Aegis Group Plc & Ors v Inland Revenue

On 26^th July 2004 Aegis Group plc and other companies having a similar interest issued a claim form against Her Majesty’s Treasury and the Commissioners of Inland Revenue, seeking permission to apply for judicial review of the validity of a section in the Finance Act 2004.

The effective defendants have been the Commissioners of Inland Revenue, and in this judgment I refer to “the Revenue” to cover both the Commissioners and the Treasury, in so far as the Treasury was a defendant to the judicial review claim. I ought to add that, because of a recent merger of departments, the Commissioners of Inland Revenue as such, are, I think, no more. The department is now known as Her Majesty’s Revenue and Customs. Nevertheless, I hope I will be forgiven if I continue in this judgment to use the long-standing abbreviation “the Revenue.” I shall also in this judgment from time to time refer simply to Aegis, although the claim form expresses the claimants as being “Aegis Group plc and others.”

At a hearing before me on 14^th January this year it was agreed that Aegis would discontinue the judicial review claim, and that has now been done. The Revenue indicated that they would seek an order that Aegis should pay some of the Revenue’s costs of the discontinued claim. Aegis indicated that it would oppose the Revenue’s application for costs, and might even make an application for costs itself. The costs issues were not dealt with at the hearing on 14^th January. On 22^nd April I heard submissions about them and I now deliver judgment.

For reasons which I will explain, I consider that in principle the Revenue should be entitled to an order for the costs which they seek to recover. However, because of a failure by the Revenue, in circumstances which I will describe, even to attempt to comply with a pre-action protocol which Aegis, through its solicitors Dorsey & Whitney, had attempted to bring into operation, I am going to reduce the costs which I will order Aegis to pay by 15 percent, so that my order will be for Aegis to pay 85 percent of that part of the Revenue’s assessed costs of Aegis’s Group relief claim which the Revenue seek to recover.

A detailed matter, which I will explain later, is that the Revenue do not seek to recover the whole of their costs incurred in connection with the judicial review application, but only those costs which have been referred to in argument as their “procedural costs.” So the result of my judgment is going to be that Aegis must pay to the Revenue 85 percent of their procedural costs arising from Aegis’s discontinued judicial review application.

I need to begin by referring to two conjoined cases which were decided by “the CJEC” a few years ago. The cases are sometimes referred to as Metallgesellschaft/Hoechst. One of the conjoined cases is Metallgesallschaft Ltd and others v. IRC and the Attorney-General (Case C0397098). The other is (1) Hoechst AG (2) Hoechst United Kingdom Ltd v. IRC and the Attorney-General (Case C-410/98). The decision of the CJEC was delivered on 8^th March 2001 and is reported at [2001] STC 452. In Metallgesellschaft/Hoechst the CJEC decided that some aspects of the United Kingdom rules concerning the taxation of dividends were vulnerable to challenge under European Community law. The particular feature of that system whereby United Kingdom subsidiaries, upon paying dividends to parent companies based in other member states, had to pay advance corporation tax (ACT) and did not have the ability to make a group income election, was held by the Court to infringe article 52 (now article 43) of the EC Treaty. The details of this appear in reports of earlier cases. See for example the judgment of the Court of Appeal in Pirelli Cable Holding NVv. IRC [2003] EWCA Civ 1849, [2004] STC 130. The Court further held that United Kingdom subsidiaries which had paid ACT in the past were, in principle, entitled to recover an amount equal to interest on the ACT. However, that right of recovery was to be subject to United Kingdom domestic law on some issues. One of those issues, which is particularly relevant to this case, was the law of limitation of actions.

Many United Kingdom subsidiary companies made claims for recovery, as the CJEC had indicated that in principle they could, and their claims were organised within a group litigation order, a GLO. This particular GLO is known as the ACT GLO. The rules about GLOs are contained in Rules 19.11 to 19.15 of the Civil Procedure Rules. The ACT GLO contained a classification of different issues, all of which would have to be determined within it by a succession of test cases. One of those issues concerned whether the recovery which the judgment of the CJEC said should be available could be formulated as a claim in restitution for money paid under a mistake of law. If it could, it was believed by claimant groups that the United Kingdom subsidiaries which were claiming restitution in that way could secure much more advantageous treatment under the Limitation Act 1980. A test case to determine that issue was brought within the overall framework of the GLO: Deutsche Morgan Grenfell Group Plc v. IRC. The Deutsche Morgan Grenfell case was heard before me, and I gave judgment on 18^th July 2003: [2003] EWHC 1779, [2003] STC 1017. I held that the claim could be formulated as a claim for restitution of money paid under a mistake of law. I gave permission to appeal, and as it happens, the Inland Revenue’s appeal has quite recently been allowed by the Court of Appeal: [2005] EWCA Civ 78, [2005] STC 329. The case is, I believe, now on its way to the House of Lords. However, what would happen in the Court of Appeal was not known at the time of the events which I am going to describe next. When those events occurred the state of the law appeared to be as explained in my judgment in Deutsche Morgan Grenfell.

Returning for a moment to Metallgesellschaft/Hoechst, that case had demonstrated that one aspect of United Kingdom tax law was invalid under Community law. Professional advisors had already turned their minds to whether other aspects of United Kingdom tax law might also be invalid, and, encouraged no doubt by the outcome in the Metallgesellschaft/Hoechst case, several other challenges have been commenced. One of them concerns the United Kingdom tax treatment of United Kingdom parent companies which received inward dividends from subsidiaries in other member states and then paid onward dividends to their own shareholders. (The Metallgesellschaft/Hoechst cases were almost the converse: they were about United Kingdom subsidiaries paying dividends to parents in other member states.) A number of United Kingdom parent companies which have subsidiaries in other member states have commenced actions against the United Kingdom Revenue, claiming compensation or restitution for payment of tax pursuant to rules of United Kingdom tax law which they contend to have been contrary to Articles of the EC Treaty. Aegis is one such company. A GLO was in the process of being organised, but several companies commenced their own actions first, expecting, correctly, that a GLO would be made, and that the actions which they had already commenced would be drawn together within the scope of it. Any United Kingdom company which started proceedings in that way would certainly, after my decision in Deutsche Morgan Grenfell, formulate its claims in various ways, one of which would be a claim for restitution for money paid under a mistake of law. In that way it would hope to secure a much more advantageous limitation treatment.

Moving from the general background, I now give some facts which are more specific to this particular case. On 8^th September 2003 Aegis issued a claim form against the Revenue seeking, among other things, restitution for money paid under a mistake of law. Aegis argued that certain aspects of United Kingdom tax law, which I do not need to describe, were contrary to Articles of the EC Treaty. Aegis plainly had in mind that, if the question of principle was decided in its favour (something which in itself was likely to have involved and in the event has involved a reference to the Court of Justice of the European Communities), it might benefit from the favourable limitation consequences which at that time appeared to be available by reason of my decision in Deutsche Morgan Grenfell.

However, coincidentally as I believe, on the same date as that on which Aegis issued its claim form, namely 8^th September 2003, the Government issued a press release or notice, the thrust of which was that the next Finance Act, which would be the Finance Act 2004, would contain a section having the effect of reversing the consequences under the Limitation Act 1980 of my decision in Deutsche Morgan Grenfell. A draft clause was attached. The proposed change in the law would apply to actions brought on or after 8^th September 2003. Thus it would apply to Aegis’s action, which had been brought on 8^th September 2003. Companies like Aegis say that this is retrospective legislation, and objectionable under Community Law. The Revenue, I am sure, argue that the change announced in the press release was not retrospective, because it would not affect actions already commenced. On the other hand, the change announced in the press release is certainly expressed to remove what might have been a favourable limitation period available to claimant companies like Aegis at the time when their cause of action first arose. Whether it would or would not have been a favourable limitation period available depends on whether my decision in Deutsche Morgan Grenfell was correct or not, a matter which still awaits a decision from the House of Lords.

From a very early date after the press release professional advisors of claimant companies like Aegis let it be known that their clients would challenge the validity of the new provisions which were to be contained in the Finance Act 2004. The argument would be that the provisions, in so far as they impacted on causes of action which had already arisen under Community Law, were themselves contrary to Community Law. Reliance would be placed on a decision of the CJEC in a case which was asserted to cover the same question of principle in a VAT context: Marks & Spencer plc v. Commissioners of Customs and Excise, Case C-62/00, [2002] STC 1036. The Government’s contention is that the legislation foreshadowed by the press release would not be contrary to Community Law, and that the Marks and Spencer case does not govern the question.

I said earlier that, when companies like Aegis commenced their actions, it was expected that a GLO would be made, to which all the separate actions would be joined. A GLO was indeed made on 8^th October 2003. It is known as the FII GLO. FII stands for Franked Investment Income. Schedule 3 to the FII GLO sets out a list of issues intended to be covered. There are 17 issues, designated as issues (A) to (Q). The important issue for present purposes is issue (Q):

“Q. Are the amendments to s.32(1)(c) of the Limitation Act 1980, introduced by Finance Act 2004 with retrospective effect upon claims issued on or after 8^th September 2003, contrary to the EC Treaty and thereby illegal..”

There is a point which I need to explain about the wording of issue Q. On the face of it it is puzzling to find an order made on 8^th October 2003 referring to provisions introduced in the Finance Act 2004, since on 8^th October 2003 the Finance Bill 2004 did not yet exist, let alone the Finance Act 2004. The explanation is that an assumption was made that the provisions of the draft clause annexed to the press release, which did of course exist on 8^th October 2003, would indeed be enacted and would be part of the Finance Act 2004.

I mention for completeness that on 20^th November 2003 the Government issued a further press release. The proposed section in the Finance Act 2004 would apply not just to new actions commenced on or after 8^th September 2003 (which is what the first press release said), but also to amendments made on or after 20^th November 2003 to actions commenced before 8^th September 2003. That particular change may be important to some companies, but is not, I think, important to Aegis.

I move forward into 2004. On 23^rd March of that year the Finance Bill was published. It contained a clause, then numbered as clause 303, which was in the terms of the drafts accompanying the earlier press releases. To anticipate, and to go outside strict chronological order, I record now that the clause became, without any material change, s.320 of the Finance Act 2004. The bill received the Royal assent so as to become the Act on 22^nd July 2004.

However, some two months before that Dorsey & Whitney, the solicitors for most of the companies enrolled in the FII GLO, including Aegis, commenced correspondence with the Revenue which foreshadowed an intention to challenge what became s.320, and to challenge it by judicial review. That mode of challenge may seem curious (and it seems curious to me), given that issue (Q) already existed in the GLO, particularly when it had been Dorsey & Whitney who had proposed that issue (Q) should be included. The inclusion of that issue in the GLO seems clearly to contemplate that the compatibility or otherwise with Community Law of the section in the Finance Act 2004, once it received Royal assent, would be litigated in the Chancery Division proceedings. In the course of being so litigated a reference to the Courts of Justice of the European Communities might fall to be made, but on the face of it any reference would be made by a judge of the Chancery Division in connection with a test case brought under the GLO.

I need briefly to describe Dorsey & Whitney’s letters which indicated an intention to apply for judicial review. The first relevant letter is dated 28^th May 2004. It is addressed to the Inland Revenue. The first two pages of the letter argue that clause 303 of the Finance Bill, as matters then stood, was contrary to community law. They request the Revenue to make changes to the clause. The letter refers to the Court of Justice’s decision in Marks & Spencer. I reproduce three paragraphs from page 3 of the letter:

“Should the clause be passed into law, our clients affected by those provisions intend to bring a challenge by way of judicial review. Given the likely timescale of the passage of the [Finance Bill] through Parliament, and the requirement to bring judicial review proceedings promptly, this letter constitutes a letter before action and is written in compliance, so far as is possible, with the judicial review pre-action protocol.

We are unable at the present time to further particularise our client’s potential loss. The loss to those affected will be of considerable monetary value. Further particulars will be pleaded should our clients be forced to move for judicial review.

As indicated above, you are now required to make such changes to the proposed s.303 as are necessary to ensure compatibility with community law.”

For some time the Inland Revenue did not reply. A major complaint by Aegis, much ventilated before me by Miss Sharpston Q.C. and Mr Post on behalf of Aegis, is that, because Dorsey & Whitney’s letter had referred to the judicial review pre-action protocol, compliance with that protocol ought to have produced a reply from the Revenue within 14 days. In the absence of a reply Dorsey & Whitney wrote a chasing letter on 18^th June 2004. This letter is quite short; it is also, in my view, rather obscure. I think that I need to quote most of it:

“We have now received instructions from two clients and their subsidiary companies [one being Aegis] ... to bring judicial review proceedings against the Commissioners of Inland Revenue immediately the Finance Bill 2004 is sent, unless clause 303 is either removed, or satisfactorily amended ...

We put you on notice that ... given the strict time limit for bringing judicial review proceedings, we are continuing with the preparation of our client’s claims, including the necessary supporting witness evidence. Those steps will necessitate considerable costs, which we will of course seek to recover from you.

Accordingly, we require you to actively monitor the progress of this clause with Standing Committee A and to advise us immediately that clause has been considered and particularly, the tabled amendment or any other change is accepted ...”

The Revenue still did not reply. On 1^st July 2004 a solicitor at Dorsey & Whitney spoke on the telephone to Mr Banks of the Inland Revenue Solicitor’s office. Mr Banks said that he had no instructions and that he had passed the relevant letters on.

On 8^th July 2004 Dorsey & Whitney wrote again to the Inland Revenue solicitor’s office. They protested that they had still not received a reply. They said that they had complied as far as possible with the judicial review pre-action protocol. They would prepare to issue proceedings for an application for judicial review.

On 20^th July 2004, by which date I think that the Finance Bill must have completed its passage through the House of Commons so that it could no longer be amended, the Inland Revenue Solicitor did write to Dorsey & Whitney. There were two different points made by the Inland Revenue Solicitor’s letter. One was that Dorsey & Whitney’s original letter did not comply with the judicial review pre-action protocol in certain respects, and that without further information the Inland Revenue could not sensibly reply to it. I will say a little more about that later. The second point was that in any event an application for judicial review was an inappropriate procedure to challenge the clause which became s.320, since there were High Court proceedings already in existence (the GLO claims in the Chancery Division), and the validity of the clause or section of the Finance Act could be raised as an issue in those proceedings. I reproduce the last two paragraphs of the Inland Revenue Solicitor’s letter:

“Further, your letter does not explain why you will submit that permission should be granted to apply for judicial review of this matter, notwithstanding the fact that the proposed claimants have an alternative remedy. Both claimants have made claims in the High Court, inter alia for restitution of tax paid under a mistake of law. The validity of the September/November legislation can obviously be raised in those proceedings if and when the Revenue relies upon that legislation. Indeed, Aegis is a test claimant in the FII GLO solely on this issue.

By letter of 8^th July you announced your intention to issue an application for judicial review without notice. Should you do so the Commissioners may be advised to resist the grant of permission to apply for judicial review on the ground that your clients have failed to comply with the pre-action protocol, and/or have an alternative remedy.”

As I have said, that letter was written and sent by fax on 20^th July 2004. I need, however, to go back some three weeks in time. There had been a case management conference before me concerning the progress of the FII GLO on 28^th June. That date fell after Dorsey & Whitney’s first letter, in which they had said that they intended to bring a judicial review application. That letter and the possibility of judicial review were never mentioned at the case management conference. On that occasion there was quite a long discussion of a draft order, and of a draft reference of questions to the Courts of Justice of the European Communities. The two sides had reached broad agreement on the contents of the order and of the questions, but after the discussion before me and having regard, among other things, to comments which I made on the draft questions, the proposed reference had to be subject to several amendments before it was made. The issues raised by issue (Q) were not one of the questions intended to be referred, and in the event they were not referred. The reason why an issue (Q) question was not included in the draft for the reference which I considered on 28^th June was, I believe now (although nothing of this was explained on 28^th June), that it would be inappropriate to refer a question of the validity of a provision at a time when the provision concerned was in a Finance Bill and had not yet become law. Issue (Q) was mentioned at the case management conference, but only very briefly. Counsel for the claimant taxpayers referred me to an agreed paragraph of the proposed order, which read:

“GLO issue (Q) to be adjourned generally pending developments concerning the proposed legislation to which it relates.”

There was no discussion about that. It was an agreed paragraph, and I was obviously prepared to make an order in its terms. As it happened, the order adjourning issue (Q) generally was not made until earlier this year. I believe, however, that that was an oversight, and that it should have been made soon after the case management conference. The general point which I make is that, as it appeared to me at the case management conference, issue (Q) was still a live issue under the GLO, but could not be progressed until the Finance Bill had become the Finance Act.

I return now to the Inland Revenue Solicitor’s letter of 20^th July 2004. I have already quoted a sentence near the end of the letter:

“Aegis is a test claimant in the GLO solely on this issue.”

I have not identified precisely when Aegis was put forward by the GLO claimants as a test case on issue (Q), but obviously it had been put forward at some stage. The general point which the Revenue were making in the latter part of their letter was that, although the GLO claimants were fully entitled to test whether what became s.320 was contrary to Community Law, the Revenue could not see how a judicial review application was the right procedure: more appropriate was a test case on issue (Q) heard in the Chancery Division within the ambit of the GLO. That has consistently been the Revenue’s position ever since, and I agree with it.

I move on. The Finance Bill having become the Finance Act on 22^nd July 2004 and clause 303 having become s.320, Dorsey & Whitney on behalf of Aegis on 26^th July 2004 formally commenced proceedings for judicial review by serving a judicial review claim form. Such a claim form in the first instance is expressed to apply for permission to apply for judicial review. If permission was granted, the principal remedies which would be sought were declarations that s.320 was incompatible with community law, and that the section could not be applied to Aegis’s claim for restitution on grounds of mistake of law.

The application was supported by various documents, including a long and thorough witness statement by Dr Whitehead of Dorsey & Whitney. One of the matters which he addressed was whether it was appropriate to proceed by way of an application for judicial review. On the point, made by the Revenue in their letter of 20^th July, that Aegis had an alternative remedy, he advanced several justifications for the use of the judicial review procedure. The only one which is, in my view, critical and to which I need refer, is a justification said to arise from s.320(3). In paragraph 135 of Dr Whitehead’s witness statement the following appears:

“Secondly, note the effect that s.320 is expressed to have on actions to which it applies:

‘320(3) ... the action (or so much of it as relates to a cause of action in respect of which a defence of limitation would have been available or, as the case may be, the claim would not have been allowed) shall be deemed to be discontinued on the passing of this Act ...’

Judicial review therefore, stands as the only available forum, as the

legislation itself terminates the proceedings where it could otherwise be challenged.”

Nothing in particular happened in August. On 14^th September the Revenue, for itself and for the Treasury, acknowledged service of Aegis’s judicial review application and stated that they intended to contest Aegis’s claim. In: “Summary grounds for contesting the application,” they said that Aegis and the other companies affected had an alternative remedy, so that permission to apply for judicial review ought to be refused. They said that there were no good reasons for preferring the judicial review application to Aegis’s action within the GLO. They went through all Dr Whitehead’s justifications for proceeding by way of judicial review and disagreed with them. As regards his proposition that s.320(3) discontinued claims so that the limitation defence would have been available to the Revenue, or perhaps so that Aegis’s Chancery Division claim no longer existed at all, the Revenue wrote this:

“However, if the whole of s.320 is inapplicable to Aegis due to the application of EU law, so also is s.320(3). Nothing in s.320 could prevent Aegis from arguing in the Aegis action that s.320 is inapplicable. The view expressed by the claimants is, with respect, unarguable.”

I say now that I entirely agree with what the Revenue said there.

A flurry of correspondence followed, which I will not track through in detail. Dorsey & Whitney maintained their position that s.320(3) was a good reason for preferring judicial review as a remedy. The Revenue maintained that it was not. The Revenue’s position was that the judicial review application had been misconceived. It should be discontinued on the basis that the claimants paid the Revenue’s costs referable to it. Dorsey & Whitney did not agree, but they introduced into the correspondence the possibility of the judicial review application being transferred to the Chancery Division.

Letters were written to the Administrative Court and to me via my clerk. Collins J, the President of the Administrative Court, and I spoke about the matter at least once and possibly twice. After a great many letters had passed between various persons, Collins J wrote a memorandum on 10^th November 2004. I will reproduce part of it:

“I have had my attention drawn to the claim which was lodged in the Administrative Court on 26^th July 2004 ... and the letter sent to Park J’s clerk on 8^th November 2004 requesting a CMC in the FII group litigation.

Although I understand why the view was taken that the issue raised concerning s.320 of the Finance Act 2004 was suitable for judicial review (and I am not concerned to decide whether that view was in principle correct), in the circumstances here it seems to me that to run parallel proceedings in the Administrative Court and the Chancery Division is not sensible...

Park J is familiar with the background to and significance of the issues raised in this claim. Separate consideration of s.320 is unnecessary. If permission were granted the claim would be dealt with by a Chancery judge, and although Park J is not generally nominated to sit in the Administrative Court, he might well be nominated to the Administrative Court ad hoc. Thus not only is this claim unnecessary, but it is also pointless.”

Mr Justice Collins’ memorandum led to an order of the Administrative Court dated 25^th November 2004. It is in terms agreed between Dorsey & Whitney and the Inland Revenue Solicitor. I will reproduce it, mentioning first that when it refers to “the claim,” it means the judicial review application:

“By consent it is ordered that:

(1)

The claim continue as if it had not been started under Part 54 of the Civil Procedure Rules.

(2)

The claim is transferred to the Chancery Division to be dealt with by Mr Justice Park.

(3)

The costs of and incidental to the claim up to the date of transfer be reserved to Mr Justice Park.”

There were more letters exchanged, which I need not refer to in detail. Then the matter came before me on 14^th January of this year on a case management conference to discuss further progress of the case. Two points were agreed in discussion on that occasion and one was held over for later determination. The first point agreed was that the validity or otherwise of s.320 of the Finance Act 2004 should be determined in Aegis’s civil claim in the Chancery Division within the ambit of the GLO, and in particular within the ambit of issue (Q). The second point which was agreed was that the judicial review application, whatever its status might have been after the Administrative Court order, should not be left in existence, but should be brought to an end. In the event, the claimants agreed to my suggestion that the judicial review application, as transferred to the Chancery Division, should be discontinued.

The matter which was left over for later determination is the matter with which I am now concerned. Should the judicial review proceedings be discontinued on the basis that the claimants are liable for the Inland Revenue’s costs attributable to them? That would be the normal order in consequence of the Civil Procedure Rules Part 38, Rule 38(6). Or should some different costs order be made? I interpolate that on the first issue of the validity or otherwise of s.320 of the Finance Act 2004, it will only be a relevant issue if the House of Lords reverses the Court of Appeal decision in Deutsche Morgan Grenfell and reinstates my earlier decision.

I now turn to the costs issue which I have to determine. A preliminary and non-controversial point is this. The Revenue do not seek to recover all of the costs which they incurred in connection with the judicial review proceedings. They do not seek to recover costs which, though in fact incurred in relation to the judicial review application, would still have been incurred anyway if Aegis, instead of launching a judicial review application, had sought to have the validity or otherwise of s.320 determined through Chancery proceedings within issue (Q). The skeleton argument of Miss Sharpston and Mr Post neatly distinguishes between “the core costs” and “the procedural costs.” The Revenue in this hearing seek to recover only the procedural costs.

But for one matter to which I will come shortly, I would certainly order that the Revenue should recover all of their procedural costs, assessed, if not agreed, on the standard basis. In my judgment the decision to apply for judicial review was misconceived. Issue (Q) was already part of the GLO, and indeed, as I have already said, had been suggested by Dorsey & Whitney when the GLO was being drafted. It was a natural and proper procedural setting for the determination of the question of principle of whether s.320 was or was not invalid by reason of infringing Community Law. The apprehension that, by reason of sub-section (3) of s.320 (which was of course always part of the draft clause appended to the Inland Revenue press releases), it would be impossible for Aegis to raise the invalidity argument in a Chancery Division action was, with respect to those who entertained the apprehension, plainly wrong. I do not suggest that Aegis did not have a serious point of principle which it wished to have determined, or at least which it would wish to have determined if my decision in Deutsche Morgan Grenfell was correct. I think that the serious question is whether s.320 was contrary to Community Law or not. But Aegis did not need to resort to judicial review in order to have that point of principle determined. It had an alternative and more appropriate remedy in the form of a Chancery Division action.

In my judgment, if Aegis had persevered with its judicial review application the application would have failed. I add that I do not base my decision on costs simply on the feature that Aegis discontinued its judicial review claim, coupled with the normal rule in the Civil Procedure Rules, Rule 38.6(1):

“Unless the Court orders otherwise, a claimant who discontinues is liable for the costs which a defendant against whom he discontinues incurred on or before the date on which notice of discontinuance was served on him.”

I have re-read the transcript of the hearing on 14^th January of this year, from which it is clear that Miss Sharpston, leading counsel for Aegis, said that Aegis would discontinue the judicial review claim, and would do so without a fight, so to speak, on the basis that all arguments as to costs remained open. However, I am clear in my view that, if Aegis had not discontinued its judicial review claim, I would have refused the permission to apply for judicial review, which was the initial threshold which Aegis needed to achieve. And in principle I would have refused permission with costs.

That, however, would have been subject to the one matter to which I alluded earlier, and to which I now turn. Miss Sharpston submits that Aegis should not be liable for the Revenue’s costs, and that, on the contrary, I might even go so far as to order that the Revenue pay Aegis’s costs, because the Revenue failed to comply with the judicial review pre-action protocol. I have already quoted Dorsey & Whitney’s initial letter of 28^th May 2004, which expressly said that they were proceeding as far as they could within the ambit of the protocol. The protocol states that defendants who receive from intended claimants a letter written in accordance with it:

“should normally respond within 14 days... Failure to do so will be taken into account by the Court and sanctions may be imposed unless there are good reasons.”

Despite that, the Revenue did not reply within 14 days. Indeed, despite Dorsey & Whitney’s two chasing letters of 18^th June 2004 and 8^th July 2004, and Dorsey & Whitney’s telephone enquiry on 1^st July 2004, the Revenue did not reply at all until 20^th July 2004. That was the letter in which the Revenue said that Dorsey & Whitney’s original letter did not itself comply with the protocol, and said also that permission to apply for judicial review was likely to be opposed on the ground that Aegis had its alternative remedy in the form of issue (Q) under the GLO.

There was force in both of the Revenue’s points, but in my judgment the Revenue should have replied much earlier to Dorsey & Whitney’s original letter, if only to say that they were unable to reply in the manner which the protocol expected. Miss Sharpston complains, with some justification, that even to this date the Revenue have offered no explanation of why they did not make some attempt to reply to the original letter within, or at least not far outside, the time limit which the protocol said should normally be followed. Given that the Revenue effectively ignored the protocol, I believe that it would be wrong for them now to obtain an order for Aegis to pay the whole of their assessed procedural costs of the discontinued judicial review claim. On the other hand, I believe that in the circumstances of this case it would be an unjustified over-reaction to the Revenue’s disregard of the protocol for me to deprive them of a large part of their costs, still less to order them to pay any part of Aegis’s costs. It is for that reason that, although I will not order Aegis to pay all of the Revenue’s procedural costs, I will order them to pay 85 percent of them.

There are certain factors which particularly influence me in coming to that conclusion, and I believe that I ought to attempt, as briefly as I can, to identify what they are. Paragraph 13 of the protocol says that, if a prospective defendant fails to reply to a protocol letter from a prospective claimant within 14 days: “Sanctions may be imposed unless there are good reasons.” It is, I think, implicit that the magnitude of any sanctions (including a denial of a costs order which otherwise might have been expected), will vary with the strength or weakness of any reasons for not replying within 14 days. Thus I need to consider what justifications there can be for the Revenue not having replied more promptly. In that connection there are three main points which I wish to make.

First, in my opinion Dorsey & Whitney’s letters did not make it clear what the content of the proposed judicial review application was, and did not easily lend themselves to a reply, or at least to the sort of focused reply which the protocol contemplates. When Aegis actually launched its judicial review application by the claim form of 26^th July 2004, the precise content of the order which it was seeking was then made clear. It wanted a declaration that a section of a United Kingdom statute, that is to say as matters turned out s.320 of the Finance Act 2004, was invalid because it was incompatible with Community Law. But the matter was by no means so clear from Dorsey & Whitney’s letters. There are sentences in them which taken by themselves do indeed appear to say that the subject matter of the proposed judicial review proceedings was to be the validity or otherwise of the intended legislation announced in the Inland Revenue’s press releases. But there are other sentences which suggested that the judicial review application would be focusing on aspects of Finance Bill procedure, and in particular on the influence which the Revenue have on the contents of provisions of Finance Bills. For example, the first page of the letter of 28^th May 2004 contains this sentence:

“On behalf of our clients, we request that you review the terms of clause 303 with the Standing Committee and make the necessary changes to ensure compatibility with European Community Law.”

Dorsey & Whitney’s first chasing letter, the one of 18^th June 2004 contains a sentence, which I have already quoted, but will repeat:

“Accordingly, we require you to actively monitor the progress of this clause with Standing Committee A, and to advise us immediately that clause has been considered and particularly whether the tabled amendment or any other change is accepted.”

The focus seems to be on the Finance Bill process, not on the final terms of the Act. It is fair to say that the second chasing letter of 8^th July 2004 does suggest that the proposed judicial review application will be one to test the validity of the proposed section of the Act. Nevertheless, looking at the correspondence as a whole, I can well understand why the Revenue, in the letter which they did belatedly write on 20^th July, included the following two items in their description of respects in which they contended that Dorsey & Whitney’s letter of 28^th May was unsatisfactory in so far as it purported to be a letter in accordance with the protocol:

“(2)

The details of the matter being challenged. By a letter of 18^th June you stated that the claim concerns clause 303, now clause 320 of the Finance Act, and by letter of 8^th July you stated that proceedings would be instituted if the clause becomes law, but you have not stated whether the measure that you intend to challenge is the clause itself or the section, should it mature into one, or some other Act or measure. Please identify precisely the Act or measure being challenged.”

(3)

The details of the action that the defendant is expected to take. Please identify the action that in your submission, the Commissioners of Inland Revenue, or any other defendant ought to take or has failed to take so as to be corrected on judicial review?”

Those are extracts from the Revenue’s letter of 20^th July, and I add, that even after receiving that letter there was still an element of ambivalence in Dorsey & Whitney’s position. On the one hand they said in their letter of reply, which is dated 21^st July, that the matter being challenged would be the relevant section of the Finance Act, not the clause of the Finance Bill. On the other hand, in answer to the Revenue’s question of what action the Revenue were expected to take, Dorsey & Whitney’s reply was:

“The action that we require the defendants to take was to amend the Bill prior to enactment by Parliament.”

So my first point is that there are obscurities in Dorsey & Whitney’s letter about what exactly the content of the proposed judicial review application would be.

My second point is that I think it unlikely that, if the Revenue had replied to Dorsey & Whitney sooner than they did, it would have made any real difference. In particular, I do not think that an early reply from the Revenue raising the point that Aegis had an alternative remedy would have caused Dorsey & Whitney to drop their intention to apply for judicial review once the Bill became an Act. The alternative remedy was of course a Chancery Division action for the determination of issue (Q) within the GLO. Dorsey & Whitney were fully aware of the existence of GLO and of issue (Q) they did not need the Revenue to remind them of it. The problem was that they had formed the view that sub-section (3) of the draft clause, which became s.320(3), meant that they would not be able to use issue (Q) in order to litigate the question of principle. They had not explained that in any of their letters, so the Revenue can hardly be blamed for not addressing the misconceived argument when they wrote the letter of 20^th July 2004. The point only emerged in the short paragraph 135 of Dr Whitehead’s witness statement, which supported the judicial review application. I have quoted that paragraph earlier. I add here that Dr Whitehead’s witness statement extended to 155 paragraphs in total.

In subsequent letters the Inland Revenue Solicitor wrote that Dorsey & Whitney’s view about s.320(3) was wrong, and that the Revenue could never have used s.320(3) as a means of defeating a Chancery Division action to determine issue (Q). In my view the Inland Revenue Solicitor was right. However, in several letters Dorsey & Whitney maintained that their concern about s.320(3) was, or at least might be, a valid one. I do not think that they or counsel on their behalf have ever expressly accepted that they were wrong. For those reasons I do not believe that an earlier reply from the Revenue to the original letter of 28^th May would have headed off the threatened judicial review application. That is my second point.

My third point is that I broadly accept Dr Plender’s submission for the Revenue that, in so far as the Revenue were in breach of the protocol by not attempting to make some reply within 14 days of Dorsey & Whitney’s letter of 28^th May 2004, the breach was corrected by the Inland Revenue Solicitor’s letter of 20^th July 2004, which spelt out that an application for judicial review was inappropriate, because Aegis had an alternative remedy. Dorsey & Whitney had received that letter before they served the judicial review claim form, but they went ahead to serve the claim form nevertheless.

In response to that point, Miss Sharpston points out that, under the Civil Procedure Rules, Rule 54.5, a claim form for judicial review must be filed: “(a) promptly and (b), in any event, not later than three months after the grounds to make the claim first arose.” She says that the claim form needed to be filed “promptly” after the Finance Bill became the Finance Act, which happened on 22^nd July 2004. The claim form was filed on 26^th July. Miss Sharpston says that Dorsey & Whitney and their clients did not have time to think about the alternative remedy argument pointed out in the Revenue solicitor’s letter of 20^th July, because if they did think about it, and then decided to proceed with the judicial review claim nevertheless, the time which had elapsed might have caused them to fail the “promptly” requirement.

I cannot agree. As I have already said, Dorsey & Whitney were well aware of issue (Q), but had already formed a view that sub-clause (3) of the draft clause would prevent the issue (Q) procedure being used. Thus the Revenue Solicitor’s letter of 20^th July did not in reality bring up something for Dorsey & Whitney to think about which they had not thought about already. In any case, if Dorsey & Whitney had taken no more than a reasonable time to reflect on the Revenue’s belated letter, but then had decided to apply for judicial review all the same, the Revenue would hardly have been in a position to object to the application on the ground that it had not been brought promptly enough. It is hard to imagine that any court would, in those circumstances, have refused permission on time limit grounds. Lest I be misunderstood I should say this. I believe that a court would have refused permission for judicial review to be applied for, but it would have done so on the ground that the procedure was misconceived, and not on the ground that the application had failed to be made “promptly.”

In my judgment, despite Miss Sharpston’s submission about the word “promptly,” there is force in what Dr Plender says on this. For all that Dorsey & Whitney only received the Revenue Solicitor’s letter on 20^th July, when they decided to file the judicial review application on 26^th July they were clearly on notice that the alternative remedy defence would be raised against the application. They went ahead on the basis, as it seem to me, that their client was at risk for costs if the alternative remedy defence was a good one.

For the foregoing reasons I decide in principle that the Revenue are entitled to their assessed procedural costs of Aegis’s discontinued judicial review application, but I reduce the amount recoverable to 85 percent, to reflect the fact that the Revenue, without explanation even now, did not until an unacceptably late stage make any attempt to comply with the terms, or even with the spirit, of the judicial review pre-action protocol.