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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Deutsche Morgan Grenfell Group Plc v Inland Revenue & Anor  EWHC 1779 (Ch) (18 July 2003)
Cite as:  EWHC 1779 (Ch),  STC 1017,  4 All ER 645,  Eu LR 838,  BTC 497
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Strand, London, WC2A 2LL
B e f o r e :
| Deutsche Morgan Grenfell Group Plc
|- and -
|(1) The Commissioners of Inland Revenue (2) HM Attorney General
Ian Glick QC and Bruce Carr (instructed by The Solicitor of Inland Revenue ) for the Defendants
Hearing dates : 12.05.03 to 15.05.03
Crown Copyright ©
Mr Justice Park:
1. Abbreviations, dramatis personae, glossary, etc.
|ACT||Advance corporation tax|
|CJEC||The Court of Justice of the European Communities|
|DBAG||Deutsche Bank AG, a German company and the parent company, direct or indirect of DBI and DMG.|
|DBI||DB Investments (GB) Limited|
|DMG||Deutsche Morgan Grenfell Group Plc, the claimant company|
|ICTA||The Income and Corporation Taxes Act 1988 in its form before amendments which took effect in 1999.|
|Kleinwort Benson||The House of Lords decision in Kleinwort Benson v Lincoln City Council  2 AC 349.|
|Metallgesellschaft/Hoechst||The combined cases in the CJEC of Metallgesellschaft Ltd and others v Commissioners of Inland Revenue and the Attorney General (Case C-397/98) and (1) Hoechst AG (2) Hoechst United Kingdom Ltd v Commissioners of Inland Revenue and the Attorney General (Case C-410/98). The judgment of the CJEC was delivered on 8 March 2001 and is reported at  STC 452.|
|MCT||Mainstream corporation tax, as to which see paragraph 6 of the judgment.|
|Pirelli case, the||Pirelli Cable Holding NV and others v Commissioners of Inland Revenue  STC 250.|
i. Does a claim for restitution of a payment made under a mistake of law apply in the case of a payment of tax to a Revenue authority? In my view the answer is: yes.
ii. Did DMG make the relevant payments of ACT under a mistake of law so as to be entitled to claim restitution in accordance with the principles laid down by the House of Lords in Kleinwort Benson? In my view the answer is again: yes.
iii. Under section 32(1)(c) of the Limitation Act 1980, when did the limitation period begin to run? Did it begin to run only at the time of the CJEC's decision in Metallgesellschaft/Hoechst (or possibly at the time of the Advocate General's opinon)? Or did it begin to run at the earlier time in mid-1995 when DMG first learned that the Hoechst group of companies was arguing that the rule that only United Kingdom resident companies could make group income elections was contrary to Community law? In my opinion the period began to run only at the time of the CJEC's decision.
It follows that DMG's claims succeed.
The relevant United Kingdom tax law
The Limitation Act 1980
32 Postponement of limitation period in case of fraud, concealment or mistake
(1) … where in the case of any action for which a period of limitation is prescribed by this Act either –
(a) …; or
(b) …, or
(c) the action is for relief from the consequences of a mistake,
the period of limitation shall not begin to run until the plaintiff has discovered the … mistake … or could with reasonable diligence have discovered it.
Does English law recognise a claim in restitution to recover taxes paid under a mistake of law?
To me, it is plain that the money was indeed paid over under a mistake, the mistake being a mistake of law. The payer believed, when he paid the money, that he was bound in law to pay it. He is now told that, on the law as held to be applicable at the date of the payment, he was not bound to pay it. Plainly, therefore, he paid the money under a mistake of law, and, accordingly, subject to any applicable defences, he is entitled to recover it.
That passage does conclude with a suggestion that there might be applicable defences, but Lord Goff went on to consider whether there indeed were any, and concluded that there were not, at least so far as the instant case was concerned. He did think it possible that there ought to be some defences, but he did not consider that the House of Lords could introduce them as a matter of case law.
At this point it is, in my opinion, appropriate to draw a distinction between, on the one hand, payments of taxes and other similar charges and, on the other hand, payments made under ordinary private transactions. The former category of cases was considered by your Lordships' House in Woolwich Equitable Building Society v. Inland Revenue Commissioners  AC 70, in which it was held that at common law taxes exacted ultra vires were recoverable as of right, without the need to invoke a mistake of law by the payer. Moreover reference was made, in the course of the hearing, to the various statutory provisions (usefully summarised in the Law Commission's Consultation Paper (Law Com. No. 120) at pp. 74-84) which regulate the repayment of overpaid tax. For present purposes it is of interest that, in the case of some taxes (including income and corporation tax), no relief is given "in respect of an error or mistake as to the basis on which the liability . . . ought to have been computed where the return was in fact made on the basis of or in accordance with the practice generally prevailing at the time when the return was made:" see the proviso to section 33(2) of the Taxes Management Act 1970.
Two observations may be made about the present situation. (I of course have it in mind that this is the subject of proposals for legislative reform contained in the Law Commission's Report (Law Com. No. 227), but your Lordships are concerned with the law as it stands at present.) The first observation is that, in our law of restitution, we now find two separate and distinct regimes in respect of the repayment of money paid under a mistake of law. These are (1) cases concerned with repayment of taxes and other similar charges which, when exacted ultra vires, are recoverable as of right at common law on the principle in Woolwich, and otherwise are the subject of statutory regimes regulating recovery; and (2) other cases, which may broadly be described as concerned with repayment of money paid under private transactions, and which are governed by the common law. The second observation is that, in cases concerned with overpaid taxes, a case can be made in favour of a principle that payments made in accordance with a prevailing practice, or indeed under a settled understanding of the law, should be irrecoverable. If such a situation should arise with regard to overpayment of tax, it is possible that a large number of taxpayers may be affected; there is an element of public interest which may militate against repayment of tax paid in such circumstances; and, since ex hypothesi all citizens will have been treated alike, exclusion of recovery on public policy grounds may be more readily justifiable.
In the present case, however, we are concerned with payments made under private law transactions. It so happens that a significant number of payments were in fact made under interest rate swap agreements with local authorities before it was appreciated that they were void; but the number is by no means as great as might conceivably occur in the case of taxes overpaid in accordance with a prevailing practice, or under a settled understanding of the law. Moreover the element of public interest is lacking. In cases such as these I find it difficult to understand why the payer should not be entitled to recover the money paid by him under a mistake of law, even if everybody concerned thought at the time that interest rate swap agreements with local authorities were valid.
i. There is certainly no principle that, for public policy reasons or for other reasons, there can never be restitutionary claims for recovery of taxes wrongly paid. See Woolwich Equitable Building Society v IRC  AC 70, recognising the existence of a restitutionary claim in respect of tax paid under protest in response to what turned out to have been an unlawful statutory demand.
ii. If Lord Goff intended to say that, although money paid under a mistake of law was generally recoverable, money paid in taxes under a mistake of tax law was not, he would not have said it at the point in his speech where the three paragraphs which I have quoted appear. The general structure of the speech was to begin with an analysis of whether a cause of action for restitution of payments made under a mistake of law existed at all, and then, having concluded that it did, to go on to consider whether there were any defences to such a cause of action which might apply in particular cases. If His Lordship wished to say that a cause of action for payments of taxes made under a mistake of law did not exist he would surely have dealt with the point in the first part of his speech. However, the paragraphs which I have quoted appear in the second part of the speech, and in particular in a section where Lord Goff is considering whether the House of Lords should introduce a 'settled law defence' along the lines of a proposal which had been made by the Law Commission. The Commission had considered that legislation would be necessary to create a settled law defence, and in a draft Bill had included a provision expressed as follows: 'An act done in accordance with a settled view of the law shall not be regarded as founding a mistake claim by reason only that a subsequent decision of a court or tribunal departs from that view.'
iii. In the context I do not believe that Lord Goff was saying that there could never be a restitutionary claim for tax paid by mistake. Rather he was observing that, although there could be such a claim, the courts might at some future time have to consider whether there was also a settled law defence. In the Kleinwort Benson case itself he went on to decide that (at common law, and leaving out of account possible future legislative changes) there was no such defence where the mistaken payments had been made under private law. He did not wish to be understood as deciding the same thing where the payments were tax payments. However, he was not deciding that there was a settled law defence in the case of tax payments. He was leaving the matter open.
iv. In the present case the submission put to me by Mr Glick QC on behalf of the Revenue was that a cause of action for the restitution of tax payments made under a mistake of law did not exist at all. He expressly said that, if I considered that the cause of action did exist, he did not invite me to decide at High Court level that a settled law defence might be available. He reserved the right to advance such an argument in a higher court, and I gave permission for an amendment to the Revenue's defence which would lay the basis for such an argument if the Revenue wish to advance it hereafter.
v. In the earlier part of Lord Goff's speech, where he discussed whether there should be a cause of action in restitution for money paid under a mistake of law, he reviewed a number of authorities in other jurisdictions which had held that such a cause of action did exist. Among them was the South African case of Willis Faber Enthoven (Pty.) Ltd v Receiver of Revenue, 1992 (4) SA 202. That was a tax case in which a restitutionary claim for the recovery of tax paid under a mistake of law succeeded. The impression which I glean from the speech is that Lord Goff approved of the Willis Faber decision and saw no objection to a similar result forming part of United Kingdom law.
vi. In none of the other speeches in the House of Lords, either of the majority or of the minority, is there any suggestion that there could be a difference between payments of tax made under a mistake of law and payments of different kinds made under a mistake of law.
Did DMG make its payments of ACT under a mistake of law?
[A]t all times prior to the determination of the European Court in the Hoechst case, I believed that the UK statute denying the ability to make a group income election was the law and I was bound to act in accordance with this law. … It did not occur to me that I could ignore the law as it stood for the simple reason that the law is the law. Just because another taxpayer challenged the law that did not mean that I could or should ignore it.
Mr Thomason was cross-examined, but I do not believe that the foregoing passage was challenged or affected by his answers on other points. He added the general point (obvious but plainly relevant) that it was not clear in 1995 what would be the outcome of the Hoechst case (or, as it turned out, of the Metallgesellschaft/Hoechst conjoined cases). He also said that there were more arguments being advanced by Hoechst in 1995 than the one which eventually succeeded in the CJEC. For example, relief was being claimed by Hoechst AG, the German parent company, as well as by the United Kingdom subsidiary which had paid the dividends and the associated ACT. In addition arguments were being advanced in reliance, not on the EC Treaty, but on the non-discrimination article in the Double Taxation Agreement between the United Kingdom and Germany.
What if (contrary to my view) DMG was no longer mistaken once it learned of the argument being advanced by the Hoechst group?
On every occasion on which a higher court changed the law by judicial decision, all those who had made payments on the basis that the old law was correct (however long ago such payments were made) would have six years to bring a claim to recover money paid under a mistake of law.
The three Law Lords in the majority clearly felt that the limitation consequences of their decision would be unacceptable in the long term and would have to be changed. Thus Lord Goff said (at p.389):
I recognise that the effect of section 32(1)(c) is that the cause of action in a case such as the present may be extended for an indefinite period of time. … [T]he recognition of the right at common law to recover money on the ground that it was paid under a mistake of law may call for legislative reform to provide for some time limit to the right of recovery in such cases. The Law Commission may think it desirable, as a result of the decision in the present case, to give consideration to this question; indeed they may think it wise to do so as a matter of some urgency.
The Law Commission considered the matter in its major report on Limitation of Actions, dated 9 July 2001 (see paragraphs 2.49, 2.90 and 4.76 to 4.79). However, no legislation consequent upon that report has yet been enacted.