taxation caused by the tax regime in the home state of the parent company (Test Claimants in Class IV of the ACT Group Litigation v IR Commrs (Case C-374/04) (12 December 2006) considered).

In the circumstances of the present case, there was no question of the UK being under an obligation to relieve the non-UK resident companies from any suggested economic double taxation suffered in respect of the relevant dividends. Following the decision of the House of Lords in Pirelli Cable Holding NV v IR Commrs [2006] BTC 181, there was no doubt that a tax credit under ICTA 1988, s. 231 was exclusively linked to the payment of ACT under s. 14(1).

Therefore, as a matter of domestic law, it was plain that upon the hypothetical exercise of a group income election, the non-UK resident companies would not, upon the subsequent payment by the UK company of its MCT, have become entitled to any tax credit at all. As no credit would have been payable, no UK tax would have been payable on the dividend paid to the non-UK resident companies, since such tax was only payable in circumstances in which the foreign parent did receive a tax credit (Deutsche Morgan Grenfell Group plc v IR Commrs [2006] BTC 781 considered).

Chancery Division
Judgment delivered 23 March 2007.