Hoechst United Kingdom Ltd v Inland Revenue

In this judgment I use the following abbreviations.

This judgment deals with a detailed question which remains unresolved in the context of what has been a wider dispute between HUK and the Revenue. All other questions have now been settled. The unresolved question concerns the ACT which HUK paid in July 1995 by reference to a dividend from it to its German parent company, HAG, earlier in 1995. This is "the 1995 ACT". I give more details of it later. The payment by a United Kingdom resident company of ACT entailed a timing disadvantage for the company because it had the effect of the company being obliged to pay part of its normal corporation tax liability, sometimes called "mainstream corporation tax", earlier than it otherwise would have done. HUK paid ACT on several occasions, and by reason of a decision of the CJEC, it is in principle entitled to compensation for the timing disadvantages which it suffered. However, two questions arise in the specific context of the 1995 ACT.

The background to this case will be familiar to revenue law practitioners, although the point which I am deciding in this judgment is not a point of revenue law.

Over the years HUK has paid dividends to HAG, and in the years when the ACT system was in force it was required by section 14 of ICTA 1988 to pay ACT to the Revenue when it paid the dividends. In the 1990s a number of groups, including the Hoechst group, raised the argument that the inability of United Kingdom subsidiaries of parent companies based in other member states of the European Community to pay dividends without paying ACT was contrary to Articles of the EC Treaty. The core of the argument was that United Kingdom subsidiaries of United Kingdom parent companies could make group elections, with the result that they did not have to pay the ACT by reference to their dividends. The inability of United Kingdom subsidiaries of member state parents to make group elections of that sort arose from the reference in ICTA 1988 section 247 to "bodies corporate resident in the United Kingdom". The question was ultimately determined by the CJEC in a case where two United Kingdom subsidiaries of German parent companies were the taxpayers whose disputes with the Revenue on the issue have been referred to the court. HUK was one of the taxpayer companies.

The CJEC decided in principle that the United Kingdom law was in breach of the EC Treaty, and that the United Kingdom subsidiaries concerned, including HUK, were entitled to compensation or restitution for the unlawful imposition upon them of liability to pay ACT. Since in HUK's case the disadvantage was solely a timing disadvantage (because HUK in time set off its ACT payments against its liability for mainstream corporation tax) the compensation or restitution was to be calculated by reference to interest for the period over which HUK was deprived of funds by having had to pay the ACT, whereas the United Kingdom subsidiary of a United Kingdom parent would have been in a more favourable situation. The decision of the CJEC is reported under the names of the two companies concerned: Metalgesellschaft Limited & Others v Inland Revenue Commissioners & Attorney General and Hoechst AG & Anor v Inland Revenue Commissioners & Attorney General. The two cases are referred to as Joined Cases C-397/98 and C-410/98. The judgment of the CJEC is reported at various places including [2001] STC 452.

However, the CJEC could not itself award compensation or restitution. It was up to claimant subsidiaries like HUK to claim relief in the United Kingdom courts, and general principles of United Kingdom law relating to civil liability would apply. Those principles include the law of limitation of actions.

HUK had commenced its action against the Revenue in April 1995. The CJEC's decision meant that in principle the action should succeed, as should other comparable actions by United Kingdom subsidiaries of companies in other member states. A number of matters of United Kingdom law remained to be determined. They are being dealt with under the general ambit of a group litigation order. Until recently it was visualised that HUK would act as the lead claimant for some of the issues covered by the group litigation order; however, HUK and the Revenue have now reached an agreed settlement on most, but not quite all, of the issues which previously had still been in dispute between them. HUK's case is no longer suitable as a lead or test case, and I have made an order discharging HUK from being a test claimant and replacing it by another company.

The present judgment concerns one loose end which is not agreed between HUK and the Revenue. It concerns only one dividend or, more accurately, the timing disadvantage to HUK of having to pay ACT by reference to only one dividend. The dividend was £10 million and was paid on or about 7th April 1995. The associated ACT was £1,156,250 and it was paid on 14th July 1995. That is what I am referring to in this judgment as "the 1995 ACT".

HUK paid other dividends to HAG both before and after the 1995 dividend, and it paid ACT by reference to those other dividends. It has claimed compensation or restitution by reference to those other payments of ACT, and all of those claims are now resolved by a settlement agreement. There remains a continuing issue with reference to the 1995 ACT.

HUK had commenced its civil action against the Revenue by a writ issued on 12th April 1995. That was before the payment of the 1995 ACT. The endorsement on the writ identified the following as one of the reliefs which HUK claimed (so far as still relevant):-

However, matters did not stop with the writ. In the usual way it was followed later by a statement of claim. In this case HUK served a statement of claim on 25th March 1996. That date was of course after the payment of the 1995 ACT. A major issue on the present application is whether the statement of claim, unlike the writ, claimed relief by reference to interest calculated on the 1995 ACT. I will consider later the arguments about whether it did so or not. Here I summarise the relevant contents of the statement of claim, quoting a few particularly important passages. I shall do this largely without comment at this stage.

On dates in 1996 the Revenue served a defence and HUK served a reply. Neither of those pleadings affect the present application.

On 1st October 1998, the writ was amended and re-issued, and on 5th October 1998 the statement of claim was amended. None of the amendments to either document made any changes which were directly material to the present issues. Neither the writ nor the statement of claim was amended so as to make specific reference to the 1995 ACT.

On 2nd October 1998 the general question of principle raised by HUK's claim was referred by the High Court to the CJEC.

On 8th March 2001 the CJEC announced its decision.

13th July 2001 was not a date on which any specific event occurred. It is, however, a significant date because, if the limitation period for any claim by HUK by reference to the 1995 ACT was six years from the payment of the 1995 ACT, the period expired on 13th July 2001. By that date HUK had not commenced a separate action relating to the 1995 ACT. Nor had it applied to amend the pleadings in its existing action so as specifically to claim relief by reference to the 1995 ACT.

An alternative formulation of the foregoing paragraph which occurs to me is that the limitation period may have expired, not all at once on 13th July 2001, but progressively over the period from that date until six years after the date when the 1995 ACT was set off against mainstream corporation tax. That date appears to have been 1st October 1996. If that is right, this possible analysis of the limitation period makes no difference because the period would have expired finally on 30th September 2002. HUK had not by then commenced a separate action relating to the 1995 ACT, or applied to amend its existing action in a relevant way.

It appears from correspondence in the bundle of documents that, in the course of exchanges about the settlement which has by now been agreed between HUK and the Revenue, the Inland Revenue Solicitor raised the point that, on limitation grounds, the Revenue could not agree that it had any liability to HUK by reference to the 1995 ACT. The Revenue's position was, and still is:

HUK has brought this application in order to ascertain whether the Revenue's position is correct. In form it is an application to re-amend the 1995 writ and the 1995 statement of claim (those documents having already been amended once in 1998) by:

There is a second aspect of the application which I will describe in the next paragraph, but there is a detailed point which it is convenient to make here. HUK also applies to amend the written statement of claim so as effectively to delete all the specific claims for relief which it had previously made. Those amendments are consequential on all issues except the ones about the 1995 ACT having been settled.

The second aspect of the application which is presently before me arises if HUK is wrong on its first argument. Thus if, contrary to HUK's argument, the existing claim does not extend to compensation for having had to pay the 1995 ACT, HUK wishes to amend its pleadings so that, after the amendments, the claim does so extend. On this second argument the amendments, if made, would change the position. So in this respect the application is more than a procedural device to determine what the present position is.

The relevant statutory provisions are section 35(1)-(5) of the Limitation Act 1980 and the CPR rules 17.1(2)(b) and 17.4(1) and (2). I will not set them out in this judgment. I believe that their effect can be summarised as follows: where an amendment to a claimant's pleading is proposed outside the limitation period, the first question is whether the amendment would involve the addition or substitution of a new cause of action to or for the cause or causes of action already pleaded. If it would not, the court has a discretion to allow the amendment. If the amendment would add or substitute a new cause of action, another question has to be asked: would the new cause of action arise out of the same facts or substantially the same facts as those out of which a cause of action which has already been pleaded arises? If it would, the court has a discretion to allow the amendment. If it would not, the court may not allow the amendment.

It may be helpful to express the effect in the negative. An amendment for which permission may not be given is one of which the following three propositions are true:

Two critical concepts which feature in the foregoing formulations of the legal position are those of a cause of action and of the limitation period. A cause of action in this context is not so much the label attaching to a claimant's claim (for example "breach of statutory duty" or "money paid under a mistake of law"). Rather, it is the set of facts which entitles the claimant to relief:-

As regards the limitation period, in the present case it is agreed that it is six years under section 2 of the Limitation Act 1980. But the vital question is: when does the six years start to run? The Act provides that it starts with the date of accrual of the cause of action. In this case, in so far as HUK relies simply on the fact that it had to pay part of its corporation tax liability earlier than it would have done if it had been the subsidiary of a UK parent company, the cause of action accrued on 14th July 1995 (or possibly accrued progressively over the period from 14th July 1995 to the date when the ACT was set off against mainstream corporation tax, that date being 1st October 1996). On that basis the limitation period expired before HUK made its application. I shall proceed on that footing in this judgment. There is, however, a further possible aspect of this, to which I will refer at the end of the judgment.

Proceeding as I do on the footing that the limitation period has expired, it is too late for HUK to commence a new action claiming relief by reference to the 1995 ACT payment. It can only recover such relief if it can bring the claim for it within the relief claimed by the existing action (the one commenced by the writ issued on 12th April 1995), and there are only two ways in which it might be able to do that. The first is by establishing that the existing pleadings already do claim relief for the consequences of the 1995 ACT payment. This route overlaps with establishing that HUK's proposed amendments to the pleadings do not involve the addition of a new cause of action. The second route is by showing that, if the amendments do involve the addition of a new cause of action, nevertheless the new cause of action arises out of substantially the same facts as the cause or causes of action which have already been pleaded.

On behalf of HUK Mr. Fitzpatrick has submitted that either or both of the foregoing routes is available in this case. Despite his excellent and thorough presentation of the submissions, I cannot agree. I accept the submissions of Mr. Carr on behalf of the Revenue that the existing pleadings do not claim relief by reference to the 1995 ACT and that it is too late to amend them now.

I begin with HUK's existing pleadings. They consist so far as relevant of (1) the writ as issued in April 1995 and as amended and re-issued on 1st October 1998, and (2) the statement of claim as served on 25th March 1996 and as amended on 5th October 1998. It is clear that the writ makes no claim by reference to the 1995 ACT. As I have said already, the 1995 ACT had not been paid when the writ was issued. The writ lists six ACT payments, of which the latest in date was made in July 1994. When the writ was amended the opportunity was not taken to add the 1995 ACT payment to the list.

I turn to the statement of claim. It was served in March 1996, after the payment of the 1995 ACT. Mr. Fitzpatrick relies on one short sentence which was contained in paragraph 8 of the statement. (The paragraph number has changed since in consequence of the 1998 amendment). paragraph 8 began:

In that respect the statement of claim was in line with the writ. That is as one would have expected, because if the statement of claim had pleaded more extensive relief than was claimed by the writ, that would have been in contravention of order 18, rule 15.2 of the Rules of the Supreme Court. It is true that that would have been an irregularity which did not render the claim by reference to the 1995 ACT a nullity, and which could have been waived by the court. But the significant point is that, if the solicitors and counsel who prepared the statement of claim had intended it to cover the 1995 ACT, they would not have proceeded as they did; they would probably have applied to amend the writ first.

The final point on the statement of claim is that when it was amended in 1998 (within the limitation period), it could have been amended so as to incorporate into the schedule and the quantification of the claim, the timing disadvantage caused by the 1995 ACT. It was not so amended.

For the foregoing reasons, I accept Mr. Carr's submission that HUK's existing pleadings do not claim relief by reference to the 1995 ACT.

The consequence is that, in my view, the amendments which HUK now seeks to make would add a new cause of action to the cause or causes of action already pleaded. Under the provisions which I specified earlier, that can only be done if the new cause of action arises out of substantially the same facts as the cause or causes of action already pleaded.

Despite Mr. Fitpatrick's attractive submission that it did, in my judgment it did not. It is true that the background to the causes of action is the same. HUK was a subsidiary of a German parent company, and UK tax law did not permit the making of a group election between them. But the central fact which gave rise to a cause of action was the payment of a specific dividend and the consequential payment of ACT to the Revenue, calculated by reference to the dividend. So far as concerns HUK's cause of action arising from the 1995 ACT, the facts were: (1) that HUK paid a dividend of £10 million to HAG on or about 7th April 1995; and (2) that in consequence HUK paid ACT of £1,156,250 on 14th July 1995. Those are not substantially the same facts as, to take one example which I derive from the schedule to the statement of claim, the following: (1) that HUK paid the dividend £43 million to HAG on 16th January 1989; and (2) that in consequence HUK paid ACT of £14,333,33 on 14th April 1989. I could, of course, repeat the example by reference to all the other five dividend and associated ACT payments which HUK had made and which were specified in the writ and statement of claim.

For that reason I do not believe that I have the discretion to permit the amendments which HUK applies to make, and I therefore dismiss the application.

There is one detailed matter which I must mention. There is a possibility that my decision may not finally dispose of HUK's claim for compensation by reference to the 1995 ACT. The possibility arises in this way. HUK and other companies which are claimants participating in the group litigation order argue that their claims to be paid money by the Revenue can be supported on all or any of three different bases:

The questions of whether (3) is a valid basis of claim at all, and, if so, when the limitation period started to run, are to be decided in a future test case to be heard within the GLO. This will be the test case to decide EU issues (i) (A) and (B). If that case is decided in favour of the claimant, HUK may wish to argue that it is entitled after all to the restitution of £102,238 which it calculates by reference to its 1995 ACT payment.

There was some discussion in the hearing of how best to deal with this. No conclusion was reached and I will welcome further discussion with counsel about it. A suggestion which I make is that I should dismiss HUK's application now but subject to the proviso that within a time limit, say six weeks after the future test case is finally decided, HUK may apply for the application which is now before me to be reconsidered in the light of the decision.

"The appellant must file the appellant's notice at the Appeal Court