Sempra Metals Ltd v Inland Revenue & Anor

This is an appeal from an order made on 16 June 2004 by Mr Justice Park in a test case brought under a group litigation order made following, and arising out of, the decision of the Court of Justice of the European Communities in the joined cases Metallgesellschaft Ltd v others v Inland Revenue Commissioners and another and Hoechst AG and another v Inland Revenue Commissioners and another (Cases C-397/98 and 410/98). The decision of the Court of Justice was delivered on 8 March 2001 and is reported at [2001] Ch 620.

The issue which was before the Court of Justice in the Metallgesellschaft/Hoechst cases was whether it was contrary to Community law - specifically, the provisions then contained in article 52 of the EC Treaty (now renumbered as article 43) - for the domestic tax law in the United Kingdom to differentiate, in the treatment of advance corporation tax on dividends paid by a subsidiary company to its parent, between cases where both subsidiary and parent were resident in the United Kingdom for tax purposes and cases where the subsidiary was resident in the United Kingdom but the parent was resident in another member state. The effect of the differential treatment under domestic law was that the subsidiary of a parent company which was resident in another member state suffered a timing disadvantage; in that it was required to pay an amount in respect of corporation tax earlier than it would have done had the parent, also, been resident in the United Kingdom.

The Court of Justice held that the differential treatment in relation to advance corporation tax was contrary to Community law. The Court went on to hold that a United Kingdom subsidiary of a parent company resident in another member state which had been required to pay, and had paid, an amount in respect of corporation tax earlier than would have been the case had its parent been resident in the United Kingdom was entitled to compensation for the timing disadvantage which it had suffered. The amount of that compensation was to be determined by the national court.

The group litigation order, which was made on 26 November 2001, identified a number of common or related issues of law arising out of the decision of the Court of Justice. Amongst those issues (at paragraph 9(ii) of the order, under the heading “EU Issues - Quantum”) were the following:

“(A)

Where an amount of [advance corporation tax – ‘ACT’] has been set off against a UK company’s corporation tax liability or has been surrendered to another group company or has been carried back against the UK company’s corporation tax liability arising in an earlier year, at what rate and for what period and on what basis is interest due in calculating the damages and/or restitution in respect of the loss of the use of the sum paid as ACT?

(B)

At what rate and for what period and on what basis is interest due on the amount calculated in accordance with (A) above?”

Those issues were raised – the first by an amendment made on 24 October 2003 - in the action which had been commenced by Metallgesellschaft Limited against the Commissioners of Inland Revenue as long ago as 1995. It was that action – and those issues – which were before Mr Justice Park in April 2004 as a test case in the group litigation. Since the issue of the writ the claimant had changed its name to the present name, Sempra Metals Limited, and the Attorney General had been joined as an additional defendant. The underlying question – as paragraph 8 of the skeleton argument prepared on behalf of the claimant made clear – was whether, in relation to each of the periods identified by the answers to issues (A) and (B), interest should be compounded. It was claimant’s case that:

“. . . in respect of the periods identified by Issue A and Issue B above, it is entitled to damages/compensation in respect of its interest costs/loss calculated on a compound basis, since it is only on this basis that, as laid down by the ECJ, it will be properly compensated for the loss it has suffered.”

In the judgment which he handed down on 16 June 2004, Mr Justice Park described the relevant period for the purposes of Issue (A) as “the premature tax payment period”. That period – in a case where an amount equal to the advance corporation tax actually paid by the subsidiary company was later set-off against a liability to corporation tax on taxable profits – was the period between the date of premature payment and the date of set-off. The judge decided that, in respect of that period, compensation (or restitution) should be calculated on the basis of compound interest. His decision on that point is reflected in paragraph 1 of his order dated 16 June 2004. It is from that paragraph (and the consequential order for costs in paragraph 5 of the order) that the Revenue appeals.

The judge described the relevant period for the purposes of Issue (B) – that is to say, the period from the date when an amount equal to the advance corporation tax paid was set-off against corporation tax on taxable profits – as “the post-utilisation period”. He held that, in respect of that period, the amount of compensation (or restitution) – whatever it might be – should bear simple interest. Effect is given to that decision by paragraph 2 of the order of 16 June 2004. There is no challenge to that part of the judge’s order.

Sempra Metals Limited (formerly Metallgesellschaft Limited, and referred to hereafter as “Sempra”) is a company resident in the United Kingdom. It trades, both as a principal and as a broker for clients, in metals listed on the London Metal Exchange. It was, at all relevant times, a subsidiary of Metallgesellschaft AG, a company having its seat in the Federal Republic of Germany. Over the years between 1974 and 1995 Sempra paid dividends to its German parent; and paid the associated advance corporation tax in respect of those dividends. It is accepted by the Revenue that, if the United Kingdom legislation had permitted group income elections to be made between United Kingdom subsidiaries and parent companies established in other member states, Sempra and its parent would have made such an election; with the consequence that Sempra would not have been required to pay advance corporation tax.

For the purposes of the test case, the parties identified and agreed four sample dividends, with associated payments of advance corporation tax. The earliest tax payment was made on 12 October 1981 and the latest on 18 July 1994. Each of the payments of advance corporation tax was subsequently set-off against corporation tax in respect of chargeable profits. The periods between payment and set-off (the “premature tax payment periods”) varied between one year and ten years. The judge found that, at almost all times, Sempra was in a net borrowing position, in the sense that its cash borrowings exceeded its cash assets.

The statutory regime under which advance corporation tax was payable on qualifying distributions made by a company resident in the United Kingdom is fully described at paragraphs [3] to [21] in the judgment of Lord Justice Peter Gibson in the first in the series of test cases to be tried under the group litigation order of 26 November 2001, Pirelli Cable Holding NV and others v Inland Revenue Commissioners [2003] EWCA Civ 1849, [2004] STC 130. It is unnecessary to rehearse every detail of that regime in this judgment.

It is enough, I think, to say this. Advance corporation tax was introduced in the Finance Act 1972 and remained payable until abolished, with effect from 6 April 1999, by the Finance Act 1998. From 1988 the relevant provisions were found in the Income and Corporation Taxes Act 1988 (“ICTA 1988”). The charging provision was contained in section 14(1) of that Act. The general rule was that advance corporation tax, when payable, was to be paid within 14 days after the end of the quarter in which the distribution was made – section 238(5) ICTA 1988, read with paragraphs 1(2) and 3(1) of schedule 13 to that Act. It could not be deducted from the amount of the distribution; but it could be set-off against the paying company’s liability to corporation tax in respect of chargeable profits (“mainstream corporation tax” or “MCT”) for the year of assessment within which the distribution was made; or (if the profits for that year were insufficient) against chargeable profits for future years of assessment – section 239 ICTA 1988.

In circumstances where the paying company had sufficient chargeable profits (in that or in future years) it would, ultimately, pay no more corporation tax than the amount which it would otherwise have paid as MCT. But the effect on the paying company, as Lord Justice Peter Gibson explained at paragraph [8] of his judgment in Pirelli Cable Holding NV (supra), was that the date for payment of the corresponding MCT which would otherwise be due was advanced by a period of between eight and a half months (if the distribution was made on the last day of an accounting period) and twenty nine and a half months (if the distribution was made on the first day of an accounting period). So there was a ‘cost’ to the paying company, in the sense that it had lost the use of money (in the amount of the advance corporation tax which it had paid) for a period which was not insubstantial.

The charging provision, section 14(1) ICTA 1988, was expressed to be subject to section 247 of that Act. Section 247(1) provided that where a parent company received a dividend from a 51 per cent subsidiary – and both parent and subsidiary were resident in the United Kingdom – the receiving company and the paying company could join in making a group income election. The effect of a joint income election was that dividends received by the parent from the subsidiary were excluded from section 14(1) of the Act. They were treated as “group income” of the parent for the purposes of the Corporation Tax Acts. The paying company was spared the ‘cost’ of losing the use of money between the date when it would have paid advance corporation tax and the date of set-off.

It was the requirement, in section 247(1) ICTA 1988, that the receiving company, as well as the paying company, should be resident in the United Kingdom that led to differential treatment, in relation to advance corporation tax, between a case where both parent and subsidiary were resident in the United Kingdom and a case where the subsidiary was resident in the United Kingdom but the parent was not so resident. In the former case, the subsidiary was spared the ‘cost’ of losing the use of money between the date when it would have paid advance corporation tax and the date of set-off; in the latter case the subsidiary had to bear that cost. The effect of the differential treatment was that the subsidiary of a parent company which was resident in another Member State was required to pay an amount in respect of corporation tax earlier than it would have done had the parent, also, been resident in the United Kingdom. The subsidiary company suffered a timing disadvantage in that respect.

The question whether it was consistent with Community law – and, in particular, consistent with what was then article 52 of the EC Treaty - for the legislation of a member state to permit a group income election (allowing distributions to be paid by a subsidiary to its parent without accounting for advance corporation tax) only where both the subsidiary and the parent were resident in that state was referred to the Court of Justice in the course of the present proceedings. The Court answered that question in the negative. It held that:

“It is contrary to article 52 of the EC Treaty for the tax legislation of a member state, such as that in issue in the main proceedings, to afford companies resident in that member state the possibility of benefiting from a taxation regime allowing them to pay dividends to their parent company without having to pay advance corporation tax where their parent company is also resident in that member state but to deny them that possibility where their parent company has its seat in another member state.”

That answer led to a second question:

“. . . do the above-mentioned provisions of the EC Treaty give rise to a restitutionary right for a resident subsidiary of a parent company resident in another member state and/or the said parent to claim a sum of money by way of interest on the advance corporation tax which the subsidiary paid on the basis that the national laws did not allow it to make a group income election, or can such a sum only be claimed, if at all, by way of an action for damages . . . and in either case is the national court obliged to grant a remedy even if under national law interest cannot be awarded (whether directly or by way of restitution or damages) on principal sums which are no longer owing to the claimants?”

The Court of Justice answered that question in the affirmative:

“Where a subsidiary resident in one member state has been obliged to pay advance corporation tax in respect of dividends paid to its parent company having its seat in another member state even though, in similar circumstances, the subsidiaries of parent companies resident in the first member state were entitled to opt for a taxation regime that allowed them to avoid that obligation, article 52 of the Treaty requires that resident subsidiaries and their non-resident parent companies should have an effective legal remedy in order to obtain reimbursement or reparation of the financial loss which they have sustained and from which the authorities of the member state concerned have benefited as a result of the advance payment of tax by the subsidiaries. The mere fact that the sole object of such an action is the payment of interest equivalent to the financial loss suffered as a result of the loss of the use of the sums paid prematurely does not constitute a ground for dismissing such an action. While in the absence of Community rules, it is for the domestic legal system of the member state concerned to lay down the detailed procedural rules governing such actions, including ancillary questions such as the payment of interest, those rules must not render practically impossible or excessively difficult the exercise of rights conferred by Community law.”

It can be seen that the question posed – and the answer – address the possibility that, at the date when a remedy is sought, it will be known that there has been no overpayment of corporation tax – because, by that date, the advance corporation tax paid prematurely has been set-off against the paying company’s liability to corporation tax in respect of chargeable profits. But, as the Court of Justice makes clear “The mere fact that the sole object of such an action is the payment of interest equivalent to the financial loss suffered as a result of the loss of the use of the sums paid prematurely does not constitute a ground for dismissing such an action”. The rule of domestic law, founded on the decision of the House of Lords in London, Chatham and Dover Railway Co v South Eastern Railway Co [1893] AC 429 and upheld in President of India v La Pintada Cia Navigacion SA [1985] AC 104, which precludes an action at common law for an award of interest by way of damages for late payment of a debt could not be invoked to deny an effective legal remedy in respect of the financial loss which had been sustained by reason of the premature payment of advance corporation tax.

The point is, perhaps, put most clearly in the opinion of the Advocate General (Fennelly), at paragraph 46 ([2001] Ch 620, 642):

“The United Kingdom submits that among the procedural matters governed by national law is the question of interest. In its view, since in English law no action for interest in respect of the loss of the use of monies which were ultimately later set off against the paying company’s corporation tax liability would lie, to deny a remedy in the main proceedings would not infringe the principle of non-discrimination.

However, if the national court agreed with the United Kingdom’s interpretation of the applicability of the rule upheld by the House of Lords in President of India v La Pintada Cia Navigacion SA [1985] AC 104 to the claimant’s claim, the effect of applying the principle of national procedural autonomy in respect of interest would be to deny a remedy to taxpayers like the claimants who suffered a cashflow disadvantage by virtue of being obliged to pay advance corporation tax . . . In my view, such a result would run counter to the principle of effectiveness that lies at the heart of the court’s case law in respect of the recovery of unduly paid taxes.”

It can be seen, also, that the second question referred to the Court of Justice was posed on the basis of alternative hypotheses. That that was how it appeared to the Court is made clear at paragraph 77 of the judgment (ibid, 662C): “In the first alternative, where the claim by the subsidiary and/or parent company is made in an action for restitution of taxes levied in breach of Community law and, in the second where the claim is made in an action for compensation for damage resulting from the breach of Community law”. The Court approached the question on the basis that it was not its role to assign a legal classification to the action to be brought by the claimants before the national court: “. . . it is for the claimants to specify the nature and basis of their actions (whether they are actions for restitution or actions for compensation for damage) subject to the supervision of the national court” – (ibid, 663A-B, at paragraph 81).

The Court of Justice did not find it necessary to decide whether the national court would classify the claim as restitutionary or as compensatory – although the Advocate General had found it “more correct and more logical to treat the claimants’ claim as restitutionary rather than as a compensatory claim for damages” – (ibid, 645H, paragraph 52). In the Court’s judgment the answer to the second question was the same, whichever classification was adopted. That appears from paragraphs 82 to 89 (ibid, 663B-664E) – where the question is addressed on the basis that the claim is restitutionary –and from paragraphs 90 to 95 (ibid, 664F-665D) – where it is addressed on the basis that it is a compensatory claim. It is, I think, important to understand why the Court of Justice reached that conclusion.

The Court defined the question (on the first hypothesis) at paragraph 82:

“82.

First, on the assumption that the actions brought by the claimants in the main proceedings are to be treated as claims for restitution of a charge levied in breach of Community law, the question is whether, in circumstances such as those in the main proceedings, a breach of article 52 of the Treaty by a member state entitles taxpayers to reimbursement of interest accrued on the tax they have paid from the date of its premature payment until the date on which it properly fell due.”

Turning to consider the question on the alternative hypothesis, the Court of Justice said this, at paragraph 90 of its judgment (ibid, 664F):

“90.

. . . secondly, assuming that the claimants’ claims are to be treated as claims for compensation for damage caused by breach of Community law, the question is whether, in circumstances such as those in the main proceedings, breach of article 52 of the Treaty by a member state entitles the taxpayer to payment of damages in a sum equal to the interest accrued on the tax which they have paid from the date of premature payment until the date on which it properly fell due.”

The Court rejected the submission that compensatory loss, under a claim for damages, could not include interest. It pointed out that such a conclusion would be inconsistent with the principle, affirmed in Brasserie du Pêcheur SA v Federal Republic of Germany; R v Secretary of State for Transport, Ex p Factortame Ltd (No 4) (Joined Cases C-46 and 48/93) [1996] QB 404, 503, that “total exclusion of loss of profit as a head of damage for which reparation may be awarded cannot be accepted in the case of a breach of Community law since, especially in the context of economic or commercial litigation, such a total exclusion of loss of profit would be such as to make reparation of damage practically impossible”. And it noted, at paragraph 93 (ibid, 665B), that, in the cases before it, “it is precisely the interest itself which represents what would have been available to the claimants, had it not been for the inequality of treatment, and which constitutes the essential component of the right conferred on them”. The Court concluded, at paragraph 95 (ibid, 665D):

“95.

In circumstances such as those in the cases in the main proceedings, the award of interest would therefore seem to be essential if the damage caused by the breach of article 52 of the Treaty is to be repaired.”

I have set out the reasoning of the Court of Justice at some length in order to give emphasis to the two factors which, as it seems to me, determine the outcome of this appeal. First, the national court is required to give a remedy, whether by way of restitution or as compensation, in respect of the breach of Community law. It is not open to the national court to deny restitution or compensation on the ground that no remedy would lie under domestic law. If necessary, Community law demands an autonomous remedy in respect of the breach of Community law which has occurred. Second, the remedy to be given by the national court must be a “full” remedy; in the sense that it must be such as will restore the equality of treatment guaranteed by article 52 (now article 43) of the EC Treaty. Nothing less will do. A full remedy for the loss of the use of money over a specified period may be measured by reference to the interest “accrued” on the amount of the tax paid prematurely. But it is important to keep in mind that there is no true analogy with the award of interest on a domestic judgment. The task of the national court is to ascertain the amount which the member state must pay to the claimant in order to restore the claimant to the position that it would have been in if it had not been required to pay an amount of corporation tax prematurely.

At paragraph 16 of his judgment, the judge set out, under six sub-paragraphs, propositions which he derived from paragraphs 77 to 96 of the judgment of the Court of Justice. I need not rehearse those propositions verbatim. For the most part, they are already included in the analysis of the judgment of the Court of Justice which I have, myself, set out in the preceding section of this judgment. It is enough to say that I agree with the judge’s summary. At paragraph 17 of his judgment the judge observed that, although the Court of Justice referred to “interest” and the period in relation to which it should be computed (the premature tax payment period), the Court did not, in terms, express a view whether interest over that period should be computed on a simple basis or on a compound basis. He saw it “as my principal task” to decide which of those two bases – simple or compound interest – “appears more precisely to accord with the principles which underlie the court’s decision”.

Before addressing that question, the judge asked himself whether the amount of the restitution or compensation should be calculated on a “conventional basis” – that is to say, by reference to interest and at a rate of interest which is the same for all claimants – or on an “actual basis”, by examining the particular circumstances of each claimant company. He held that it was appropriate to adopt a conventional basis in all cases. He thought it implicit in the decision of the Court of Justice that a claim to be recompensed for loss of the use of money was to be measured by reference to interest – rather than by an enquiry into the return on the money which the claimant would have obtained if it had not been required to make premature payment. And, at paragraph 22 of his judgment, the judge said this:

“22.

. . . in my judgment the rate of interest to be used should be derived from prevailing levels of interest rates in the market generally, and should in principle be the same for all claimants. It should not vary with the particular levels of profitability or non-profitability of the large number of separate claimant companies.”

There is no challenge to that approach. This Court has not been asked to consider whether (as, for my part, I think I would have been inclined to accept) there might not be merit in a case by case approach. Both parties have been content, on this appeal, to confine their submissions to the question whether – on the assumption that restitution or compensation should be computed on a conventional basis by reference to interest and at a rate of interest which is the same for all claimants – the computation should be on the basis of simple interest or compound interest.

The judge held that the computation should be on the basis that interest was compounded. His reasoning is encapsulated in paragraphs 25 to 27 of his judgment:

“25.

In my judgment it is a matter of Community law that the CJEC required restitution or compensation to be paid by the Revenue to United Kingdom subsidiaries which the ACT system (in breach of Community law) effectively compelled to pay parts of their corporation tax liabilities prematurely. The court has entrusted the ascertainment of the restitution or compensation to the national court, but the remedy to which the national court gives effect is a remedy required by Community law. It is irrelevant whether national law would also give a remedy, and it is also irrelevant to enquire whether an analogous remedy under national law would be measured on a compound basis or on a simple basis.

26.

I have described . . . how, in Metallgesellschaft/Hoechst, the Revenue argued, in reliance on the La Pintada case . . . , that, because English law does not recognise a cause of action for interest where there was no principal debt outstanding at the time when the action was commenced, no restitution or compensation should be payable to the claimant companies. I paraphrased the CJEC’s answer as follows: whatever the position might be under domestic English law, the case before the court was a matter of restitution or compensation for breach of an article of the EC Treaty, and the remedy could not be denied on the basis that an English court would not give judgment for an amount of interest in similar circumstances. It seems to me that to argue that, although a remedy must be given (because the CJEC has so decided) and although it must be calculated by reference to interest (because the CJEC has decided that as well), nevertheless the interest should be restricted to simple interest because that is what would happen in the case of a claim brought under English law, would be to reintroduce essentially the same argument as that which the CJEC rejected. It is true that in the CJEC the Revenue were attempting to use principles of English law in order not to have to pay restitution or compensation at all, whereas the question now is whether principles of English law can be invoked to secure that the Revenue should pay lower amounts by way of restitution or compensation. However, the principle is the same. I believe that I have to look for the measure of restitution or compensation which Community law requires, untrammelled by restrictions which English law may impose in situations which might be said to be comparable in some respects.

27.

In my judgment Community law requires the remedy to be a full one and not a partial one. In paragraph 87 of the CJEC’s judgment the court said that ‘the award of interest . . . would appear to be essential in restoring the equal treatment guaranteed by article 52 of the Treaty’. In my opinion only compound interest will fully restore equal treatment.”

The appellants submit that the judge was wrong to approach his task on the basis that he had to “look for the measure of restitution or compensation which Community law requires, untrammelled by restrictions which English law may impose in situations which might be said to be comparable in some respects”. It is said that that is not what Community law requires. Properly understood, the decision of the Court of Justice was that “where the loss to be made good is the time value of money, . . . full compensation is given by an award of interest, calculated in accordance with the normal national approach”. In awarding compound interest, the judge departed from the normal approach under English domestic law.

In support of the proposition that the Court of Justice had in mind, and was content, that an award based on simple interest would meet the need to provide full compensation for the loss of the use of money in a case where, in breach of Community law, the claimant had been required to make a premature payment of tax the appellants relied on the decision of the Court in Marshall v Southampton and South West Hampshire Area Health Authority (Teaching) (No 2) (Case C-271/91) [1994] QB 126. The appellants pointed out that the Court of Justice had referred to its decision in Marshall atparagraph94 of the judgment in Metallgesellschaft/Hoechst ([2001] Ch 620, 665B-D) :

“In [the Marshall case], which concerned the award of interest on amounts payable by way of reparation for loss and damage sustained as a result of discriminatory dismissal, the court ruled that full compensation for the loss and damage sustained cannot leave out of account factors, such as the effluxion of time, which may in fact reduce its value, and that the award of interest is an essential component of compensation for the purposes of restoring real equality of treatment: Marshall (No 2), pp 164-165, paras 24-32. The award of interest was held in that case to be an essential component of the compensation which Community law required to be paid in the event of discriminatory dismissal.”

It is pertinent to have in mind the underlying facts in the Marshall case. Mrs Marshall had been dismissed by her employer, the health authority, at the age of 62 years, on the sole ground that she had reached the retirement age for female employees stipulated by the authority. She claimed that, since the stipulated retirement age for male employees was 65 years, she had suffered unlawful discrimination on the grounds of her sex. That claim was upheld by the Court of Justice in Marshall v Southampton and South West Hampshire Area Health Authority (Teaching) (Case 152/84) [1986] QB 401. Her claim was remitted to the industrial tribunal (as it then was) to assess compensation. The tribunal awarded a sum which included £7,710 in respect of interest. It did so in purported reliance on section 35A of the Supreme Court Act 1981. That award was challenged by the health authority on the ground that the tribunal had no power, under domestic law, to award interest. That challenge was upheld by the appeal tribunal and by this Court. On a further appeal to the House of Lords, the question was referred to the Court of Justice for a preliminary ruling. At paragraph 31 of its judgment ([1994] QB 126, 165F) the Court gave the ruling to which it was later to refer in paragraph94 of the judgment in Metallgesellschaft/Hoechst (supra).

It is submitted, on the present appeal, that the interest awarded to Mrs Marshall by the industrial tribunal must have been simple and not compound interest. The award had been made under section 35A of the Supreme Court Act 1981; and simple interest is all that that section 35A(1) allows:

“Subject to rules of court, in proceedings (whenever instituted) before the High Court for the recovery of a debt or damages there may be included in any sum for which judgment is given simple interest, at such rate as the court thinks fit or as rules of court may provide, on all or any part of the debt or damages in respect of which judgment is given, or payment is made before judgment, for all or any part of the period between the date when the cause of action arose and – (a) in the case of any sum paid before judgment, the date of the payment; and (b) in the case of the sum for which judgment is given, the date of the judgment.”

So, it is said, the Court of Justice must have taken the view, in the Marshall case, that simple interest provided the full compensation that was required for the purposes of restoring real equality of treatment. And, it is said, that was what the Court had in mind when it left it to the national court to ascertain the amount to be paid by way of restitution or compensation in Metallgesellschaft/Hoechst.

That, as it seems to me, is to treat the decision in the Marshall case as determinative of an issue which was never before the Court of Justice and to which the Court never turned its mind. The Court was concerned only with the question whether, in principle, full compensation for loss suffered as a result of the discriminatory dismissal could leave out of account a factor – the effluxion of time – which might, in fact, reduce its value. It decided that the award of interest, in accordance with applicable national rules, was an essential component of compensation for the purposes of restoring real equality of treatment. But there is nothing to suggest that the Court was asked to consider – or did consider – whether the amount of interest actually awarded in the Marshall case was sufficient for those purposes. I am not persuaded that the Marshall case provides any support for the proposition that the Court of Justice was content to assume, in the present case, that an award based on simple interest would meet the need to provide full compensation for the loss of the use of money which the claimant had been required to pay prematurely.

The appellants rely, also, on the decision of the Court of First Instance of the European Communities in Corus UK Ltd v Commission of the European Communities (Case T-171/99) [2002] 1 WLR 970. The underlying facts may be stated shortly. In February 1994 the Commission had found that Corus and other steel undertakings had participated in a series of anti-competitive agreements and practices on the Community steel beam market, in breach of article 65(1) of the ECSC Treaty. The Commission imposed a fine, which Corus paid in June 1994. Subsequently, in March 1999, the Court of First Instance annulled the February 1994 decision in part, and reduced the amount of the fine. On 23 April 1999 the Commission repaid €12m. Corus sought interest on that sum in respect of the period from June 1994 to April 1999. The response of the Commission was that it had satisfied its obligations under article 34 CS by repaying the principal sum. The article was in these terms:

“If the court declares a decision or recommendation void, it shall refer the matter back to the Commission. The Commission shall take the necessary steps to comply with the judgment. If direct and special harm is suffered by an undertaking or group of undertakings by reason of a decision or recommendation held by the court to involve fault of such a nature as to render the Community liable, the Commission shall . . . take steps to ensure equitable redress for the harm resulting directly from the decision or recommendation declared void and, where necessary, pay appropriate damages.

If the Commission fails to take within a reasonable time the necessary steps to comply with the judgment, proceedings for damages may be instituted before the court.”

The Court rejected the claim in so far as it was based upon the first paragraph of article 34: faults of such a nature as to render the Community liable, or direct and special harm. But it went on to say this, at paragraph 49 of its decision (ibid, 979E-F):

“In the context of the present action, it remains, however, to be determined whether the payment of arrears of interest on the principal amount of the fine repaid is a step necessary for the enforcement of the annulment decision which the Commission is required to take in any event under the second sentence in the first paragraph of article 34 CS, even in the absence of any fault on its part of such a nature as to render the Community liable. If so, the failure of the Commission to take such a step within a reasonable period of time would itself give rise to proceedings for damages under the second paragraph of article 34 CS.”

The Court held, at paragraph 53 of its decision, that the obligation to repay extended not only to the principal amount of the fine overpaid, but also to ‘default interest’ on that amount. At paragraph 54 the court referred to the principle set out at paragraph 31 in Marshall (No 2) and at paragraphs 94 and 95 in Metallgesellschaft/Hoechst: “complete reimbursement of a fine unduly paid cannot leave out of account factors, such as the effluxion of time, which may in fact reduce its value . . . Proper compliance with such a judgment therefore requires, in order fully to restore the applicant to the position in which it legally should have been, that it be taken into account that such restoration only occurred after an appreciable lapse of time, during which the applicant did not have the use of the sums it had unduly paid . . .”.

At paragraphs 60 to 63 of its decision in the Corus case, the Court of First Instance addressed, directly, the question what amount should be allowed in respect of the loss of the use of the money that had been overpaid. Before setting out those paragraphs it is convenient to note two matters. First, Corus assessed the cost of its loss of the use of the €12m overpaid by reference to the interest lost to it resulting from the diminution of its cash balances in respect of the sterling equivalent of that sum. It did so on the basis that, during the relevant period, it was “in a cash surplus situation and was investing funds on a three month rolling basis with interest compounded”. The lost earnings from investment were put at £3,533,474 in respect of the period June 1994 to April 1999 (paragraph 17). Second, there was evidence from the Commission that fines were added to levies and invested, and so earned interest for the Community (paragraph 31). The yield over the period, at an average rate of 4.613%, “taking account of the quarterly capitalisation of interest”, was calculated at €3,016,608 (paragraph 32). With those matters in mind, the Court of First Instance said this:

“60.

Regarding the rate of interest, it should be pointed out that, according to a principle generally accepted in the domestic law of the member states, in an action for the recovery of a sum unduly paid based on the principle prohibiting unjust enrichment, the claimant is normally entitled to the lower of the two amounts corresponding to the enrichment and the loss. Furthermore, where the loss consists of the loss of use of a sum of money over a period of time, the amount recoverable is generally calculated by reference to the statutory or judicial rate of interest, without compounding.

61.

Applying the same principles, mutatis mutandis, to the present proceedings, given the similarities with such an action, it would normally be appropriate to award the applicant simple interest on the sum of €12m, at a fixed rate to be determined by the court, for the from 2 June 1994 to 23 April 1999.

62.

In the present case, however, it appears from the Commission’s explanations . . . that the sum of €12m invested at an average rate of 4.613% during the period in question yielded a total return for the ECSC of €3,016,608, taking into account quarterly compounding of interest.

63.

It seems fair in the circumstances of this case to award that sum to the applicant.”

The appellants rely, of course, on the observation, in paragraph 61 of the judgment of the Court of First Instance, that “it would normally be appropriate to award the applicant simple interest on the sum of €12m, at a fixed rate to be determined by the court, for the period from 2 June 1994 to 23 April 1999”. For my part, I do not find that observation of much assistance; when set in the context of what the court did in fact. Although the court explained that “according to a principle generally accepted in the domestic law of member states . . . the claimant is normally entitled to the lower of the two amounts corresponding to the enrichment and the loss”, it made no calculation of what the loss would have been on the basis of simple interest at a fixed rate. And it is not self-evident that loss calculated on the basis of simple interest over the period of nearly five years (Footnote: ¹) would not have been less than the amount actually awarded – which was, itself, based on compounding interest. Mr Justice Park took the view that no general principle could be extracted from the Corus case. I think he was correct to take that view.

The more powerful argument advanced on behalf of the appellants, as it seems to me, is that based on the anomaly which, it is said, would arise between what the appellants describe as ‘category 1’ cases and ‘category 2’ cases if the judge’s view were to prevail. In that context, a category 1 case is one (such as the present) in which the United Kingdom subsidiary has sufficient chargeable profits in the year of assessment (or in subsequent years) to be able to set-off advance corporation tax against corporation tax on chargeable profits. That is to say, the subsidiary has been able to utilise the advance corporation tax paid. A category 2 case is one in which the subsidiary has not been able to set-off advance corporation tax (or all advance corporation tax) paid against corporation tax on chargeable profits; and so has become entitled (in the light of the decision in Metallgesellschaft/Hoechst)to a repayment of advance corporation tax. It is said that, under domestic law, the claimant in a category 2 case would be entitled to recover the overpaid advance corporation tax as a principal sum, together with simple interest on that sum under section 35A of the Supreme Court Act 1981, from the date on which the advance corporation tax was paid until the date of judgment. So, it is submitted, “the remedy in category 1 claims should be that the claimant is entitled, as a basic sum, to simple interest on his ACT for the premature tax period. Only in that way can the taxpayers whose ACT payments have been set off be treated in the same way as those still left with surplus ACT”. The anomaly, if it exists, is presented starkly in a case where the claimant has been able to set off against corporation tax on chargeable profits some, but not all, of the advance corporation tax paid prematurely. In such a case the claimant has claims (i) for interest on the amount of advance corporation tax paid prematurely but subsequently set-off (for the period from the date of payment to the date of set-off), (ii) for repayment of the amount of the advance corporation tax which it has not been able to set-off, and (iii) for interest on the amount of the advance corporation tax paid and not subsequently set-off – that is to say, for interest on the amount of the repayment – for the period from the date of payment to the date of judgment. It would be strange if interest under claim (i) were calculated on a different basis from interest under claim (iii) – the one compound and the other simple - in circumstances in which the period for interest under claim (i) would comprise part (at least) of the period for interest under claim (iii).

The judge addressed that argument at paragraphs 33 to 39 of his judgment. Put shortly, he took the view that, if there were a true anomaly between the treatment of category 1 and category 2 cases, it was the treatment of category 2 cases under domestic law which was impossible to reconcile with what Community law required; those cases should be seen as exceptional cases; and the anomalous treatment did not provide a sufficient reason to refuse to give effect to the requirements of Community law in the, more normal, category 1 cases. But he went on to say this, at paragraph 37):

“Further, although . . . so far as I am aware no-one has yet challenged the Revenue’s view that, in the case of unutilised ACT which is repaid by reason of the CJEC decision, the interest payable for the intervening period must be simple interest because the right to it derives from s.35A, I do not wish to be understood as accepting that that is necessarily correct. I can see substantial arguments that, in the case of unutilised ACT as well as in the case of utilised ACT, the entitlement to interest for the intervening period does not depend on s. 35A, but rather depends on the principles of Community law explained by the CJEC in Metallgesellschaft/Hoechst.”

It is important not to lose sight of the fact that, in a case (such as the present) where there is no principal sum outstanding at the time when the action is commenced, a claim for interest by way of restitution or compensation for loss of the use of money during a period over which the principal sum was outstanding would not be allowed under the domestic law of the United Kingdom – President of India v La Pintada Compania Navigacion SA [1985] 1 AC 429. So, as the judge held (at paragraphs 24 and 25 of his judgment), the domestic rules in relation to interest are unlikely to be of much (if any) assistance. The task for the English court is to give the remedy which Community law requires in circumstances where domestic law would not provide a remedy.

Nevertheless it is, I think, pertinent to have in mind that – as the Law Commission observed at paragraph 2.3 of its recent report, Pre-Judgment Interest on Debts and Damages” (Law Com No 287):

“ The English courts have long been reluctant to award interest at common law . . . interest is largely a matter for either contract or statute. The court’s inherent power to award interest is largely confined to a few limited circumstances, such as where interest is claimed as special damages or under the equitable or Admiralty jurisdictions.”

The circumstances in which pre-judgment interest may be awarded under domestic law are conveniently set out, under seven heads, at paragraph 2.18 of the Law Commission Report. By far the most common is the award of interest under section 35A of the Supreme Court Act 1981; and, under that statutory power, only simple interest can be awarded.

It is, I think, generally accepted that, in commercial cases at least, an award based on compound, rather than simple, interest is more likely to reflect economic reality and to provide full, rather than partial, recompense for the loss of the use of money. That was the view of the Law Commission, which (in the report to which I have referred) recommended that the courts be given power to award compound interest. It was the view expressed in trenchant terms by Mr Justice Hobhouse in Westdeutsche Landesbank Girozentrale v Islington London

“Simple interest does not reflect the actual value of money. Anyone who lends or borrows money on a commercial basis receives or pays interest periodically and if that interest is not paid it is compounded (eg Wallersteiner v Moir (No 2) [1975] 1 All ER 849, [1975] QB 373 and National Bank of Greece SA v Pinos Shipping Co No 1, The Maira [1990] 1 All ER 78, [1990] 1 AC 637). I see no reason why I should deny the plaintiff a complete remedy or allow the defendant arbitrarily to retain part of the enrichment which it has unjustly enjoyed.”

In the event, the House of Lords, [1996] AC 669, held (by a majority of three to two) that domestic law did not permit the award of compound interest on the facts in that case. But it was not, I think, in doubt, that only compound interest would provide the bank with full recompense for its loss. Lord Goff of Chieveley (ibid, 691D) expressed his “entire agreement” with the passage in the judgment on Mr Justice Hobhouse which I have just set out. He went on to say this (ibid, 691E-F):

“The council has had the use of the bank’s money over a period of years. It is plain on the evidence that, if it had not had the use of the bank’s money, it would (if free to do so) have borrowed the money elsewhere at compound interest. It has to that extent profited from the use of the bank’s money. Moreover, if the bank had not advanced the money to the council, it would have employed the money on similar terms in its own business. Full restitution requires that, on the facts of the present case, compound interest should be awarded, having regard to the commercial realities of the case. As the judge said, there is no reason why the bank should be denied a complete remedy.”

Lord Goff was one of the minority (with Lord Woolf). But “the strength of the moral claim of the bank . . . to receive full restitution, including compound interest” was recognised by Lord Browne-Wilkinson (ibid, 717D) and by Lord Lloyd of Berwick (ibid, 738E). Lord Woolf (ibid, 719H-720B) also adopted, with approval, the passage in the judgment of Mr Justice Hobhouse which I have already set out; and (ibid, 723D) observed: “What is critical is that payment of compound interest is required to achieve restitution”.

The reason why compound interest is required to achieve full restitution or recompense is to be found in the basis upon which interest rates are set (or agreed) in commercial transactions. It is necessary to have in mind that parties to a commercial loan expect interest to be paid (or accrued) periodically. The rate of interest is set on the basis that the interest will be paid (or accrued) at the end of each period. So a bank may lend at a daily rate, a monthly rate or a quarterly rate, or perhaps at a half-yearly or yearly rate. In each case the rate may be expressed as an annual rate - say, 5% per annum. But the return on a loan at 5% per annum will vary according to the periodic basis (daily, monthly, quarterly, etc.) on which that rate has been set.

The point may be illustrated by an example. A bank which lends £10,000 on 1 January at a rate of 5% per annum payable quarterly will expect to receive £125 on each of 1 April, 1 July and 1 October. And, if it does receive those interest payments on the due dates and re-lends them on the same terms, it will have received £509.45 by 1 January in the following year (Footnote: ²). In order to obtain the same return over one year on a loan at simple interest, the rate of interest would need to be 5.0945%. Or, to put the point another way, if the rate of interest chosen is the rate appropriate to a commercial loan (say, 5% per annum fixed on a quarterly basis), but only simple interest is allowed, the return at the end of the year will be £9.45 less than it would have been done if the loan had been made on commercial terms.

There are two other factors which should be kept in mind. First, the ostensible object of an award of interest under section 35A of the Supreme Court Act 1981 is to compensate the claimant for the loss of the use of money. An award under that section is not made in order to prevent the unjust enrichment of the defendant – although it may have that effect. That is in contrast to the basis upon which, under domestic law, compound interest may be awarded in equity. The position is explained by Lord Browne-Wilkinson in the Westdeutsche Bank case (ibid, 700H-702E). After referring to the statements of principle by Lord Hatherley, Lord Chancellor, in Burdick v Garrick (1870) LR 5 Ch App 233, 241, and Lord Justice Buckley in Wallersteiner v Moir (No 2) [1975] QB 373, 397, and to observations of Lord Brandon of Oakbrook in President of India v La Pintada Compania Navigacion SA [1985] AC 104, 116, Lord Browne-Wilkinson said this:

“ These authorities establish that in the absence of fraud equity only awards compound (as opposed to simple) interest against a defendant . . . by way of recouping from such a defendant an improper profit made by him.”

The award of compound interest “was in lieu of an account of profits improperly made by the trustee” – (ibid, 701D). The court proceeds on the basis that the defaulting trustee “has made – or has put himself into such a position as he is presumed to have made . . . compound interest” – per Lord Hatherley, Lord Chancellor, in Burdick v Garrick (supra, 241).

Second, the convention – or, at least, the practice in the Commercial Court - when awarding interest under section 35A of the Supreme Court Act 1981, is to treat the claimant as a net borrower; and to award interest at a rate which reflects the cost of borrowing rather than the return on lending. The point was addressed by Mr Justice Forbes in Tate & Lyle Food & Distribution Ltd v Greater London Council [1982] 1 WLR 149, 154. His conclusion – that a borrower’s rate should be awarded – was adopted by Mr Justice Webster in Shearson Lehman Hutton Inc and another v McLaine Watson & Co Ltd and others (No 2) [1990] 1 Lloyd’s Rep 441, 451-453. That approach was followed in this Court in Saleem Jaura v Saeeda Ahmed [2002] EWCA Civ 210 (unreported, 21 February 2002). In that latter case this Court was ready to accept that the law should recognise that the rate of interest at which a small business man could borrow was likely to be higher than that available to a first class institutional borrower.

I mention those points in order to put in context the observations of the Court of First Instance in the Corus case – to which I have referred earlier in this judgment. The award actually made in that case was comparable to that which could have been made in equity, under English domestic law, in a case where the defendant was a defaulting trustee – but not otherwise (see the decision in the Westdeutsche Bank case). The award which was sought by the claimant in Corus wasbased on a lender’s rates – because the claimant accepted that it was in cash surplus. It is not at all clear that the Court of First Instance appreciated that – under English domestic law, at least – it is unlikely that either of those two alternatives would have been adopted. But that, perhaps, serves only to illustrate that, in order to provide the remedy which Community law requires, the national court may find little or no assistance in its own domestic rules as to interest.

In my view the judge was correct to hold that the task of the national court was to give effect to the decision of the Court of Justice by providing the remedy in respect of the loss suffered by the taxpayer by reason of the premature payment of advance corporation tax which Community law requires. That remedy is full compensation for the loss of the use of money. The measure of compensation is interest accrued on the money over the premature payment period.

The judge was invited to approach the task on the basis that the rate of interest to be applied should be a conventional rate; that is to say, that he should not seek to tailor the rate to the individual circumstances of each taxpayer. And, if the matter is to be approached on the basis of “one rate suits all”, then (as it seems to me) there is really no alternative to adopting a borrower’s rate rather than a lender’s rate. To adopt a lender’s rate in all cases would lead, inevitably, to under-compensation in those cases where the taxpayer was in cash deficit. To adopt a borrower’s rate will (or may) lead to over-compensation where the taxpayer is in cash surplus; but that, as I understand the Revenue’s position, is accepted as price worth paying for the practical advantages of a single conventional rate.

Accepting, therefore, that compensation is to be measured by interest accrued at a single conventional rate – which is to be a borrower’s rate – the question is whether the computation should be made on the basis that interest is compounded at periodic intervals.

The judge thought that only compound interest would fully restore equal treatment. The premise which underlies that conclusion is that the rate chosen will be a rate which has been fixed by reference to the rates at which commercial loans are offered in the market – for example, London Inter-Bank Offered Rate (LIBOR) or the base rate of one or more of the London Clearing Banks. And, as I have said, the rates at which commercial loans are offered are set on the basis that interest will be paid periodically. So, if the rate chosen is set by reference to the rates at which commercial loans are offered on the market, a computation made on the basis of simple interest at that rate will be made on a false basis. It will ignore a critical feature which is inherent in rate which has been chosen. And, save in the rare case where the premature payment period is less than the period by reference to which the rate is set, the computation made on the basis of simple interest will produce an undervalue.

For those reasons I think that the judge was right to reach the conclusion that he did. Community law requires full compensation for the loss of the use of money; and full compensation for the loss of the use of money requires that interest is compounded – at least where the rate of interest chosen is a rate set by reference to the periodic payment or compounding of interest. The English domestic rules as to interest fail to provide the remedy which Community law requires. Those rules must yield to the overriding requirement that the domestic court gives full compensation. And, to my mind, the judge was correct to take the provisional view – expressed at paragraph 37 of his judgment - that that applies as much to unutilised ACT as it does to utilised ACT

For my part, I would vary paragraph 1 of the order of 16 June 2004 so as make it clear that the rate of interest adopted dictates both the principle that interest should be compounded and the periods (or rests) at which it should be compounded. Subject to the observations of counsel, I would declare that “Interest over the premature tax period (as defined in paragraph 6 of the judgment of Mr Justice Park) should be computed by compounding at the same periodic rests as those by reference to which the applicable rate has been fixed.” Save for that variation to paragraph 1 of the order, I would dismiss this appeal.

I agree with Lord Justice Chadwick’s judgment, including the variation he would make to the order, and have nothing to add.

I also agree.